ESG in payments

Back in November, I had the pleasure of attending the Commercial Payments International (CPI) Global Summit and joining a panel to discuss Sustainability and ESG in Commercial Payments. I was joined by Lydie Charpin (Mastercard), Delphine Millot (GBTA) and Patrick Diemer (BT4E and former CEO-AirPlus).

I took this opportunity to reflect on 4 areas:

Why does sustainability and ESG matter to the commercial payments industry?
What are the 3 key roles the industry can play in moving the needle in the right direction?
Does the narrative need to change… should we be rewording ESG to E (sg)?
Where is the industry today?

Before diving into these areas, it is worth taking a step back to frame the discussion. Sustainability and ESG are often discussed together as a single topic. It is also common for other terminology to be used interchangeably to describe these topics, such as Corporate Social Responsibility (CSR), responsible business and altruism, to name but a few.

Despite some shared common purposes, each of these topics is different and should not be referred to interchangeably. In a nutshell, sustainability is not ESG, and CSR is not ESG, and altruism is something very different!

In this discussion, I looked at the sustainability and ESG topics from a holistic level, and not specifically from an ESG investment perspective.

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1.Why does sustainability and ESG matter to the commercial payments industry?

I opened the panel by answering this critical question, and one that is still being grappled with in the industry. I examined 4 key angles of influence in this discussion:

A) The impacts the payment industry has

B) Its unique position in the global economy

C) The growing interest from regulators that is amplifying the need to build sincere and measurable ESG strategies, policies and practices

D) And finally, the benefits that sustainability and ESG initiatives can provide players in the industry, as well as the benefits they can provide their clients

A) The payment industry’s impacts

Environmental and social issues have increasingly become more prominent discussion points in our daily lives and workplaces. Despite counter arguments and opponents, there is wide consensus that these issues are impacting the whole of humanity and that action must be taken to address worsening environmental issues (e.g., pollution, climate change, ocean acidification, loss of biodiversity, deforestation, etc.) and social issues (e.g., inequality, inclusion, fair and safe working conditions, human rights, etc.).

Yes, it is fair to say that there are other industries that, on first thought, have more evident impacts, but it must be remembered that the payments industry is a heavy user of energy and resources. It is also a significant employer and an industry that touches so many communities.

When categorising impact, we need to consider both direct and indirect impacts, and take into account the broader effect businesses have across across the entire supply chain (e.g. Scope 3 emissions).

Key direct and indirect impacts for the commercial payments industry:

Direct

Direct impacts: Impacts arising from a company's own operations (based on resources and practices that a company directly owns and controls)

Despite advances in virtual payments in some countries, the industry has historically produced large volumes of non-recyclable PVC payment cards, which also require EMV chips. We are seeing card manufacturers and issuers investing in more sustainable card formats, e.g., recycled PVC, reclaimed ocean plastic and bio-sourced plastic substitutes; all of which will help reduce plastic waste. However, we must remember that plastic cards are in circulation today and are likely to remain so for the foreseeable future.
The move towards digital payments and wider digital adoption is gathering pace and this is helping companies to be more environmentally friendly. Payment companies do need to take a step forward and think beyond promoting paperless and digital payments; these alone are no longer enough.
The payments industry is a large employer and touches peoples’ everyday lives and communities around the world. From an employment perspective, payment companies should be incorporating Diversity, Equity and Inclusion (DE&I) values into their hiring, training and development frameworks. Not only to provide equal opportunities and treat people fairly, but also to attract talent, e.g., from underserved or disadvantaged communities.
The payments industry could have, and has had in many cases, a role to play in increasing the financial literacy of consumers and businesses, ultimately helping them make better financial decisions and protecting their rights. Likewise, it can play a role in providing disadvantaged people and communities access to payment methods for financial inclusion.

Indirect

Indirect impacts: Impacts arising from business operations across a company’s ecosystem or value chain (based on resources and practices that a company does not directly own or control)

The processing of transactions uses cloud and mobile infrastructure powered by data centres. These data centres are typically energy hungry and operate 24/7/365, producing a significant environmental impact.
Going forward, the increased deployment and advancements in Artificial Intelligence (AI) and Machine Learning will lead to ever higher demands around computing power, amplifying their environmental impact.
Some data centres have started taking action to reduce their environmental impact and more are set to follow, e.g. using water cooling vs. air cooling systems.
Payments are industry agnostic. Nevertheless, when discussing sustainability and ESG, the payments industry is often closely linked to the travel industry given the use of payment solutions (especially cards) to make travel purchases, e.g., purchase flights, hotels, etc. for business purposes. The process of moving people or running hotels, among other things, is energy and resource intensive, and hence the travel sector can be seen as a larger emission contributor vs. many other industries.
Outside of the environmental impacts, the travel industry also has wide reaching social impacts on its host communities. By offering products and services that facilitate travel related purchases as well as programmes that incentivise and reward travel, the payments Industry has an indirect impact on the travel industry’s Environmental and Social footprints.

