The rules shaping diversity in fintech

The current state of diversity in fintech—or a relative lack thereof—is certainly driven in large part by the priorities, worldviews, and decision-making processes of investors. But policies and regulations undergird these trends, and can materially affect the kinds of projects and populations that end up seeing fintech-focused investment.

ESG regulations

Though not immediately related to questions of demographic diversity, environmental, social, and governance (ESG) rules do call upon companies to factor community engagement, ethical business practices, and environmental impacts into their operations. With communities of color and low-income populations affected by climate change and corporate extractivism to a greater extent than other groups, ESG rules—when holistically executed—respond to the realities of racial, gender, and economic discrimination, and create more diverse solutions and products in the process.

At their best, these frameworks can compel companies, including fintechs and the VC firms investing in them, to push into underserved markets and geographies. But a growing number of states have imposed major limits on ESG-led operations, politicizing the practice as a symptom of gratuitous progressivism. But “ESG is simply about identifying material risk factors that matter to company profitability and shareholder value over time,” Daniel Crowley and Robert Eccles write in Harvard Business Review, meaning constraining ESG frameworks can exacerbate the long-term viability of a range of investments, including those made into fintech ventures.

Hurdle rates

As financial analyst Advait Arun notes in his analysis of the relationship between investment standards and social outcomes, investors are beholden to fiduciary duty requirements and commitments to shareholders. These thresholds “prevent fund managers from making investments unless they meet certain profitability or earnings quality thresholds that enable them to pay carried interest and adequate dividends,” Arun writes.

These limits, known as “hurdle rates,” are unattached to the cost of capital or macroeconomic conditions “As a result many projects with otherwise healthy returns and low costs of capital may never secure investment,” Arun continues. This, no doubt, affects the kinds of fintech solutions that are invested in—seeing runaway growth through tried-and-tested markets, rather than expanding into underserved or slower-growth markets.

Social safety nets

From a more HR-related perspective, the lack of regulatorily-entrenched social safety nets affect who can enter higher-risk forms of employment like working at—or launching—a startup. Backstops like paid parental leave and public health insurance can offer the breathing room for lower-income entrepreneurs and parents to turn their fintech-focused mission into a successful venture.