The financial sector is at the forefront of adopting digital technology, but only to a limited extent to innovate the financial system to deliver sustainable finance. A new report reveals that a landscape of digital solutions exists across the G20 countries with the potential to transform the current financial system to deliver on the financing needs of the Sustainable Development Goals and the Paris Agreement on Climate Change. The new report “Digital Technologies for Mobilizing Sustainable Finance” was launched by the Sustainable Digital Finance Alliance (SDFA) at the Singapore Fintech Festival on November 14th, 2018.
The report identifies 4 concrete ways digital finance can take sustainability to scale to inform the work of policy makers and financial institutions. The four are 1) incentivizing sustainable consumption choices 2) bringing down the cost of data on sustainability risks and returns 3) unlocking new sources of sustainable finance and 4) driving innovative sustainable business models.
Digital technology can incentivize sustainable consumption choices by helping to correct the failure of the market to price externalities. Algorithms and big data can translate transaction data into carbon footprints, highlighting to citizens for the first time the environmental impact of their purchases in real time. It can thereby produce individualized carbon wallets for consumers and enable them to off-set their own carbon footprint.
Bruno Oberle, Board member of the SDFA explains: “In China Ant Financial has developed the Ant Forest app, which deploy algorithms to develop the world’s largest informal carbon market. Anyone in China can download an app, which invites algorithms to look through the transaction data of the individual and calculate it into a carbon footprint. Individuals can then gain carbon points if they start to live a more carbon light lifestyle and use these points to develop a seed into a tree at which point the Ant forest team plant a real tree in China to off-set carbon.”
Secondly, the report shows how the application of digital technology can bring down the cost of data on sustainability risks and returns on investments. Data is the backbone of investment decision-making as it helps investors quantify risk as well as risk-adjusted returns. Lack of disclosure of environmental information push up the ‘search costs’ for green assets. This prevalence of asymmetrical information is a key barrier to enhancing sustainable finance. Big data, machine learning and AI reduce the costs and time of gathering and analyzing large amounts of complex data.
“We need to move to a world where sustainable finance is the preferred option because the cost of capital is lower on sustainable financial products. The report shows concrete ways we can apply digital technology to make this transition” says Simon Zadek, Board member of the SDFA.
Thirdly, digital finance opens a new pool of ‘bottom up’ investors via crowd funding platforms. Estimates show over $ 34 billion was raised by crowdfunding in 2015. AI can match investors with sustainable projects.
Lastly, the report shows how digital finance can drive innovative sustainable business models. Innovative payment options help rabidly scale access to renewable energy and hence the deployment of capital for sustainability purposes in remote communities.
Background on the SDFA: The Sustainable Digital Finance Alliance is a nonprofit launched by Ant Financial Services and UN Environment to address the potential for digital finance and fintech-powered business innovations to reshape the financial system in ways that better align it with the needs of sustainable development.
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The report is available here.