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  • Writer's pictureMarianne Haahr

Digital Technology Help Green Central Banks

It is a short walk to the Banque de France from the offices of ‘Finance for Tomorrow’ in Paris Europlace in the center of the city. The distance between fintech’s and central banks’ operations is also shrinking as digital technologies make their way deeper into central banking systems. A number of central banks follow Twitter to monitor public opinion about commercial banks. Big data and artificial intelligence have already become indispensable tools to detect systemic threats, and blockchain is a major area of research.

On April 17th the SDFA was part of a panel at the Network for Greening of the Financial System (NGFS) conference. Our panel, sponsored by the United Nations Secretary-General’s Task Force on Digital Financing of the Sustainable Development Goals (the Task Force), explored how central banks and other regulators can use fintech to advance sustainability. The timing was fortunate. NGFS just completed its first comprehensive reportof concrete recommendations for greening the financial system. The Task Force, which SDFA serves as a knowledge partner, is developing its own interim report of findings over the summer. The discussion points below from the April 17 panel will be refined with an aim towards incorporating the NGFS report’s recommendations into central bank practice and will also provide input into the Task Force’s work.

Data, Data, Data to feed Green Intelligent Central Banks

Do a Google search on green finance and you will get a large body of articles about metrics for pricing climate change risks and upside opportunities on investments. Green finance metrics has been the most discussed topic in the sustainable finance community for years. It is a core issue, as it will enable us to effectively incorporate the price of externalities.

If you look at the NGFS report’s focus on disclosure requirements and its recommendation for central banks to bridge data gaps, it becomes clear that this long-established discussion about metrics remains relevant in a digital age. Digital can re-shape that discussion, because it allows us to harvest, mine and analyze green data in new ways. Intelligent chips can entirely take over the work of data harvesting from some green assets and projects. Data from a solar cell can be uploaded onto a distributed ledger to which all investors have real-time access. In short, digital technology will bring down the cost of harvesting data about green assets and projects.

Not just data harvesting, but also analysis, will benefit from cost savings. AI can be trained to search green data points in large data sets, but that needs to be enabled by digital processes and tools and by data standards to make green data machine-readable. Greening central banks is also about feeding the artificial intelligence sufficiently green- and climate-aware data to train the systems properly to allow them to get really good at analyzing the state of greenness of the financial system. 

Digital Green Finance is Efficient

The Central Bank of Thailand estimates that distributed ledger technology can shorten its bond underwriting time from more than two weeks to just a few days. This implies that applying digital technologies to green bonds can expand the discussion beyond climate change finance to a broader discussion around efficiency in general. The efficiency gains are important because green bonds add another layer of complexity to the bond issuance process because there is a need to harvest credible data validating that proceeds are spent on green outcomes. The World Bank was the first to issue a bond on the blockchain in 2018, the i-bond. Some of the value added of the blockchain is that data is shared with investors in real-time and auditing is automated.  Different technology mixes can accelerate the green bond market by increasing efficiency, de-risking the investment, and automating and digitizing data collection.

Building green intent into ‘test and learn’ regulatory approaches

As regulatory sandboxes for fintech continue to expand around the world (there are currently 41, the majority in Asia), the timing is right to develop tools to help them incorporate sustainability more broadly, as well as to facilitate peer learning across geographies. A way to go about this is to adopt an outcomes-based approach that analyzes fintech solutions in terms of stability, consumer protection, and a climate-stable future. This will enable sandboxes to take a proactive role in understanding the barriers to scale for fintechs with a high potential to green the financial system.

This was the intention of a green fintech challenge issued by the British financial and supervisory authority, but although many potentially eligible firms have a potential green use case, few self-identify as “green fintechs.” Think for example of a green bond undergoing a digitalization process. It will need to deploy a technology mix composed of blockchain-powered software, IoT for data harvesting in the form of intelligent chips, and potentially biometric technology to provide investor access to the ledger. Such a technology mix could just as easily be deployed to digitalize a brown as well as a green bond: green, as noted, is just one potential use case. That leaves the regulatory sandbox with the significant additional complication of having to analyze the potential use cases of fintechs that were not necessarily built with green intent but could be deployed for that purpose.

Central banks have a unique role to play in connecting the dots to make digitalization a tool to build a greener world.

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