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1、 1 ESG AND FINTECH FUNDING IN THE EU ANASTASIA GIAKOUMELOU a*ANTONIO SALVI b*STELIOS BEKIROS c GRAZIA ONORATOd a Ca Foscari University of Venice,Venice,Italy(CORRESPONDING AUTHOR)b University of Turin,Turin,Italy c University of Turin,Turin,Italy d University of Bari Aldo Moro,Italy Abstract The acr
2、onym FinTech,delineating financial technological innovation,altered the modus operandi of traditional banks and intermediaries and gave rise to alternative providers in the FinTech realm.At the same time,the increasing regulatory and market attention to environmental,social and governance(ESG)risks,
3、changed the rules of traditional finance.This work investigates the impact of ESG on FinTech pricing.We analyze European FinTech firms to evaluate whether superior sustainability profiles lead to higher valuations during funding rounds from 2014 to 2022.We find that ESG reporting is positively relat
4、ed to capital raised,with investors addressing physical and transition risks and demonstrating higher propensity for firms that appear to mitigate them.Lower trust in the relatively young FinTech niche is confirmed by the signalling role ESG disclosure demonstrates,while finer shades of ESG profilin
5、g,such as rankings and certifications that are also examined in this paper,remain of no impact.Keywords:FinTech;ESG;physical risks;transition risks;firm value All authors jointly declare that This research did not receive any specific grant from funding agencies in the public,commercial,or not-for-p
6、rofit sectors.a*Department of Management,Ca Foscari University of Venice,Italy,Tel:+390412348701,Edward Wright Building S29,Email:ana.giakoumelouunive.it b Department of Management,University of Turin,Via Verdi 8-10124 Torino,Italy,Tel:+3901167025902222;E-mail address:antonio.salviunito.it c Departm
7、ent Management,University of Turin,Via Verdi 8-10124 Torino,Italy,Tel:+3901167025902222;E-mail address:stelios.bekirosunito.it d Department of Economics,Management and Business Law,University of Bari Aldo Moro,Largo Abbazia Santa Scolastica,53,70125 Bari,Italy,Tel:+393891719001;Email:grazia.onoratou
8、niba.it This preprint research paper has not been peer reviewed.Electronic copy available at:https:/ not peer reviewed1ESG AND FINTECH FUNDING IN THE EUAbstractThe acronym FinTech,delineating financial technological innovation,altered the modus operandi of traditional banks and intermediaries and ga
9、ve rise to alternative providers in the FinTech realm.At the same time,the increasing regulatory and market attention to environmental,social and governance(ESG)risks,changed the rules of traditional finance.This work investigates the impact of ESG on FinTech pricing.We analyze European FinTech firm
10、s to evaluate whether superior sustainability profiles lead to higher valuations during funding rounds from 2014 to 2022.We find that ESG reporting is positively related to capital raised,with investors addressing physical and transition risks and demonstrating higher propensity for firms that appea
11、r to mitigate them.Lower trust in the relatively young FinTech niche is confirmed by the signalling role ESG disclosure demonstrates,while finer shades of ESG profiling,such as rankings and certifications that are also examined in this paper,remain of no impact.Keywords:FinTech;ESG;physical risks;tr
12、ansition risks;firm valueThis preprint research paper has not been peer reviewed.Electronic copy available at:https:/ not peer reviewed2IntroductionAlready well into its third era,referred to as FinTech 3.0,financial innovation has reshaped the market for financial services,a sector traditionally ch
13、aracterized by limited efficiency leaps and restricted entry of new players(Philippon,2016;Campanella et al.,2023).Traditional financial services are now integrated with technology,while new services emerge through technological advancement(Liberti and Petersen,2019).The ongoing digital transformati
14、on of the economy has given birth to a new type of institution that differs substantially from a traditional bank:the FinTech firm.The latter is a prevalently young,fast-paced,highly technological and not always purely financial institution(Murinde et al.,2022).The robust presence of FinTech firms i
15、n a changing industry,also in terms of its demographic and consumption trends,is evident in the professional and academic debates focus on the risk of displacement that traditional banking institutions run if they do not adapt to the new digital and data-driven environment(Mills and McCarthy,2017;Ze
16、tzsche et al.,2017).The role of FinTech players in profoundly altering the current market is highlighted by a series of recent studies that focus on the evolution of the sector in the post-pandemic era,indicating a strong growth for FinTech corporate adoption rates in technology-driven transactions(
17、Alawi et al.,2022;Karim et al.,2022 a,b;Naeem et al.,2022 a,b).The post-pandemic economy,however,is not only defined by digitalization but also by an equally dominant trend towards a sustainable transition through environmental,social and governance(ESG)integration(Becker et al.,2022).In fact,among