But is it all bad news?

Thankfully no! The payments industry’s linkage to other industries does not and should not be skewed to focus on the negatives, e.g., the payments industry indirectly contributing to the travel industry’s carbon footprint. To the contrary, these links provide opportunities for industries to have a shared commitment and amplify positive impacts, e.g., supporting the travel industry’s efforts to decarbonise by providing products to support smarter and greener travel, or educating businesses on alternatives at the point of payment, e.g., greener accommodation options, more green travel routes, carbon calculators and offset rewards, etc.

B) The payment industry’s unique position

I also took the opportunity to discuss the somewhat unique position that the commercial payments industry holds and why the industry is so well placed to be a positive force for good.

The industry touches many parts of peoples’ and corporate lives; payments often underpin and are intwined in many of our daily tasks
The industry engages with a wide variety of sectors including larger emissions contributors such as the travel sector, oil & gas, etc. where helping create a small positive change could have significant impacts and benefits on an environmental level
Payments operate on a truly local and global scale; domestic and cross-border payments help connect people, communities, businesses, marketplaces and economies
The industry and its ecosystem are well positioned to provide access to resources. This can be access to finance but also expands to providing resources critical in driving change and measuring success, e.g. data (which is often a scarce resource and, as I explained to the CPI audience, is a salient challenge faced by many businesses as they look to measure and evidence their impacts)

C) Regulators care!

Recent developments have also shown that regulators globally are increasing looking to incorporate ESG principles into regulation. In the U.K. and at the European level, regulators are being more forward thinking. For example, the Corporate Sustainability Reporting Directive (CSRD) came into force this month (January 2024) and requires companies to report on the impact of their corporate activities on the environment and society, and requires the audit to assure the accuracy of any reported information.

In territories such as the U.S., the landscape is more complex, and views are more polarised. In several U.S. states, we have seen the passing of anti-ESG bills or state boycotts of institutions perceived as boycotting fossil fuels. We’ve also seen the Securities and Exchange Commission (SEC) indicate its plans to release a final rule mandating that companies describe their strategy toward climate risk, including plans to achieve any targets they have set, on their 10-K Form.

Staying in the U.S., the SEC and The Federal Reserve are increasing their focus on investigating companies’ ESG activities, particularly around environmental, social and governance-related misstatements – or green washing. Recent fines issued for misstatements, as in the case of the asset manager – DWS, shows that these can be sizable in value.

Despite this increased activity, sadly there is still a lack of correlation and interplay between regulations, as is also the case with the multiple ESG reporting frameworks that currently exist today.

I explained to the CPI audience that the trends seen in the U.K., Europe and the U.S. signal a shift from voluntary reporting to mandatory reporting, and that I feel that this shift will only gather momentum over the next 1-2 years.

D) The benefits – Sustainability and ESG as a value creator and risk management strategy

Incorporating Sustainability and ESG principles into your business planning and operations can provide significant value creation opportunities and help manage business risks:

e.g. increasing revenue, profits, lowering costs (e.g., using environment-friendly and digital alternatives, reducing energy consumption, etc.), improving brand equity (e.g., connecting with stakeholders on an emotional branding level and building a bank of goodwill), among others
e.g., creating new products / services / approaches to address environmental and social challenges
e.g., being seen as a better employer, engaging employees on a deeper emotional level, having access to a more diverse talent pool, among other benefits. Increasingly, a business’s ESG activity, along with its Diversity, Equity, and Inclusion (DE&I) practices, are areas that Gen Zers are looking at in the recruitment process and are translating into how this cohort select employers and business partners
e.g., attracting and driving long term loyalty with your customer base as consumers begin to favour sustainable businesses, customers being prepared to pay price premiums, and the like
e.g., detecting off-balance sheet risks such as environmental issues that could impact your business
e.g., by avoiding building relationships with companies that have a poor workforce health and safety record or high labour disputes, have insufficient access to raw materials, etc.
e.g., providing measures to evaluate a company’s performance against that make leaders and businesses more accountable, which will help improve overall business performance in the long run

2. What are the 3 key roles the industry can play in moving the needle in the right direction?

I believe there are 3 key roles that payment companies can play in the Sustainability and ESG space, and many are well placed to fulfil all 3, albeit some will be more prominent in certain roles than others.

