Fintech-Enabled ESG integration in Indian MSMEs: Empirical evidence from open finance & embedded banking and policy implications

Abstract

This research explores the impact of financial technology (fintech) especially open finance and embedded banking as a driving force for Environmental, Social and Governance (ESG) integration of micro, small and medium enterprises (MSMEs) in India. Survey data from 127 MSMEs situated in three digitally developed southern Indian cities, including Bengaluru, Hyderabad and Chennai, is collected and analyzed using a quantitative, descriptive–analytical research design. The study employs various analytic techniques such as descriptive statistics, ANOVA, exploratory factor analysis (EFA), Bayesian inference and structural equation modeling (SEM) to investigate the behavior and demographic drivers of fintech-enabled ESG practices. The results show that factors such as personalization, trust and ease of use have a significant and positive effect on MSME's satisfaction with fintech platforms and through this, they develop ESG-aligned financial behavior. The gender variable does not have a significant impact on the behavioral scores, which hints at the fairly neutral perception of fintech by MSME decision-makers in terms of gender. The SEM results produce a good model fit (CFI = 0.95, RMSEA = 0.045, TLI = 0.93) with personalization being the prime factor of satisfaction. Though there are promising adoption trends, there are still some problems like the digital financial literacy issue, unevenness in infrastructure and unclear policies on ESG standards specific to MSMEs.