GLOBAL GOVERNMENT FINTECH LAB 2023: FIRESIDE CHAT
Climate change presents governments worldwide with a duty to avert catastrophe. It also presents them with an opportunity to innovate on an unprecedented scale.
This doesn’t just mean transitioning from fossil fuels to cleaner energy sources, nor simply investing in greener infrastructure. Averting disaster of this kind will require public authorities to invest in cutting-edge financial solutions to help accelerate effective climate action.
This was the overarching message during a fireside chat with Aiaze Mitha, the United Nations Development Programme (UNDP)’s global lead for digital finance for the Sustainable Development Goals (SDGs) – the 17 goals agreed in 2015 by the UN General Assembly, with the aim of achieving them by 2030.
Mitha role focuses on mobilising private capital to help achieve the SDGs. It involves advising governments on the development of green and sustainable fintech strategies to achieve national development priorities; designing and implementing specific projects; and helping colleagues, for example with SDG ‘investor mapping’.
For Mitha, there is “no question” that fintech solutions are increasingly driving sustainability-related products, services and initiatives, for example, ‘nature-positive finance’. But there challenges galore, too.
RELATED ARTICLE Digital finance crucial to help achieve SDGs, says UN taskforce – an article (7 September 2020) on a report, ‘People’s Money: Harnessing Digitalisation to Finance a Sustainable Future’, that set out what its authors referred to as an ‘action agenda’ for policymakers aligned with the SDGs
Small enterprises, soil and scepticism
He provided in-the-field examples of fintech in action related to small- to medium-sized enterprise (SME) financing in Zimbabwe and related to the natural environment in Argentina.
In Zimbabwe, where SMEs are responsible for 90 per cent of the economy, the UNDP has designed an ‘SME financing marketplace’ where businesses are onboarded through an online portal that is integrated with data providers, Mitha said. This allows the accumulation of multiple data points on these enterprises, which is then used to “rebuild their book value”, as well as score and rate them for the purpose of connecting them with potential funders.
The portal, he added, is “integrated directly into” the Zimbabwe Stock Exchange, meaning many of the larger SMEs can be listed so as to secure direct equity investments. “Within a six-to-nine-month pilot timeframe, we’ve piloted 150 SMEs, and we’ve been able to mobilise about $8 million [about £6.3m] in funding for [them],” he said.
In Argentina the UNDP is designing a blockchain-based security in the form of what Mitha described as an ‘eco-token’ to mobilise private capital for the conservation and restoration of the Chaco province’s forestry, wetlands and peatlands. It also involves investment in the resilience of indigenous communities, whom he called “guardians of that ecosystem” (resilience here means access to clean energy, drinkable water and digital infrastructure). In respect of the third of these, the UNDP has designed a digital system that uses satellite imagery, remote sensing, the Internet of Things (IoT) and AI to monitor and report on the project’s environmental and social outcomes.
Mitha’s interlocutor, Siobhan Benita, asked whether sceptics are right to question the effectiveness of climate-focused financial instruments, such as green bonds.
On the problem of ‘greenwashing’, Mitha said: “I guess the starting point is to have a very strong definition of what we mean by ‘sustainable’ bonds and ‘green’ bonds. We need those taxonomies and standards to create trust… but the financial instrument itself can actually have trust built in. In some cases, we can start issuing green bonds on the blockchain, with all the features of transparency, trust and accountability. That can contribute to trust, particularly in high-risk countries where trust might be an issue.”
He highlighted, too, the potential for greater ‘democratisation’ or scaling of investment in sustainability via fintech. “When we think of bonds, we tend to think only of institutional finance flows and institutional investors. But we can [also] use blockchain for tokenising the assets that get invested into, and by [doing this] we can fractionalise them, and that reduces the coupon sizes [which] allows retail investors to start participating,” he said.
RELATED ARTICLE Going green: governments look to fintech to help combat climate crisis – write-up of a Global Government Fintech webinar titled ‘How Can “Green Fintech” Help Tackle Climate Change?’ held on 8 February 2022
Greater ‘clarity of thought’ needed
What other further thoughts did Mitha have in regards how governments can help? Mitha responded that they typically needed greater “clarity of thought” around how fintech solutions are used to address climate change in the context of national development priorities, and then in “streamlining ecosystem engagement and market action around that”.
