Sustainable Digital Finance Readiness
The UN Secretary General’s Task Force on Digital Financing of the SDGs launched its interim report of findings during the General Assembly in New York late September. The Task Force, whose mandate is to recommend and catalyse ways to harness digitalization to advance SDG financing, includes tech entrepreneurs, commercial and development banks, business associations, and United Nations agencies, as well as central bank governors and ministers. Findings of the Task Force to date point to some high-potential focus areas. These are: Identifying major areas of opportunities; supporting governance innovations for sustainable digital finance; building national and regional capabilities; pinpointing areas for international cooperation; and measuring progress (emphasis added) on sustainable digital finance at the country level around the world.
Toward a Country Benchmark
The measuring progress pillar of the UN Task Force work will be led by the SDFA. We think of it as measuring the sustainable digital readiness of a country, and the data sets are a mix of demand, supply and regulatory frameworks for each given country’s sustainable digital finance landscape. We launched a prototype of a country-level SDF readiness benchmark last Friday. Populated with preliminary data compiled by Holland Fintech, the Holland Stock-Take prototype, with inputs from APG and the Dutch Central Bank, received a strongly positive initial response from participants at the October 4 event in Amsterdam.
A First Benchmark Test
In the Netherlands sustainable digital finance solutions at market level have been mainly driven by incumbents, rather than coming from the fintech community. Examples of incumbent-led solutions are numerous. They include the recently launched partnership in Africa between Rabobank and MasterCard which uses data to offer farmers real-time information about market prices and link them directly to market platforms allowing them to by-pass middlemen. Then there is Rabobank’s recent adoption of satellite image analytics to monitor de-forestation in their value chain. The pension asset manager APG used artificial intelligence to analyze 10,000 companies, which allowed it to spot 1,325 sustainable companies to invest in. ING uses artificial intelligence and Big Data for sustainability-linked lending products that factor in the costs of externalities. This list gets longer the more one looks at the three large Dutch banks and some of the major Dutch asset owners: there is a strong focus on environmental issues.
This is in sharp contrast to the fintech start-up scene in the Netherlands. Few Dutch fintechs are what SDFA describes as “native-SDG fintechs”—that is, few of them were explicitly designed to tackle a sustainability challenge of any sort. However, in developing our prototype with Holland Fintech, our fintech landscape survey asked them to self-select the SDGs to which they contribute. Here the fintech community perceive themselves as having the greatest impact on SDGs 8 (Decent Work and Economic Growth) and 9 (Industry, Innovation, and Infrastructure). The four green SDGs (#7 Affordable and Clean Energy, #13 Climate Action, #14 Life Below Water, and #15 Life on Land) are the SDGs where the Dutch fintechs perceive their business models to have the least impact.
The sustainable digital finance solutions in the Netherlands are mainly found in circular economy, agricultural finance, and in crowdfunding. In the latter the Netherlands is a European stronghold. At last Friday’s event in Amsterdam, OnePlanet Crowd was sharing their journey, stressing that sustainability is something the Dutch public is eager to invest in. OnePlanet Crowd recently launched a renewable energy project and it was immediately oversubscribed. OnePlanet Crowd shared that at the moment, there is more savings from the Dutch people than there are investible green projects.
Rabobank offered a final reflection which perhaps suggests why in the Netherlands it is the incumbents who are the sustainable digital finance champions. The Rabobank executive said that sustainable digital finance is something Rabobank largely pursues with foreign partners, in projects outside the bank’s home country. Inside the bank, the two workstreams—digital transformation and sustainability—remain perhaps too siloed.
Regulatory readiness means clarity of the regulations governing the underlying technologies (blockchain, ioT, AI, and especially Big Data) needed to build high impact sustainable fintech solutions. It also means the existence of regulatory practices and standards for auditing how that technology is deployed for sustainability. This clarity is needed for both upfront licensing as well as for ongoing supervision. Does a regulatory body review algorithmic design for sustainability outcomes as part of its standard practice? Is there regulatory clarity around potentially high impact solutions such as fractional ownership of green assets through tokenization? In the Netherlands the central bank shows great leadership in green finance as the chair of the Network for the Greening of the Financial System (NGFS) and has an internal sustainable finance platform. However, even in the Netherlands, the integration between sustainable finance and fintech regulation remains limited and tentative.
Along with our country-by-country stock-taking of the supply side, SDFA is mapping the regulatory landscape. Our next steps will be to test the regulatory metrics in more countries to refine our Sustainable Digital Finance Readiness Benchmark. The product will go live in mid-2020 with the launch of the UN Digital Financing Task Force’s final report.