How sustainability also wins in Covid-19 fintech boom
From the booming challenger bank market to fast-spreading mobile payment technologies, crypto-assets, crowdfunding platforms, and online marketplaces: digital disruption in finance could have a similarly “transformative impact” in delivering the Sustainable Development Goals. That’s according to a new report by the UN-secretary general’s Task Force on Digital Finance, released Wednesday.
A shift to a more digital future was already well underway but the Covid-19 crisis has brought it a big step closer. For billions of people, digital services — from telemedicine to online learning, shopping, and videoconferencing — have been a lifeline for surviving life under lockdowns. And beneath it all, the financial technology has been key to making these processes happen.
Why it’s important: power to the people. The report “People’s Money: Harnessing Digitalization to Finance a Sustainable Future” argues that these trends provide “a historic opportunity” in giving citizens, the ultimate owners of the world’s financial resources, a greater say over how those finances are spent — and ultimately how they are invested in a more sustainable future.
“Through much of the 20th century, institutions and financial intermediaries have increasingly left citizens really outside the front door,” Achim Steiner, UNDP Administrator and the Task Force co-chair told reporters at a briefing ahead of the launch of the report.
“Only in recent times have we seen, for example, impact investment connecting the priorities of an investor not only in terms of their money but in terms of their preference and desire to see their money contribute to solutions rather than amplifying problems.”
Call to action. The Task Force sets out five ways, or “catalytic opportunities”, that digitalization trends in finance can help further the UN’s Sustainable Development Goals (SDGs).
Firstly, the vast pools of money flowing through global capital markets need to be invested in a way that supports the SDGs. Public finances need to be more effective and accountable. Domestic savings need to be channeled into long-term development projects, using digital tools. Citizens need to be better informed on how to spend in a way that supports sustainability targets. And there needs to be more financing for small and medium-sized businesses, which are crucial for generating employment and income.
“There are $185 trillion of equities and bonds in the world. And $30 trillion dollars has some kind of SDG screen on it although very diverse,” Simon Zadek, head of the Task Force secretariat, told Geneva Solutions.
“Clearly digital innovation, whether it be AI, big data, blockchain or other means, can massively ramp up the availability and use of data across capital markets in ways that internalize SDGs.”
Tapping into micro-savings. Bangladesh relies on international capital markets to finance much of its infrastructure. However this has impacted its level of indebtedness and its vulnerability to foreign exchange fluctuations, explains Zadek.
To address these problems, the Task Force has partnered with the government of Bangladesh to explore what the implications would be of using digitalization to channel the micro-savings of Bangladeshi citizens into sustainable infrastructure investments, such as roads, or hospitals. Zadek:
“The numbers are interesting because not only are the cost of capital reductions very significant but the distributional effects are very important in that the dividends are flowing to taxi drivers in Dhaka rather than JP Morgan or the world bank or the Chinese government.”
In another example, the Task Force has collaborated with global data provider Refinitv to create a digital database of several trillion dollars worth of project financing, the aim being in the long-run to fold in environmental and SDG-related data.
“The biggest area of opaqueness in global financing is project financing,” Zadek explained. “By being available to policymakers and regulators and broader civil society we think it illustrates how digital can change the governance of finance in some quite innovative ways.”
No reward without risk. Advances in digitalization have not come without risks, however, including privacy violations, fraud, and data security breaches to name a few. There also remain huge barriers to digital innovation. For example, 750 million people remain without physical access to a mobile or broadband network, according to a recent report by the GSMA Association.
Zadek said: “We try to spell out some of those risks. But rather than spelling out proposals of how do we deal with, for example, illicit financial flows, we have sought to build many of the ways of addressing risk into the ways one addresses the catalytic opportunities.
“Our mandate as a task force was both to recommend and catalyze action in harnessing digitalization to finance the SDGs. And so, as part of our work, we have helped to initiate eight pathfinder initiatives that we think exemplify what ambitious action is really about. So taken together they don't solve the problem but they show show large scale plays can be made.”