Provide information, materials, training and share knowledge and best practices to businesses to help them make more informed decisions, e.g., thought leadership, training, evidence of business benefits, frameworks on how to manage pitfalls, among others. From my experience, this is key for most of the SME segment, which is still characterised by a lack of sustainability awareness and understanding
Provide solutions to directly address businesses’ sustainability and ESG needs, e.g. through providing plug & play solutions or programmes that businesses can adopt or participate in, allowing cardholders to use their reward points to make a positive change / support initiatives (e.g. Mastercard’s Priceless Planet, Visa’s Eco Benefits, etc.), offering carbon calculators, offering differential pricing on green / sustainable activities, moving money quickly and safely to hard to reach and underserved countries through the established payments infrastructure, etc.
Create opportunities for businesses to address sustainability and ESG needs themselves, for example through providing:
- Data to feed into ESG reports and/or to be used to identify areas to increase efficiencies (especially data that could help bridge the gap for companies in regards to Scope 1-3 carbon emissions disclosures)
- Access to partners that businesses would not necessarily have access to themselves
- Access to new technologies, tools and thinking to help make considered purchases or assist with ethical supplier selection, among others

In providing new technologies and new tools to empower companies, payment providers take on the role of an ‘Engineer.’ Fulfilling this role will include a mix of small and large scale developments, but ultimately payment companies should be looking to build and facilitate the building of responsible ecosystems and rails that drive positive change and inclusion. Yet, despite the positive impacts that the industry can have on society at large, it must deploy these in a considerate way to avoid any negative impacts. For example, the drive towards cashless payments and cashless societies does present some challenges and risks, such as social exclusion (of disadvantages communities, countries, etc.), increased risks of identity theft, compromising individual and corporate privacy, and the like. To achieve this, payment providers need to step up and play a role not only as a steward, but also a guardian, to ensure that all developments and actors in the ecosystem drive and safeguard positive outcomes for the economy, the environment and society at large.

3. Does the narrative need to change… should we be rewording ESG to E (sg)?

This is a frequent question and a comment I hear when discussing sustainability and ESG, as most commentary is focused on the ‘E’, or the Environmental aspect. The ‘S’ and the ‘G’, or the Social and Governance aspects, are by no means less important, they have simply received less airtime.

I explained to the panel that I think the ‘E’ has been more centre stage as there has been a louder narrative on this aspect; it has been easier for people to see, understand, and also take action towards addressing it. Headlines frequently discuss climate change, we’re encouraged to recycle, tools exist to help us track our carbon footprint, we can contribute to reforestation programmes, etc. This has helped make the Environmental aspect a common discussion point.

Specifically in the business travel space, we are seeing travellers take less trips but have longer stays. Travellers are also turning their business trips into 'bleisure trips' to make the most of the trip. As Lydie from Mastercard commented during our panel, sustainable business travel is top of mind and companies are looking to revise their T&E policies to better manage their environmental impacts. In fact, travel decision makers are saying that their responsibilities now include a greater emphasis on ESG tracking for business travel. Mastercard have also observed that they are seeing increased investment in product development focused on collecting carbon data, defining standards and digitizing payments, e.g. with virtual cards being embedded into booking and expense tools.

The ‘S’, or the Social aspect does often feel the poor relative of ‘E’, and is often overcast by its shadow. Why is this? One reason for ‘S’ not having the same airtime as ‘E’ could be linked to the complexity of issues that it covers. Social issues are wide and far reaching, and cover topics such as inequality, diversity & inclusion, working conditions, human rights, product safety, community relations, supply chain transparency… and the like.

I do feel that this aspect has received heightened attention on the back of the Covid-19 pandemic as it demonstrated the importance of treating employees well, and many companies were evaluated on their behaviour, and on having a resilient supply chain.

