JANUARY 2020
The Digits – A Monthly Newsletter of the Sustainable Digital Finance Alliance
VOLUME 2, ISSUE 1
LETTER FROM THE DIRECTOR
Marianne Haahr
What would January be without a preview of the year to come, complete with fearless predictions? To get into the spirit of the season (and to take a break from vows to eat better and exercise more), this first 2020 edition of The Digits offers SDFA’s take on what the new year might bring to the fast-changing world of fintech for impact. But first, a few words about our own plans.
For SDFA, 2020 will be a year of experimentation. We want to build on the groundwork we laid in 2019 and start really pushing the boundaries of the green fintech market. Last fall we hosted the Fintech for Biodiversity Challenge. In the coming year, SDFA plans to take the Challenge to the next level. We’re going to foster partnerships between solutions-providers who can take some of the biodiversity ideas and run with them, launching pilot-stage experiments.
We will carefully track and document the intelligence we gather, and then analyze and package it into insights for policymakers who deal with biodiversity, especially biodiversity financing. In October, the fifteenth Conference of the Parties (COP15) will be held in China and is expected to adopt a biodiversity framework. SDFA’s work can help inform that framework, offering concrete, empirically backed policy recommendations on how to leverage fintech to advance financing for conservation. Parts of this SDFA workstream will also have relevance to national-level policymakers responsible for implementation of the COP15 framework in their respective countries.
So for the Alliance, 2020 is going to be a year defined by digital financing for nature and for climate. It is also a year when the SDFA plans to rebrand as the GDFA, or the Green Digital Finance Alliance to more clearly signal our focus on the green SDGs as well as on the Paris Agreement on Climate Change. Of course, many green digital finance solutions will also have applicability for non-green SDGs such as those related to job creation, inequality, or poverty reduction. That is a good thing. However, the Alliance’s primary work will focus on fintech to innovate and thereby to unlock more financing for the environment, so the time seems right to revert to our original name.
Finally, an early major project for the first quarter involves a framework for measuring the progress of fintech-for-impact at the country level. In collaboration with the United Nations Secretary-General’s Task Force on Digital Financing of the SDGs (the Task Force) and with a number of German partners including Conscious Fintech, we are conducting the first fintech-for-impact inventory in Germany. We are surveying which German fintechs are working on which SDG(s), the core products and services they offer, the underlying technologies they pursue, and other relevant data. We’ll unveil the findings at a high-level gathering in Berlin on January 27. Beyond that, the framework will be launched together with the Task Force’s final report, scheduled for mid-2020.
The end of the previous decade saw fires burning huge swaths of the Amazonian rainforest and the southern coast of Australia—but also saw the whole world stop to pay attention to a 16-year-old girl and her climate change message. For the Alliance, the advances in financial technology, coinciding as they do with a welcome (albeit long overdue) sense of urgency about the environment, mean that our work is more important and potentially more impactful than ever.
On behalf of all of us at the Alliance, thank you for your interest and support.
Green Fintech Trends for 2020 –
What’s to Come?
It is impossible to look back at fintech trends in 2019 without immediately seeing a mental image of the Libra stable coin logo. A few days before stepping into this new decade, Switzerland’s finance minister and outgoing president Ueli Maurer stated that Libra stands no chance of approval in his country, at least, because the central bank will not accept the basket of currencies underpinning it. Despite this unpromising conclusion to 2019 for the year’s biggest story in stable coins, we believe that 2020 will see more stable coins that either have their own explicit SDG-aligned purpose or else that render green investment products more efficient.
The growth of stable coins signals a shift for crypto assets from a volatile investment option to a greater maturity, a maturity based on a growing understanding about how to deploy this significant innovation for public policy-related goals. The maturity of the stable-coin market to take these next steps may also influence fintech more broadly. The fact that the world has reached the saturation point with payment solutions means that here too, there is space for a next step, one of building green applications on top of the digital infrastructure. Below we zoom in on four trends that point to where specifically green digital finance may be heading in 2020.
1. Artificial Intelligence for Personalized Green Investment Profiles
A personalized experience is what creates loyalty. Just think about the last time you experienced a highly personalized service, such as a training session specifically designed for your back problems, age and training preferences, or the neighborhood restaurant where they know you by name, or the mechanic who knows all your old car’s quirks. Now imagine that kind of experience transported over to the financial sector. Imagine you want to put some of your savings into investments that protect nature, and the investment advisor has prepared a portfolio option corresponding specifically to those goals. It’s a personalization powered by behavioral data that you have allowed to be used for the specific purpose of creating an individual green investment profile, a profile over which you retain ownership and control.
The trend toward robo-advisor-generated investment advice and management services has been growing for a number of years and will continue to accelerate in 2020. Robo-advising will also increasingly direct its attention towards automated sustainability preference profiling. This change will partly be in response to changes to the Mfid II Directive in the European Union requiring the integration of sustainability into investment advice. AI and machine learning can help contain the costs of complying with that directive while at the same time opening an avenue to better understand a person’s green investment preferences. Financial institutions will therefore need to increasingly apply technology to turn the information about their customers' behavior and their social media and browsing history into personalized sustainability and green investment profiles. AI, Big Data and machine learning can be deployed to design green individual investment portfolios that are both transparent about the underlying assets and that can offer more complex data about proof of impact.
