ESG 101: Why isn’t the industry making an impact?

by Natasha Healy

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Discover how The Payments Association’s ESG Working Group is addressing the challenges and solutions for effective environmental, social, and governance initiatives within the payments industry.

The Payments Association’s annual PAY360 conference featured several talks and panels highlighting the importance of ESG initiatives. Experts across the payments industry spoke passionately at these events, championing their organisation’s ESG strategies and wider industry and governmental ESG policies. So, despite this goodwill, why is the industry falling short? One panel, ‘ESG 101 – why isn’t the industry making an impact?’, moderated by Angela Yore from SkyParlour, tackled this question.

Challenging complacency

One reason for this lack of interest could be that the industry overestimates the progress it has already made. For instance, the UK’s departure from a cash-based payment system gives the impression of forward momentum. Cash, being extremely resource-heavy, energy-consumptive and having a very short shelf-life, is not a green option. However, panellist Richard Theodossiades, co-founder and CEO of Zero, noted that digital payment options are not necessarily better regarding carbon emissions.

Card payments may seem like a low-carbon option, but the British Retail Consortium found that, on average, 25 billion card payments are made annually in the UK, which uses 1 million tonnes of carbon. The Payments Association estimates that this amount of carbon generates enough energy to charge your smartphone 6 trillion times. In fact, UK Finance’s ‘UK Payments Markets Summary 2023’ found that 45.7 billion card payments were made in the UK in 2022 alone, far higher than the average.

According to figures taken from Mike Berners-Lee’s book ‘How Bad Are Bananas: The Carbon Footprint of Everything’ and the British Retail Consortium, the incredible amount of carbon that this number of card payments requires in one year would allow you to use your phone for 10 hours a day for over 2 million years.

It seems that entirely digital payment methods—contactless, virtual wallets, virtual coins—would be the natural next step in reducing carbon usage. Still, the amount of energy required to fuel the data centres for some digital currencies and artificial intelligence (AI) applications is astronomical. Perhaps one of the most famous offenders is Bitcoin, which, according to Forbes Advisor, uses more energy annually in its processing centres than in Norway.

Similarly, the payments industry may believe that if it refrains from investing in companies that produce outputs with evidently high carbon emissions, its carbon footprint remains low. For instance, investors may feel they prioritise the environment by investing in fintechs, creating systems for digital currencies rather than a fossil fuel company. However, how the industry is currently building these systems is extremely carbon inefficient. Many of the data centres fintechs rely on to inform their software consume an enormous amount of electricity and carbon.

Strategic insights: Moving beyond short-term gains

The industry’s complacency may also stem from organisations not seeing how ESG initiatives will benefit them directly. On this point, Yore notes, “The fintech industry has always been forward-thinking, but when it comes to ESG, it’s clear that we are behind.” Indeed, many firms may shy away from investing in specifically ESG-related propositions due to the perception that they will not produce significant returns.

The fintech industry has always been forward-thinking, but when it comes to ESG, it’s clear that we are behind.

Panellist Philippa Martinelli, advisor and investor at Phronesis, argues that investment firms are simply not doing enough to live up to their environmental promises. In its ‘Global Investor Survey 2022’, PwC finds that whilst a lack of action on ESG issues would deter most investors, they also do not want a company’s action on ESG to impact investment returns. 81% said they would accept no more than one percentage point less in investment returns to pursue ESG goals.

In its ‘2021 Global Investor ESG Survey’, PwC found that (49%) were unwilling to accept any reduction in returns. Yet in an article titled ‘Five Ways That ESG Creates Value’, McKinsey contests this industry-wide belief, arguing that firms are short-sightedly focusing on immediate impacts rather than long-term rewards. All firms need to work in tandem to achieve environmental goals.  

Martinelli contends that it is important that governing boards turn their attention to environmental issues as the ‘S’ and the ‘G’ cannot happen without the ‘E’. The environment’s health is the base of everything, and if we do not tend to the pervasive problem of climate change, social inclusion and governance policies will cease to matter. In its 2021 ‘The Cost for the Financial Sector if Firms Delay Climate Action’ report, the Oxford Sustainable Finance Group found that the delay in climate transition plan implementation from the early 2020s to 2026 will cost US$2.2 trillion to the financial services industry. Why is that not driving people to action? 

The story is similar on the social side of ESG. Francesca Brown is global director of policy at Women’s World Banking, a global NGO and impact investor advocating for women’s economic empowerment globally, which aims to reach 100 million women by 2027. Brown says that whilst the ‘World Bank’s Global Findex Report of 2021’ finds that financial inclusion and inequality based on gender are improving, there are still nearly a billion underbanked women. In response to this report, she adds that “nearly 750 million women worldwide still don’t have access to financial services , and a further 250 million women have inactive bank accounts.” Alongside missing investment propositions from environmentally minded organisations, she says companies are similarly passing up on huge sections of the market by not having gender and social equality in mind when designing their products. Inherent biases and a lack of diversity in the top tiers of the business often cause this, explains Brown, adding that companies will only begin to attract these forgotten customers if they purposefully take a women-centred approach to product design, including women in the right teams and senior positions in the company. 

Inclusion and governance: Keys to effective ESG policies

Joanne Dewar, project lead of Project Nemo, a grassroots pro bono initiative to accelerate disability inclusion in fintech, suggests ESG policies lag as real change requires bold and determined governance. When asked to rate the current engagement of the payments industry in ESG policies, she awarded it 1/10. The ‘G’ in ESG is getting lost, and if companies don’t get governance right at the board level, none of the other initiatives can work. She observes that companies like to position ESG policies as being at the core of their business, but they are rarely at the top of the board’s agenda. 

Joel Blake OBE, founder of GFA Exchange, poses that to reflect our diverse economy, “companies need to invite the people they’re supporting into their decision-making circles. This way, they can get valuable advice on how to create inclusive strategies and solutions that truly meet their needs, as well as the strategic objectives of the company.” 

Boardrooms in the payments industry show clear complacency and reticence regarding ESG initiatives, stresses Yore. She adds that there is a desperate need for this to change: “We can’t allow either the geopolitical landscape or inertia to keep us from securing a better present and future for all”. Yet, Blake argues that more effective board governance will not happen until environmental or social issues hit companies in their pockets, adding that “the cultural mindset always has to lead back to a commercial conversation”. Moreover, there needs to be a change in the approach and prioritisation of investors so that short-minded profit growth is not the only long-term goal.  

Dewar ended the session by encouraging the industry that companies are never too small and that it is never too soon to start implementing ESG policies. The passion for creating change and pressure must come from all angles, not the boardroom alone. Dewar remarks, “All colleagues can be curious,” and suggestions to improve a company’s environmental or social workings don’t have to come from the designated ESG advocate.  

In response, The Payments Association’s ESG Working Group developed a Toolkit to help all companies start their ESG journey. All employees can use this Toolkit to drive ESG initiatives. It contains articles, reports, and blog posts to help inspire the industry to delve deep and commit to meaningful and impactful ESG resolutions. 

Payments Review Summer 2024
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