November 28, 2019
The concept of sustainable finance broadly encompasses all those financial activities and initiatives that are directed towards achieving social, environmental and economic sustainability, in addition to immediate financial gain that is generally assumed to be the necessary outcome of any financial activity.
Contemporarily, and in the modern period, on the whole, ideas of sustainability concerning financial activity are generally encompassed under the broad concept of environmental, social, and corporate governance (ESG). Interestingly, in the 1960s and 1970s, laissez-faire economists such as Milton Friedman argued against emerging notions of financial sustainability and government regulation, noting that these were ultimately detrimental to the financial performance of firms and larger national economies. Nevertheless, by the late 1980s and early 1990s, new theories based on the sociological ramifications of sustainable or unsustainable finance began to gain new ground, not only compelling businesspersons to consider then new concepts such as corporate social responsibility but also form new partnership conclaves with governments and NGOs towards fulfilling environmental and social challenges. By the beginning of the 21st century, concepts of responsible investment and ESG became more relevant and acceptable, as earlier theories of the incompatibility of sustainability and financial returns were debunked, and there was an increasing awareness regarding the close connection between financial activity and climate change, for instance.
While the ESG paradigm has become a necessary component for any financial practice that might be considered as feasible and practical, the concept of sustainable finance is becoming an essential component and concept in global finance.
Sustainable finance can be broadly described as those set of ethical concerns and practices that are dedicated to social and environmental prerogatives alongside financial gains that are made from any business activity (BNP Paribas, 2018). Currently, the following can be considered as the set of broad areas involving efforts towards creating sustainable finance:
Presently, a variety of individuals and organizations are involved in ventures directed towards achieving sustainable finance in economic, social, and environmental terms. These include investors willing to invest in ventures that have significant social & environmental impact; investment funds aimed towards SRI activities, pension funds, and private banks, and wealth managers, represented by an increasing number of young professionals and entrepreneurs who are motivated by investing in activities that have visible and tangible social and environmental outcomes (BNP Paribas, 2018).
Today, socially responsible investing or ESG activities as such, are carried out through a variety of strategies on the individual and institutional level such as positive investments, activism, engagement strategies, efforts towards aligning traditional financial institutions to the ESG paradigm, and lastly, exclusion techniques to weed eliminate investments & ventures that are not socially or environmentally sustainable.
Currently, one of the most significant driving forces behind the current move towards sustainable finance or green finance is are the sustainable development goals (SDGs) established by the United Nations in 2015. UN Deputy Secretary-General highlights that the current financing gap stands at $2.5 trillion per year, with poverty rates falling too slowly and global hunger rising for the third successive year. No country is on track to achieve gender equality goals, and biodiversity is being lost at an alarming rate. Moreover, while public sector institutions may form the foundation of research and important policy changes with regards to green financing, it is argued that at least 80–90% of the funding for sustainable finance programs will need to come from the private sector. Owing to these factors, it has become necessary to include a variety of private players, both small and large, towards achieving the goals of sustainable finance.
In contrast to the earlier binary, where socially and environmentally sustainable financial practices were viewed as antithetical to high financial returns, contemporary thinking on sustainable finance has expanded from the efforts and activism of individual investors towards the role of institutions in large-scale financial sustainability on the global level. In recent years, more than one-third of institutional investors in both Europe and Asia-Pacific have claimed the primacy of the ESG paradigm in their current efforts towards inculcating financially sustainable practices. New metrics have also been developed by private companies that assist institutions towards performing self-assessments with regards to financial sustainability and their role in the issuance of sustainable financial tools such as green bonds.
Alongside sustainable finance, one of the other important areas of financial thought is regarding the role of digital technology towards the improvement of financial services and its possible role in the developing and supplementing financial sustainability. Paul North notes that in contrast to earlier modes of financial thinking as were current in the 19th and the first half of the 20th century, contemporary thinking on finance is based on the paradigm of ‘risk-return-impact’ where impact and sustainability are not seen as antithetical to financial returns (North, 2019). Consequently, to accurately measure and assess the extent of impact and its tangible outcomes, FinTech and associated digital financial instruments may be crucial towards mobilizing green finance initiatives and creating more financial inclusion by enabling the equitable distribution of information resulting in better decision-making and risk management without compromising on the SDGs and larger economic and social sustainability goals. New technologies such as cloud computing platforms, learning machines, and tools such as distributed ledgers may prove to be crucial towards fulfilling financial sustainability by reducing overall costs, creating intelligent datasets, and streamlining complex processes into readily available analyses for better deployment of financial sustainability initiatives.