18、financial trends that emerged after COVID-19,green and sustainable finance is most likely the strongest,following the first ESG-related regulation after years of complete lack of standardization and law for environmental and social disclosure.Policy makers identify finance as the key vessel to guide
19、 the transition of the economy(Park and Kim,2020),while the ESG integration is further backed by corporate and retail demand(Quatrini,2021).Van Tulder et al.(2021)sustain that the transition towards a sustainable economic paradigm could generate$12 trillion of economic opportunities by 2030.A large
20、number of global public and corporate entities are utilizing FinTech tools and services on their sustainable transition(Baldassarre et al.,2020),while technology is considered crucial for the creation of a green and inclusive framework as markets are driven by ESG concerns(Fernando et al.,2019).The
21、heightened attention on sustainability has created a need for technological infrastructure to support both corporations and investors;from the multifaceted assessment process to the lack of standardized,reliable and objective ESG data,FinTech can play a big part in the transition economy(Huovila et
22、al.,2019;Rangu et al.,2022).FinTech can facilitate impact valuation for firms,as well as channel capital towards more sustainable assets through artificial intelligence,blockchain and big data applications(Mosteanu and Faccia,2020).Corroborating this idea,FinTech is classified by the United Nations(
23、2019)as one of the innovations that can support the Sustainable Development Goals(SDGs)and UN 2030 Agenda,as a booster for green development and social inclusion(Arner et al.,2015;Mirza et al.,2023).Despite what has been discussed so far,however,the fields of FinTech and sustainability have very rar
24、ely been combined both in research and in policy making(Nassiry,2018).More specifically,only recently have regulators treated the two growing fields in a relatively unified manner.The EUs Fintech Action Plan for a more competitive and innovative European financial sector(more recently,the Digital Fi
25、nance Strategy)and the Sustainable Finance Action Plan as of March 2018 represent important pillars of the current European political agenda.European authorities recognize for the first time the common characteristics and synergistic effects between ESG and digitization(Macpherson et This preprint r
26、esearch paper has not been peer reviewed.Electronic copy available at:https:/ not peer reviewed3al.,2021),exploring the link between FinTech and Sustainable Finance through referenced to the eco-sustainable segment of the former(Macchiavello and Siri,2020).This paper aims to bridge the gap in curren
27、t literature,combining FinTech and sustainability to explore how ESG considerations affect FinTech funding,as well as the impact of recent regulation on financial market participants(FMPs,as referred to within the SFDR EU regulation for ESG disclosure).The EU has provided the first regulatory framew
28、ork targeting the reorientation of capital in order to finance the economys transition towards sustainability,increase transparency and standardization in terms of ESG risks,valuation and products and deal with greenwashing(PRI,2018).In fact,the EU is the first geographical block to present a unifor
29、m and wide-spectrum legal framework,translating the pledges made in line with the UNs SDGs and 2030 Agenda into regulation for both corporations and financial market participants(banks,insurance companies,funds,asset managers and alternative investment services providers).Given the relative novelty
30、of FinTech firms in the market,their valuation drivers remain widely unveiled,particularly so in a field that is still evolving such as ESG risk and value integration.Our study focuses on EU FinTech firms,drawing from the peaked relevance of the particular market being the first geographical block t
31、o present a legal framework for ESG.This paper analyses the sustainability profile of European FinTech firms during funding rounds,without segregating them by service specialization(insurance,loan provision,direct investment services).We make several contributions of particular significance for inve
32、stors,the financial services industry and policy makers,highlighting the need for increased transparency in the industry and the significance of ESG integration in the pricing mechanism,both in terms of risk and value opportunities.The rest of this study is organized as follows.Our second section de
33、velops the theoretical framework and elaborates current literature in the field of ESG and FinTech,concluding with our hypotheses.Following,we discuss our sample and econometric model and proceed,in our fourth section,with the empirical findings of our research.Finally,we discuss our works practical
