Fintech and sustainability are the two major drivers of change in the financial sector. There isn’t a financial institution that’s not involved in it. There isn’t a startup that does not derive its right to exist from it. What is striking about this, however, is that the combination is rare. FinTech is usually primarily a way of organizing the existing financial practice more efficiently. But what is the role of FinTech in creating a financial sector that includes green and social values?
In 2016, the UN Environmental Programme (UNEP) published a report called FinTech and Sustainable Development. The report presents sustainable development and new (financial) technology as the two ‘strains’ of DNA. They both have the same ‘basic potential as drivers of change and impact’ and are suitable for ‘creating new, sustainable business models’. It challenges financial institutions and FinTech start-ups to collaborate with a new sense of purpose, building sustainable development goals into their new value propositions. This is what a younger generation of Millennial and Generation Z investors expect.
Digitalization is transforming financial and capital markets, of that there is no doubt. Less clear is how we can best harness this disruption to ensure financing for the Sustainable Development Goals (SDGs) and the goals of the Paris Agreement on climate change. The newly-established U.N. Secretary General’s Task Force on Digital Financing for the SDGs is designed to figure out answers to this question, and to actively catalyze arising opportunities and mitigate associated risks.
Digitalization is far more than turning everything we know into ones and zeros. Gathering, moving, and using more data will make it faster and cheaper. This increased digitalization drives fundamental changes in business models, markets, and the design of physical infrastructure, and enables new policy and regulatory options. It covers a growing technological ecosystem, including artificial intelligence, the “internet of things,” blockchain, and cryptocurrencies, as well as the more basic but all-important mobile payment platforms. Digitalization will disrupt and recast the $300 trillion global financial systems as part of its impact on reshaping the core of the real economy. It is already changing the ways we pay for everything from food to energy to health care. Beyond that, it will change these goods and services themselves, our understanding of their relationship to us, and so how we value our options in making choices. As Jack Ma asserted in Davos this January, tomorrow’s digital economy offers us a way to address many of our global and local goals, from decent livelihoods to tempering the pace and effects of climate change. Digital financing could boost the GDP of emerging economies by $3.7 trillion by 2025. Yet its impact on sustainable development is less certain. Financial inclusion is most clearly associated with digital finance or FinTech. There have been significant advances at this nexus, catalyzed through the leadership, for example, of the U.N. Secretary General’s Special Envoy on Financial Inclusion, Queen Maxima of the Netherlands. It was a welcome sight to see financial inclusion as a core theme running through Singapore’s annual Fintech Festival last November, one of the world’s largest gatherings of FinTech folks.
More broadly, FinTech could help in ensuring that financing decisions take greater account of social and environmental externalities: from climate risk to community impacts to labor standards. For example, U.N. Women is using blockchain to strengthen financial autonomy and security for women. Crowdsourcing is being used to fund distributed solar technology, made accessible to poorer communities through the use of mobile payment systems, increasingly linked to valorization through tokenization.
On the other hand, the digitalization of finance may have serious downsides. It automates financing decisions, risking systematic exclusion of poorer, higher risk, or just unusual would-be borrowers or insures. Digitalization might increase the transparency of financial decisions but could equally open new opportunities for illicit financial flows, including those that reduce resources available for financing sustainable development. Digitally-driven increases in the pace of financing decisions can increase the profitability of volatility trading, putting a premium on liquidity and, as Michael Lewis pointed out in his best-seller on high-frequency trading, “Flash Boys,” penalize long-term investors.
Policies, regulations, and standards, alongside technology and market innovation, will be needed to encourage the upsides and mitigate the downsides of digital financing. Yet today, the first generation of rules governing digital financing is mainly about financial stability and consumer protection, with an increasing focus on measures to encourage financial inclusion. Few have connected the dots, with financial regulators and policymakers having parallel but disconnected workstreams on sustainable finance and FinTech. The nexus between FinTech and different aspects of sustainable development is likely to vary considerably, highlighted by a recent report to the G-20 by the Sustainable Digital Finance Alliance and by the T-20 Policy Brief on sustainable finance. Overcoming barriers to infrastructure investment may benefit more from innovations using blockchain than from the internet of things, while the internet of things may well be key to unlocking the circular economy. Some SDGs, such as access to education, may not be advanced through digital finance, while others, such as access to clean energy, may depend on it. Humanitarian assistance stands to benefit from the extensive use of digital finance, perhaps including cryptocurrencies, while AI and the use of big data may enable unique and productive e-identities to be established for growing numbers of displaced people.
The UNEP report identifies the main functions of the financial system and links them to the possibilities of FT4SD. This inventory presents a world of opportunities. From startup OnePlanetCrowd (which provides financing for social projects through crowdfunding) to Impak Finance. Impak is a bank that uses data collection and the application of algorithms to calculate the creditworthiness of companies focused on CSR. Customers can subsequently choose what to invest in. Or Chinese Ant Financial, which uses shared payment data to give customers, in addition to their savings account and outstanding credits, insight into their CO2 emissions. He or she can then participate in a climate compensation program, which now has 200 million active users. Sustainable Finance Lab itself is working on a Community of Practice (CoP), which includes collaboration with Bundles, a company that offers pay-per-use washing machines. The aim is to help customers reduce their energy, water, and detergent consumption. Within this CoP, the possibilities of blockchain technology within the circular economy are explored together with the six partners Circle Economy, Nederland Circulair! Rabobank, Allen & Overy, ING, and De Lage Landen.
The UN calculated that until 2030 there will be an annual funding gap of $1.5 trillion to meet the Paris objectives. The efforts of more and more multinationals, NGOs and governments have not been sufficient to date. FinTech offers many opportunities, but most of the FinTech companies are not engaged in this transition and the economic opportunities it offers. A recent analysis by the World Economic Forum and PwC also showed that most FinTech start-ups do not have a clear focus on sustainability. It is very important that when designing and implementing new financial technologies, we consider which values we stand for. A discussion about visions and prospects. A discussion between politicians, society and the sector. A holistic discussion that is not or hardly conducted. A discussion that goes much further than just FT4SD, but also touches on other unintended, negative effects of FinTech. Think of the privacy, energy consumption, unemployment (by AI) and scams due to absent regulation. In this context, UNEP refers to a possible standards battle. The next few years will be crucial for the FinTech revolution to benefit everyone, including the planet. In order not to lose the battle of ‘prevailing financial paradigms’ such as short-term thinking and one-sided focus on shareholder value, UNEP outlines a short window of opportunity of 3-5 years. Are you waiting too long? Then it becomes almost impossible to implement other values and interests. Because the winner determines the standard. Think of earlier technological battles, from the battle over alternating or direct current to operating systems for computers. The loser then does not have the scale benefits to reverse established values and interests.