“I see a lot of governments trying to do different things to nurture fintech businesses to support different priorities, but it’s not really focused,” he said. “If you want to produce results, you really need to be very clear about the outcome you are seeking. Then [you need to identify] the fintech innovations you want.”
Driving this must be an end goal, allowing everything else to fall into place, from infrastructure and policy stimulations to fiscal incentives and regulatory clarity.
One audience member asked what potential Mitha saw in artificial intelligence (AI) to improve the objectivity of environmental and social governance (ESG) compliance.
To answer, he drew upon the example of a loan financing project in Uganda that illustrated the range of data sources being harnessed to deliver more credible climate-geared financial services. To encourage coffee-farmers to adopt more environmentally responsible practices, AI had a role in assessing deforestation, scanning soil and detecting biodiversity loss. These variables were then fed into an algorithm that assessed farmers’ eligibility for credit, he explained.
Mitha went on to mention carbon accounting, describing carbon calculators as “proliferating” and market fragmentation amid a sea of proprietary methodologies.
“If I’m using two different apps because I’m using two different types of credit cards that have two different providers providing me with the carbon content of my transactions, I’m getting inconsistent information [about this], [and] then I’m going to start to lose trust and start disengaging,” Mitha said.
With political will, there’s a (fintech) way
The threat posed by climate change disproportionately affects the world’s poorest regions and populations. What more can be done to help the most vulnerable access and benefit from fintech solutions?
Mitha responded that this is a matter of “will and determination” on the part of governments – emphasising that technology itself is not typically the barrier.
As an example, he mentioned a further UNDP project – for which a pilot is due to launch in June – in Bangladesh. Normally, he explained, a developing country will go to international financial capital markets or government-to-government borrowing, both of which come with relatively high interest rates. “You have more than $20 billion [about £15.7bn] of resources available in the retail market in Bangladesh,” he explained (a figure that includes the ‘informal economy’). “What we have designed using the digital wallet infrastructure available in Bangladesh is a mechanism whereby you can aggregate small amounts of money from a very large number of digital wallets. Individuals can invest just one or two dollars, and fintech can reduce the cost of transactions.”
Citizens can help to decide which of a list of projects they are most happy to invest in. Whether it turns out to be a school, hospital, road or bridge, it ensures those most affected have a stake.
Digital and financial skills-building is an essential part of achieving this. Mitha pointed out, however, that skills training requires strong, well-organised educational infrastructure. Again, governments can make this happen, provided there is political will.
RELATED ARTICLE Ireland’s government backs sustainable fintech diploma – an article about a Postgraduate Diploma in Sustainable Financial Technology & Innovation (government-funded through Ireland’s International Sustainable Finance Centre of Excellence), launched by Ireland’s minister of state with responsibility for fintech at the Global Government Fintech Lab 2023
Collective action required
With the Lab being held in Dublin, Mitha was also asked by an audience ember about Ireland’s International Sustainable Finance Centre of Excellence. With a growing number of nations setting up similar initiatives, how sustainable are such centres?
Mitha said that question in his mind was whether such centres would have a domestic, regional (for example, European) or “even global” ambition.
He continued by focusing on ‘carbon calculators’ (to estimate carbon footprints). “Annually, you have $60 trillion of consumer consumption,” he said. “Now, if even 10 per cent of that could actually shift towards greener consumption choices, we would be ‘sorted’ with nationally determined contributions and SDG financing.”
It was necessary, he said, to “harmonise and standardise” approaches, led at a country, European Union or global level, adding that he was in the process of “cooking” a ‘global coalition’.
But climate change is, by nature, a collaborative challenge. “None of us is going to be able to get all the job done, there are way too many things to do,” he concluded. “I think if everyone takes a leadership or championing role in specific areas of expertise, then collectively all the financial centres can really drive the world towards sustainability.”
Watch the fireside chat (it runs from about 07:16:22 to 07:39:04 if clicking on the full-day event video) =>