If ‘S’ is the poor relative, ‘G’, or the Governance aspects of the ESG family resembles more of a long lost or distant family member that is often forgotten or overlooked for being invited to any festivities! It is, however, a critical aspect and one that ultimately determines any companies’ long term success in the sustainability and ESG areas.

Governance plays a critical role for business success in general. It encapsulates how companies are structured, how they are controlled (e.g., having the right leadership and culture in place), as well as what the company’s vision, mission and strategic goals are. It is also responsible for establishing clear performance measurement parameters. So, if you get it wrong from a Governance perspective, it is likely your business will underperform, e.g., from a lack of strategic vision and purpose, poor risk management, among others. Insufficient governance practices can have a significant negative impact on business reputation and investor confidence.

In the ESG space, sound governance could include making more ethical or green focused investments, having a more diverse board of directors, increasing executive accountability, training all employees on ESG policies, having clear company policies and values, linking incentive payments and bonuses to ESG performance measures, all the way through to making regular ESG information disclosures.

As a call to action, I do believe that we need to increase the airtime for ‘G’ as it is a vital ingredient for creating winning 'E' and 'S' strategies.

4. Where is the industry today?

In answering this question, I explained to the CPI audience that I believe we are still at the beginning of the payments industry’s journey. There have been some great initiatives, but we are still really at the tip of the iceberg. When compared to other industries, the payments industry is behind.

It is fair to say that over the last 5 years, coverage and discussion of sustainability and ESG has skyrocketed. However, it has not all been plain sailing as more recently, the sustainability and ESG agenda has faced some strong and challenging headwinds. Extraordinary events such as the Covid-19 pandemic and an increasingly challenging geopolitical landscape shifted the focus for many businesses away from sustainability and ESG, placing a strain on many companies’ ability to achieve their objectives.

Despite these headwinds, we have seen a number of positive tail winds emerge. Putting aside the obvious and enormous negative impacts of the Covid-19 pandemic, businesses were given the opportunity to reassess almost every aspect of their operations. The pandemic also accelerated the rate of digitalisation as businesses had to respond to the ‘new normal,’ and this happened at a rapid pace with step changes often being seen in corporate transformation activity. Over this period, interest in sustainability, ESG and wider corporate responsibility was largely elevated. Emissions were reduced, social issues like labour practices and employee safety were paramount concerns and supplier stability became an important issue.

In ending our panel discussion, I called out the need for all companies to take into account the complexity and ambiguity around sustainability and ESG when formulating business strategies. Navigating these topics is often challenging and ESG opponents will be quick to call out any ill-conceived and poorly implemented activities. To succeed, sustainability and ESG should not be seen as a box ticking activity, instead it needs to be woven into the DNA of companies and underpin the way that businesses do business. It is also imperative that businesses must truly commit to the causes and initiatives they are championing, as well as being willing and able to demonstrate their impact.

The Commercial Payments International (CPI) Global Summit was a great event with yet another fantastic line up of top speakers, thought leaders and a diverse audience. The event covered a vast array of topics of relevance to the commercial payments industry and I’m looking forward to the 2024 conferences, starting with the European Summit in March.

Glossary:

Not all things are equal: Unwrapping commonly used terms when discussing sustainability and ESG

Sustainability: Refers to conducting business activities without negatively impacting the environment, communities, or society at large. Sustainability is a broad principle that encompasses a range of responsible business practices

Corporate Social Responsibility (CSR): Refers to businesses being accountable for their behaviour and impacts. This is embedded in the concept that businesses have a social mandate to fulfil and there is mutual dependence between businesses and society. It can be seen as a form of self-regulation that ensures a company's actions have a positive impact on all stakeholders, from consumers, employees, investors to the wider community and the environment

Altruism: Refers more to a corporate undertaking activities or exhibiting behaviours that are intended to provide value for others, and not for the business. Altruism can also be described as selfless behaviour and is often driven by a person’s self-beliefs. This is different from the above topics where value creation for the business is a planned outcome / benefit

ESG: Refers to measuring the impact of a company’s activities or investments on Environmental and Social issues. It also aims to ensure there is the right governance in place amongst companies to optimise their respective impacts. ESG has also come to formalise CSR, sustainability and other topics such as Diversity, Equity & Inclusion (DE&I) into business operations and planning. ESG was born from the investment community to provide meaningful sets of numbers to help investors understand and more importantly measure a company’s philanthropic, social and internal governance practices. So measurement is key to this topic.

An insider’s perspective:

Focus on what matters