Fintech firms see a role for themselves in assisting and enabling the Luxembourg financial centre’s strong move towards sustainable investing, but call for collaboration and support from the financial industry and the Luxembourg government to make this work.
“Supporting the presence of Green FinTechs and their collaboration with Luxembourg incumbents should be viewed as a high-multiplier investment against the backdrop of the country’s sustainable finance ambitions,” a report by Luxembourg House of Financial Technology, or Lhoft, and Deloitte Luxembourg said.
“With the burgeoning growth of FinTech across the globe and likewise in Luxembourg and its success in driving efficiency, effectiveness and change in the finance sector to meet ever-evolving customer needs, the obvious question that has arisen is how FinTech can specifically assist in, if not accelerate, the widespread adoption of sustainable finance,” said Lhoft CEO Nasir Zubairi.
Sustainability has become one of the main facets of Luxembourg’s financial centre – judging from the amount of attention paid to the various aspects of this subject. Luxembourg has also become known as a centre for financial technology companies - fintechs - founded to find better technical solutions for issues facing financial institutions. The report says there are currently more than 250 of them. In some ways it’s no surprise that fintechs would take a look at the sustainability issue for financial institutions as an business opportunity given the emphasis that’s been put on developing it amidst the urgency of doing something about the climate, as a first order of business.
Scope to develop
A report produced by Lhoft and Deloitte Luxembourg takes a look at the role fintechs can play in supporting financial institutions. While it’s clear that there’s already work going on, the report argues that there is a lot of scope to develop this collaboration.
“Fintechs have had the opportunity to develop and offer their services regarding many regulatory topics, and there is no reason why sustainable finance should be any different, said Francesca Messini, sustainability leader at Deloitte Luxembourg.
The publication, entitled “FinTech for Sustainable Finance: Technology as an enabler of Luxembourg’s Sustainable Finance strategy”, “demonstrates several opportunities which, to be realised, require the removal of certain barriers and mitigation of certain challenges.
Even without that happening yet, Luxembourg FinTech sector’s environmental, social and governance offerings are growing, as fintechs interviewed for the report say they “believe they have the possibility to enter a welcoming, multicultural and dynamic market.” Financial institutions interviewed said they knew they needed to work with fintechs.
Key role of ESG data
The report points out that the most obvious way that fintech firms can help firms find ways to help them deal with the much-discussed “data challenge” as it relates to sustainability. The complexities of sustainable finance are associated with the availability and proper management of ESG data for disclosure and reporting, according to the report.
As the report says “going forward, these institutions are not only expected to integrate ESG data into their IT landscape, but the must be able to use it meaningfully for the purpose of, among others, reporting, interacting with clients on their sustainability preferences, manufacturing new products, and distributing these products on the market.”
Fintechs can support with data collection, integration and consolidation, as well as quality assurance and report production, according to the report. One of the key tools they will leverage is blockchain/distributed ledger technology, since the technology is “premised on transparency, openness and cryptographic principles enabling a new approach to the all-important concept of trust, which fosters inclusion as a result.” DLT is seen as a vector for the popularisation of sustainable finance.
Luxembourg lags on the ‘S’ of ESG
The report mentions that Luxembourg is more developed in terms of the Environmental and Governance pillars of ESG, referring to “Luxembourg’s historical maturity on Governance aspects, intertwined with the financial centre’s functional bias with a heavy emphasis on middle- and back-office functions.”
Shifting to the attainment of sustainable finance goals, such as regulatory or behaviour consumer changes, requires education, the report says. “FinTechs have an opportunity to support the ecosystem … thanks to the knowledge and technical expertise they naturally develop to build their solutions.”
A collaborative, multi-stakeholder and cross-sectoral approach can be very beneficial to sustainability overall and sustainable finance in specific.
However, as one participant is quoted as saying in the report: “FinTech alone won’t solve the problem; culture, values, education and cross-ecosystem collaboration are key.”
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