34、 implications for the various stakeholders in todays economy.1.Literature Review1.1 FinTech and ESGAs briefly introduced,the two fields of financial technologies and sustainability have rarely been combined,despite their synergistic potential(Lisha et al.,2023).Few studies delve into the relationshi
35、p between environmental externalities,such as pollution levels,and FinTech(Macchiavello and Siri,2022;Irfan et al.,2022),theoretically exploring the relationship between technology and sustainability in Europe.Similarly,Croutzet and Dabbous(2021)find support for the positive role of FinTech in trigg
36、ering renewable energy use across OECD countries.They suggest that FinTech can incentivize the use of renewable energy and help fund its development,as well as facilitate the management of grids of small renewable energy prosumers.According to their study,cryptocurrencies,such as NRGcoin-a blockchai
37、n-based cryptocurrency for renewable energy,are an example of FinTech applied to renewable energy use.Similarly,Moro Visconti and Morea(2020)and Li et al.(2022)investigate Green FinTech and demonstrate a link between green financing and sustainable development.Those findings are contradicted by stud
38、ies on the relationship between technologically advanced financial products,especially cryptocurrencies that are powered through high energy consumption,and the environment,which find that environmental externalities generated outweigh potential benefits(Tao et al.,2022;Liu et al.,2022).Mirza et al.
39、(2023)suggest that This preprint research paper has not been peer reviewed.Electronic copy available at:https:/ not peer reviewed4technological innovations optimize various functional aspects of banking firms and expedite green finance while supporting bank profitability.Their paper focuses on the E
40、uropean banking sector and showcases a positive relationship between investment in FinTech and green lending attributable to the search,diligence,and monitoring efficiency of new technologies,as well as improved risk-adjusted returns on capital associated with low cost,expanded product base,and lowe
41、r economic capital.Similar results are found by Yan et al.(2022),who reveal a positive impact of FinTech adoption on the sustainability performance of banking institutions in an emerging economy such as Bangladesh.Research focused on China has further shown the role FinTech has played in the reducti
42、on of green-house gas emissions,through the assistance provided to the government in implementing environmental regulations and promoting green financing(Muganyi et al.,2021,Wu et al.,2022).Sustainability in finance also refers to financial products and services that factor ESG in during the loan de
43、cision,monitoring,and risk management processes,encouraging environmentally responsible investment and promoting low-carbon technologies,projects,industries,and businesses(Kemfert and Schmalz,2019).As a matter of fact,new studies have further elaborated the role of FinTech in the sustainable transit
44、ion of the economy.Blakstad and Allen(2018)empirically supported the enabling role of FinTech in the achievement of SDGs.Moving past the environmental impact that is most frequently investigated,Afzal et al.,2022 provide proof of the social inclusion and progress that new technologies can garner.Add
45、itionally,a positive relationship from the latter aspect has been found also in developing markets,such as Ghana,where the growth of the FinTech market is linked to an increase in financial and social inclusion in the country(Coffie and Hongjiang,2023).Examples of areas in which Fintech can play a s
46、ignificant role,according to Pizzi et al.(2021),include:(1)food trust and supply chain traceability;(2)reputation systems to build trust;(3)fractional ownership of assets;(4)improved identity applications through traceability of use/ownership;(5)disaster prediction and management;(6)traceability of
47、investment and tracking of development funds.As established banks are no longer the only players in the financial services industry,FinTech firms create new competition and product offer,benefiting both the economy and society as a whole(Zetzsche et al.,2020).This assumes particular relevance in eco
48、nomies that are heavily reliant on small-and medium-sized SMEs,a segment of the business universe that was severely restricted in terms of access to capital after the 2008 financial crisis.In this direction,Abbasi et al.,(2021)demonstrate how FinTechs improve SMEs efficiency through a wider range of
49、 financing options,as well as increase the propensity of SMEs to adopt tech and digital solutions across their business.1.2 The characteristics of FinTech firms The strong growth the FinTech field has registered during the past decade has been primarily fueled by the sharing economy,favourable regul
50、ation,ICT innovation and the advent of Industry 4.0(Huynh et al.,2020).The innovative technologies of the firms that are identified in the FinTech market are found to spur cost of capital reductions and boost operational efficiency through scale and speed,while maintain a customer-centric business m