Case study: In 2018, Austrian energy company VERBUND AG’s EUR100 million green Schuldschein was the first transaction of its kind. The proceeds were intended to be used exclusively for the revitalization of a power grid in Ernsthofen. The revitalization of this power grid would increase the security of supply, grid stability, and operational efficiency, reduce grid losses by around 70% and diminish grid noise. VERBUND AG utilized a FinTech solution called “vc trade” to structure and execute its entire green Schuldschein transaction. vc trade is a centralized digital issuance platform for private placement transactions. The digital platform supports all major steps throughout the transaction, including mandating, structuring, documentation, marketing, settlement, and post-settlement. For VERBUND AG, the digitalization of this process reduced issuance & liquidity costs, reduced placement risks, and enabled smaller issuance volumes.
According to recent reports, Asian countries might need to invest anywhere from $300 billion to $1 trillion annually in sustainable finance projects. However, only a fraction of these funds is available at this point in time (Green Finance: Explained, 2018). Nevertheless, while it is estimated that the Asian continent, on the whole, will suffer from massive food and water shortages in the coming decades leading to a decrease in GDP by more than 3% by 2050, Asia is also currently one of the most active regions in the world experimenting with various tools towards achieving financial sustainability, including FinTech solutions.
In 2014, China launched the first green finance policy package in the world, which included various tools and instruments such as green credits, securitization, green industrial funds, green bonds, and insurance, amongst other innovations (Qi, 2018). According to China Daily, China offers incentives to banks and businesses in the form of lower central bank borrowing costs and subsidized interest payments on green bonds. For the most environmentally friendly loans, the government subsidizes up to 12% of the interest rate. China is currently the largest issuer of green bonds in the world, accounting for more than 40% of all green bonds issued globally (2018). China’s FinTech players are also playing their part. China’s FinTech giants are using their online platforms to promote sustainable behavior that can lead to commercial opportunities. This can be the secret sauce for FinTech’s role in sustainability. Ant Financial, for instance, employs game-based strategies towards encouraging its users towards reducing their carbon footprint by rewarding them with “green energy” credits for using public transport instead of private cars. Ant Financial created an online game called Ant Forest that encourages players to reduce their carbon footprint. It used the game to collect data that helped it to understand that it can strategically market sustainable products to 350 million users based on players’ behavior, interests, and goals. This is a highly commercial and unique way of looking at sustainability. But in a simpler format, there are many FinTech players increasing microlending to sustainable projects at preferential rates to promote additional green habits.
Aimed to integrate financial sustainability with digital FinTech solutions, new initiatives aim towards integrating ease of business, environmental sustainability, and associated incentives through smooth value chains created by digital financial technology. In Singapore, companies such as Rely are using FinTech towards providing new forms to access to credits, for individuals with irregular and possibly undocumented sources of income. Moreover, crowdfunding platforms such as Ethiscrowd are creating avenues for impactful investments that have till now not been possible with conventional financing institutions or sustainable finance initiatives that have little outreach.
Recent conferences such as the Innovate4Climate in Singapore and the 2019 Asian Financial Forum have underlined the increasingly important role played by FinTech towards initiating and bolstering financial sustainability. The Monetary Authority of Singapore has recently announced a Green Bond Grant Scheme that aims to include the development of social and sustainability bonds as part of their effort towards creating Singapore as an epicenter of the green bonds market in Asia. One of the crucial and expected outcomes of such schemes is also the encouragement of small and large FinTech companies towards enabling flexible access to credit, for a variety of clients. In the case of China, Ma Zhitao, the Vice President of WeBank, has noted the crucial role played by FinTech service providers such as WeBank towards creating access for formerly “unbanked” communities, most of whom are small and medium entrepreneurs (Sarmiento, 2019).
In addition to providing easy financial services to underbanked regions and communities, one of the crucial roles played by FinTech in the area of sustainable finance, has been in creating collaborations between various FinTech service providers both within and between national regions. In 2019, for instance, the Monetary Authority of Singapore signed an MoU with the International Finance Corporation (IFC) as a way of reinforcing the growth of green bond markets through increased collaborations between FinTech players in the ASEAN region across Singapore, Malaysia, and Japan amongst others (The Monetary Authority of Singapore, 2019).
Historically, FinTech has been closely connected with sustainability. By offering easy access to financial services, FinTech has directly contributed towards the social, economic, and environmental sustainability in various regions of the world by supporting small and big businesses that are closely tied to regional and international contexts. While unbridled technological expansion and unchecked industrial development may have proved to be unsustainable in the long run, FinTech may offer a powerful foundation for sustainable finance towards achieving urgent social, economic, and environmental goals, while creating business opportunities for all. At MEDICI, we echo Asian Development Bank Institute’s views on FinTechs’ importance for sustainability which says that policymakers should engage more closely with the FinTech as it can create new opportunities for countries that wish to reach the next stage of development in terms of financial, economic, and technological performance in a global economy that is increasingly dependent on complex, decentralized networks. And the earlier this happens, the better.
If you are wondering which FinTech can be an ally to your sustainability efforts, talk to us