2. Taxonomy – from Classification to Innovation
Sustainable finance is drowning in data yet starving for the actionable intelligence that can translate data into decisions that actually direct capital flows towards sustainable assets and projects. Part of the problem historically has been that all of the data was idiosyncratic, without standardized metrics to provide the basis for any sort of meaningful comparison. 2019 witnessed a step towards more standardized and therefore comparable data sets that hold the potential to help investors allocate capital towards green assets. Implementation of the EU’s sustainable finance taxonomy will set clear and defined rules for an entire region, rules which many asset managers in other regions may wish to adopt. Until now the smaller cousin of fintech called regtech has mainly been responding to the financial sector’s increasing costs for regulatory compliance, costs which have been driven up mainly by the effort to combat financial crime. Regtech thus has understandably focused on anti-money laundering and know-your-customer compliance issues. 2020 will see an increase in exploration of how to apply regtech to move beyond AML/KYC compliance concerns to embrace the taxonomy compliance requirements as well. We expect to see regtech deployed first for increased accuracy of regulatory reporting on taxonomy-aligned investments via the use of Big Data, AI and machine learning. Eventually it will expand to tap the internet of things (ioT) for monitoring compliance from the real economy.
3. Blockchain Powered Green Bonds – one will become more
2019 witnessed the first-ever issuance of a blockchain-powered green bond. By the time the Spanish bank BBVA issued this bond last year, Japan’s Fisco Ltd. had already (in 2017) issued the first experiment with selling bonds denominated in bitcoin. In 2018 the World Bank’s i-bond later entered the market, a collaboration with CBA of Australia.
Towards the close of 2019 The Central Bank of China issued a blockchain-powered $2.8 billion small and medium enterprise finance bond. Coupled with emergence of the central bank digital currency, China can digitize even the payment and settlement of digital bonds, which the World Bank i-bond and the other issuers’ blockchain-powered sustainability bonds did not do, for reasons including regulatory unclarity. China’s green bond market has followed a hockey stick trajectory since its emergence. A report issued by Climate Bonds in late 2019 documented that 40 percent of the USD 14.5 billion was aligned with international standards. Regulators continue to improve market integrity in China through a series of measures and to stimulate market growth through policy tools. Leveraging the data capabilities of blockchain, in combination with IoT for automated data harvesting of proof-of-impact reporting from the underlying asset, offers investors real-time credible data. Even if the first end-to-end digitized green bond does not become reality in China in 2020, it may happen in another country in Asia, a region that spent 2019 laying the groundwork for crypto assets by clarifying the regulatory guidelines governing them.
The more the green bond market can be viable for smaller issuances, the more democratized it could become. This is a trend likely to intensify during 2020, and Europe could be a pretty solid guess in terms of a frontrunner region. This is partly due to friendly regulation introduced in 2019 that allows companies to issue securities up to a value of EUR 1 million without the need for a prospectus. This makes it cheaper and easier for small and medium enterprises to access capital markets.
As well, the EU’s taxonomy (described in #2 above) arrived to clarify green assets at more or less the same moment that people (mainly youth) were taking over the streets in a large outcry for greater climate action, powerful evidence of demand for a greener future which will of course require a credible way to finance and evaluate it. Germany leapt into a blockchain future in 2019 with both a DLT strategy that positions that technology within the sustainability agenda and also with the new cryptocurrency law that the German parliament adopted on November 29th . These developments, together with the EU's first fully regulated securitized token offering (STO) which also came out of Germany last year, have laid a solid foundation for a potential green-aligned STO in 2020.
4. Fintech will Find its way to the Forest
Ant Forest remains the Green Fintech champion with 500 million users having planted more than 100 million trees. 2019 saw the first Ant Forest replicator outside China, with GCash Forest in the Philippines run by GCash, Ant Financial’s partner in that country. The aim is to plant 365,000 trees in 365 days. Meanwhile in the Netherlands, the challenger-bank Bunq launched their Green Card where a tree is planted for each 100 euro spent. It was oversubscribed in no time. The data capabilities of fintech to automatically link consumption to individualized off-setting via tree planting is a trend that is set to grow further in 2020.
Consider also EcoTree which invites people to become tree owners through investing in trees via a digital wallet and to receive returns once the tree reaches maturity and the forest is renewed. The tree asset has an expected appreciation of 2 percent annually. Innovations like these will increasingly use digital technologies for proof-of-impact reporting or even to give each tree its own QR code, using drone surveillance and blockchain to keep track of tree assets. The trees themselves will be rooted in the ground but their life-cycle data will live in the cloud, updated and available in real time. Questions about the localization of the efforts will become increasingly relevant to enable the tree planting to be financed via locally-owned digital wallets and to create tree-planting and other jobs in the local communities.
2020 will see more fintechs harnessing people power to help increase tree cover for carbon capture. One individual tree might not make a difference—but if hundreds of millions of people plant one tree each, the impact could have global significance. Different models and their impacts will be a subject for exploration in 2020. We want to understand whether the best options involve enabling people to become investors with investments securitized by the tree assets, or whether de-risking via technology and tools such as first loss, or some other approach, might work better.
Conservation finance urgently needs new public-private partnership models. The examples above suggest that the two most necessary ingredients—technological innovation and citizen interest—are there waiting to be fully leveraged. In the run-up to October’s meeting in China of the 15th Conference of the Parties to the UN Convention on Biological Diversity, the public sector will undoubtedly be focused on designing and encouraging such models as we move towards final decisions on the global framework for biodiversity that will lead us beyond 2020.
The Digits is published the first Monday (excepting holidays) of the month for the members of the Sustainable Digital Finance Alliance and interested stakeholders. Comments and questions to mh@sustainabledigitalfinance.org