By Sylvia Kezengwa, RFI Foundation Global Virtual Innovation Hub Coordinator
FinTechs, like other financial sector institutions, have to consider and respond to environmental, social and governance issues. Although this will reduce their susceptibility to ESG-related losses, it can also provide something for FinTechs to capitalize on. The RFI’s Responsible Finance FinTech program is recruiting a fourth cohort of FinTechs active in or interested in expanding to the Middle East, North Africa or Turkey to develop their capabilities in responsible finance.
- ESG is rising in prominence in the venture capital sector, with PRI recently releasing a due diligence questionnaire for venture capital limited partners
- Asset owners’ focus on how their venture capital investments account for ESG risks is increasingly flowing down to their FinTech portfolio companies
- The RFI Foundation Global Virtual Innovation Hub returns for a fourth cohort of the responsible finance FinTech program at a pivotal time for MENA + Turkey FinTech startups as they face investors’ heightened expectations
Businesses are typically cognizant of the need to deliver financial returns in the short and long term. These days, they are becoming more aware of the additional need to be accountable for generating positive value for society and mitigating any negative impacts resulting from their operations. Focusing on Responsible Finance — taking into account the environmental, social, and governance (ESG) factors of an economic activity or project — has become more relevant for a wider range of financial sector institutions, including now the smaller ones.
This is why the RFI Foundation is bringing back the Responsible Finance FinTech Program within our Global Virtual Innovation Hub for another cohort starting in February. The return of the GVI Hub’s program for FinTech startups in the Middle East, North Africa and Turkey comes after the Principles for Responsible Investment (PRI), which counts $121 trillion of signatory assets under management, recently released a due diligence questionnaire for asset owner limited partners of venture capital funds.
PRI’s new focus on venture capital funds will impact those funds’ investees over time, further underlining the growing importance of ESG for smaller companies and not just for publicly listed companies. All of the focus on responsible finance builds on a common rationale, which is that companies that fail to incorporate responsible finance put their own existence at risk if it causes them to overlook the expectations of stakeholders and today’s non-financial risks that could become sources of financial loss in the future.
There is also growing interest in firms embedding sustainability for customers, investors, partners and other stakeholders including financiers. The financial ecosystem has not been left behind, and is in fact leading the sustainability imperative. There is a need for FinTech startups to borrow a leaf from bigger organizations and think longer term. This may offer a much needed help to startups to recognize a wider range of risks that could lead to their demise. This may help FinTech startups regardless of whether they can make their business enable sustainability outcomes by others.
The growth of responsible finance presents a huge opportunity for FinTech startups to integrate sustainable business models and systems into their culture early. It is imperative for FinTechs to start putting relevant processes in the early stages of their development, building them into the firm’s culture and way of life. Sustainability helps to get the ball rolling for strategic development as it converts a firm’s short-term focus towards its longer-term priorities and risks.
Implementing and communicating sustainability and responsible finance practices can provide a wide range of benefit. It can help reduce FinTechs’ operational costs, provide new business opportunities, spur innovative models, and build external respect for the FinTech as a forward-looking player.
Six steps that FinTechs can take to integrate sustainability in their business and company culture
1. Discover: What is Sustainable Finance? What Does It Mean For My Firm?
Most people have heard of, or have some form of understanding of, the concepts of sustainability. However, many of those who know what sustainability is don’t go beyond the surface, and those that know about it more need to build confidence in their own knowledge base. FinTechs need to invest in their teams to get exposure and improve understanding of sustainability across the organization, starting with the people who want to lead, and expanding that with training, workshops and mentorships. As we ran the RFI Foundation Global Innovation Hub FinTech Program cohorts, some participants showed interest in elevating their knowledge, attitudes and practices. The program offered them the training, tools and a safe space to experiment and share with others going through the same journey in a way that focused on relevance to their companies.
2. Engage: Listen, Learn and Discuss with Stakeholders
Just like the African proverb that “it takes a village to raise a child”, embedding responsible finance in an organization is a team effort. It is thus imperative to engage with stakeholders, understand their needs, and see where they can plug in to give input or advance these processes. Starting internally with staff, the board and suppliers and fanning out to the external environment encompassing customers, investors and legislators, involving everyone in developing sustainability goals can have far-reaching implications for a smoother integration and a truly sustainable organization.
3. Map: Chart a Sustainability Journey
It is critical during the mapping stage for FinTechs to develop short- to medium-term strategies to help them kickstart their sustainability journey. This includes all of the activities needed to build out and expand their responsible finance strategies. FinTechs need to realize that all this doesn’t need to come at once, since the startups have to juggle competing priorities. The goal is to consistently and progressively make sustainability and responsible finance an ongoing priority in determining what sustainability elements are material to the company and starting to implement these plans.
4. Develop: Craft Action Steps
FinTech startups working to put their responsible finance strategies into practice should focus on prioritization. It’s not just a technical challenge that can be added as just one more element of a strategic plan. Sustainability plans need to have broad buy-in to go more than skin deep, so the first step is to design and communicate the plan to all staff and partners and let people step up (or step down over time) as priorities and capabilities develop.
5. Implement: Actualize the Sustainability Strategy
This is where the rubber meets the road, and the agreed strategies and plans are transformed into actionable components. The process of implementation comes with technical challenges, consensus building and training to build experience and confidence. Companies that try to take on too much may end up achieving less than those that start slower but build a broader base of consensus for the way that responsible finance is integrated into their business model. The key is focusing on “materiality”; the things that matter for the business, and not just capitalizing on the latest and/or trending topic in sustainability.
6. Iterate: Improve, Repeat, and Change for Better
Each firm’s journey towards sustainability may be unique, but one thing is for sure — transformation of business around sustainability and responsible finance cannot happen overnight. FinTech companies should aim for steady and consistent progress in line with their growth stage, their needs, and, most importantly, the materiality of different sustainability issues.
A FinTech startup can compare their maturity and growth in sustainability to a child learning to walk. They first start by moving in small spaces in the first couple of months after birth, graduate slightly to crawling and/or more confident movements while supported, then advance to shaky independent steps before reaching the prized milestone of walking and then running. In the same way, FinTechs should adopt sustainability early in their growth and advance its implementation, measure and evaluate resulting changes, and incorporate continuous improvement to ensure their sustainability goals are met.
To start or advance your sustainability journey, join the fourth cohort of the GVI FinTech Program — Applications close 18th Jan 2023.