Environmental, Social and Governance in the Payments Industry

Jun 16, 2023
5 minutes Read
Discover how ESG in Payments is transforming the industry, prioritizing sustainability and governance for a socially conscious future.
Environmental, Social and Governance in the Payments Industry

These days, businesses in every sector are concerned about more than their bottom lines. They need to think about where they stand on Environmental, Social, and Governance (ESG) factors. People want to do business with companies that share their values. They’re looking to support, buy from, and work for organizations that are socially and environmentally conscious – and that includes the payments industry.

Promoting Sustainability in Payments

Payment companies occupy a critical role in the value chain as payment transactions are fundamental to nearly every business and consumer relationship. As such, payment organizations are uniquely positioned to leverage those arrangements in promoting sustainable practices, both in the industry itself and across society at large.

Many already are. A report by Global Data showed a market size of ESG in payments of $1.5 billion in 2021. ESG commitments are becoming the norm across the payments industry and payment leaders are shifting to sustainable practices inside their own operations, through the products and services they provide, and as part of the vendor relationships they maintain.

To support the “E” in ESG, for example, some payment companies offer carbon-neutral payment options or loyalty programs that reward low-carbon transactions. Many redirect a small fraction of the payment to carbon emissions removal or reduction projects, such as reforestation. Business and consumer support for digital payments over cash, and biodegradable debit and credit cards over plastic, helps reduce energy and resource consumption, and reduces costs.

Other payment companies and fintech startups focus on the “S” of ESG through financial inclusion and serving communities beyond the scope of larger financial institutions. For example, some fintechs specialize in remittance and cross-border payments for remote workers and gig workers. Others help drive financial literacy through budgeting or green investment apps, or by providing micro-loans to entrepreneurs in communities underserved by the standard credit system.

Others focus on supporting and building ethical supply chains, by partnering with financial institutions that offer green payments products. Others provide carbon impact data to customers about their transactions to build awareness about how smart spending can drive sustainability. In this case, a thorough evaluation of ESG factors forms part of the onboarding process for new vendors, often through sustainability questionnaires.

Leveling Up on ESG Reporting

One of the primary ways that payment providers and the payment industry amplify the Governance part of their ESG commitments is through policy and decision making. When ESG priorities are embedded into a company’s DNA, every decision – operational, investment, hiring and salary, product development, and more –  is evaluated for its sustainability impact.

Wherever payment service providers and payment fintechs focus their ESG activities, people want proof of performance. Investors, customers, and downstream and upstream partners are requiring more complete details on ESG activities and impacts, both internally and externally.

That data can be challenging to collect, and those metrics can be difficult to pin down. However, governments and industry bodies are making the ESG landscape clearly by devising new policies, legislative requirements, and quality standards to ensure that companies are transparent in their ESG reporting and make full and complete disclosures. In turn, better data and increased scrutiny provides more insights that help companies drive more sustainable practices within their operations and across the industry.

ESG Risks and Opportunities

Building and implementing an ESG strategy is a long-term process. As with any business decision or process transformation, it involves risks and opportunities. As companies in the payment industry optimize their payment offerings for ESG and make sustainability a core part of their value propositions for employees, suppliers, and customers, they need to weight the benefits of various approaches. The following are major gains for payment providers from leveraging ESG that nevertheless carry some risk.

Cost savings: Adherence to ESG factors can involve initial outlays, such developing new software that calculates carbon offsets, switching to low emissions energy sources or electric vehicles. Over time, these changes reduce costs, by saving resources and fuels, and by attracting new vendors and customers.

Attracting talent: Payment companies and fintechs can leverage ESG commitments to attract talent and motivate employees. Younger demographics in particular are choosing to work – and work better – for socially engaged companies that do the right thing on environment, society, and demonstrate high levels of corporate responsibility. Paying lip service to inclusion, diversity, green initiatives, and community philanthropy won’t cut it. Companies may need to hire new people, shake up their Board memberships, or designate a committee to head up ESG initiatives and targets.

Reputation and brand positioning: While it’s not yet common in the payment industry, some firms in other sectors are gaining market position by attaching their brand to ESG factors. The crucial detail here is authenticity: going all in on ESG – on such factors as ethical spending and investing, diversity, and net-zero emissions targets – without being able to demonstrate tangible positive impacts could do more damage than good. Once those impacts are tied to measurable KPIs, they may garner more customers, grow revenue, and increase shareholder value.

Making ESG the “Point” of Sale

As businesses, governments, and communities look for ways to combat climate change, the financial system and the payments ecosystem supporting it are emerging as vital partners. In this context, payment organizations that fail to address issues of environmental and social sustainability may lose out. They risk eroding their customer base, losing partners, and turning away investors who will opt instead for providers that share their outlook on ESG.

As ESG factors become the standard across the economy, payment leaders of the future will be those who grab the reins on ESG, leverage opportunities, and encourage others to follow their lead.