The Bank for International Settlements (BIS) Innovation Hub and Hong Kong Monetary Authority (HMKA) are partnering six companies on a blockchain-based green finance initiative.
BIS and HKMA announced today (24 August) that they have engaged the companies as part of a project to build prototype digital infrastructure that can ‘enable green investments and help issuers and governments to meet environmental and sustainability goals’.
Known as ‘Project Genesis’, the project will explore the tokenisation of green bonds enabling investment in small denominations, combined with real-time tracking of environmental outputs.
The project is announced amid mounting interest in green finance – the allocation of capital to economic projects that protect the environment – which itself is part of the broader trend towards environmental, social and governance (‘ESG’) investing.
The aim of Project Genesis is to show ‘the green art of the possible’ by combining blockchain, smart contracts, Internet-of-Things and digital assets, according to a press release, which states that prototypes will allow policymakers and stakeholders to ‘explore innovative approaches to green bond distribution and transparency’. Smart contracts are self-executing, business automation applications that run on a decentralised network, such as blockchain.
Aiming to make investing easier – and clearer
In many countries, issuing and investing in bonds can be cumbersome and complex, involving many steps and parties, and typically requiring a considerable financial commitment from the investor, Switzerland-headquartered BIS’s announcement points out.
‘For those investing in environmentally friendly projects, there is uncertainty about whether the bond issuer is delivering the positive green impact it committed to at issuance. Also, there are typically no liquid and transparent secondary markets for retail investors,’ BIS states, further explaining the project’s rationale.
The six companies are: Digital Asset (Switzerland), which alongside its partner GFT Technologies Hong Kong, will deploy multiple permissioned blockchains; the Liberty Consortium, consisting of SC Ventures, Standard Chartered Bank and Singapore-based Shareable Asset, will be leveraging a public permissionless blockchain infrastructure; and Allinfra, a Hong Kong start-up, will provide technology-verified data that can track projects’ environmental impact in real-time.
Experts in ESG considerations, green finance, bond markets, law and regulation are advising the development teams, who are now building prototypes. Results will be published during the fourth quarter of 2021.
Technology’s potential to ‘streamline issuance’
“Our vision is that you can download an app to your phone, and invest any amount into safe government bonds, which will develop a green project – let’s say a solar or wind farm,” said Bénédicte Nolens, head of the BIS Innovation Hub’s Hong Kong centre. “Over the bond’s lifetime, you would be able to not just see accrued interest, but also track in real time how much clean energy is being generated, and the consequent reduction in carbon dioxide emissions linked to your individual investment. Further, you could sell the bonds in a transparent market.”
“Technologies such as blockchain and smart contracts, combined with the Internet-of-Things, could streamline the bond issuance process, improve efficiency in distribution and facilitate reporting on the use and environmental impact of green bonds proceeds, thus enhancing transparency to green bond investors,” said HKMA deputy chief executive Edmond Lau.
“Green and digital are not only interconnected but interdependent – the fate of one depends on the other. Green finance, accordingly, is a key priority of the BIS Innovation Hub, and Genesis is an integral part of that,” said Benoît Cœuré, head of the BIS Innovation Hub, which was set up in 2019.
Pressure growing on governments
Pressure is continuing to build on governments and other public sector authorities to step up their action to tackle climate change.
A UN Intergovernmental Panel on Climate Change (IPCC) report published earlier this month concluded that human activity is changing the climate in unprecedented and sometimes irreversible ways. The report was described as “code red for humanity” by UN secretary-general António Guterres.
The UK is among those putting increased energy into developing green finance initiatives. The publication of the UK Government Green Financing Framework at the end of June saw details announced on the types of green projects that will be eligible for funding when the UK issues its first sovereign green bond, known as a green gilt, later this year, as well as green savings bonds from state-owned savings bank NS&I (National Savings and Investments).
In a speech last month, chancellor Rishi Sunak said the government would be working with the Financial Conduct Authority (FCA) to create a sustainable investment label – ‘a quality stamp’ – to enable consumers to compare the impacts and sustainability of investments. The UK government also intends to legislate to set out its approach to regulation ahead of the 26th UN Climate Change Conference of the Parties (COP26), which will be held in Glasgow in November
BIS, in conjunction with the Banque de France, published an 115-page book, ‘The green swan: central banking and financial stability in the age of climate change’, in January 2020, which described climate change mitigation as ‘a complex collective action problem requiring co-ordinating actions among many players including governments, the private sector, civil society and the international community.’
Green finance is among six priorities in the BIS Innovation Hub’s work programme for 2021-2022, which was published in January.
‘Fintech hackathons turn attention to green finance’ – our news story (11 May 2021) on the BIS Innovation Hub and Banca d’Italia launching the ‘G20 TechSprint 2021’ focused on technology’s potential to tackle challenges in green and sustainable finance; and the Monetary Authority of Singapore (MAS) making ‘Harnessing Technology to Power Green Finance’ the theme of its next ‘Global FinTech Hackcelerator
‘UK government invests £10m in green finance hubs’ – our news story (16 February 2021) on the establishment of a twin-site UK Centre for Greening Finance and Investment (CGFI) in London and Leeds
‘Switzerland launches “green fintech network”’ – our news story (10 November 2020) on the Swiss government having launched a ‘green fintech network’ to help it identify and decide how it can improve its support for the sector