Green finance focuses on allocating capital to projects that protect or enhance the environment, part of the shift towards environmental, social and governance (‘ESG’) investing. Ian Hall reports on a Global Government Fintech webinar focused on how public authorities are supporting this trend
Human activity is changing the climate in unprecedented and sometimes irreversible ways, according to the United Nations (UN) Intergovernmental Panel on Climate Change. The UN body’s warning, described as ‘code red for humanity’ by secretary-general António Guterres, was delivered in 2021 – a year that brought the launch or evolution of a growing number of government-led projects seeking to encourage green fintech.
With the climate alarm-bells ringing, Global Government Fintech asked ‘How Can “Green Fintech” Help Tackle Climate Change?’ during a webinar on 8 February. The online audience heard that green fintech solutions have growing potential to help public and private-sector organisations meet their climate targets – and that public authorities should create more spaces for climate-related fintech innovation to thrive.
Specific initiatives have included the Bank for International Settlements (BIS) Innovation Hub and Banca d’Italia (Bank of Italy) running the G20 TechSprint 2021 to highlight the potential for technology to tackle challenges in green and sustainable finance; the BIS Innovation Hub and Hong Kong Monetary Authority (alongside private companies) completing two prototype blockchain platforms for green bond tokenisation in ‘Project Genesis’; and the Monetary Authority of Singapore making ‘Harnessing Technology to Power Green Finance’ the theme of last year’s Global FinTech Hackcelerator.
In Europe, Switzerland’s government launched a Green Fintech Network in 2020 to support the sector; while UK has seen the Financial Conduct Authority’s (FCA) first ‘Green Fintech Challenge’ (in 2019) and the FCA and Corporation of London’s ‘Digital Sandbox’ to accelerate innovation in ESG data and disclosures.
At a global level, green finance has also just been confirmed, for the second year, as one of six priorities in the BIS Innovation Hub’s work programme.
Switzerland increases green fintech focus
Switzerland’s Green Fintech Network was created by the State Secretariat for International Finance (SIF), whose sustainable finance taskforce head, Christoph Baumann, spoke at the webinar. He described the world as being in the throes of “the biggest shift of capital in human history” in favour of green investments.
He highlighted two developments driving progress towards transparency: article 2.1(c) of the Paris Agreement 2015 that obligates countries to ‘make finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development’; and net zero pledges by financial institutions and companies made during last November’s COP26 summit.
But he warned that governments “don’t make it easy” by subsidising fossil fuels. He referred to then-outgoing Organisation for Economic Co-operation and Development (OECD) secretary-general Ángel Gurría’s remark, one year ago, that the world needs a “big fat price on carbon”. Baumann told the webinar audience that that “really needs to continue to be a focus in policy globally, but in the absence of that, transparency is key”.
Green fintechs, he said, have an “instrumental” role to play, for example by generating and “making sense of” sustainability data using machine learning and artificial intelligence (AI); and helping financial institutions such as banks comply with regulatory processes. He added that consumer-facing green fintechs are also increasingly challenging established financial institutions, “putting them under pressure, and also pushing [them] to innovate and to contribute credibly”.
The Swiss Green Fintech Network provides a route for organisations to highlight to government “what’s hindering them on their way to success”, Baumann explained. It published an action plan 10 months ago and is working with the Green Digital Finance Alliance on a publication – due next month – to “help policymakers understand what the various green fintech applications are, and what data sources are needed to provide these products”. This builds on a report, ‘A Green Fintech Taxonomy and Data Landscaping’, released in November.
Green fintech becoming ‘driving force’
Banca d’Italia’s retail payment instruments and services department’s deputy head, Paola Giucca, described 2021 as having been a “very critical year” for national governments as regards climate change challenges. Green fintech initiatives in fields such as artificial intelligence were, she said, growing rapidly to become a “driving force” in progress towards an “environmentally-friendly financial system”.
She highlighted the G20 TechSprint 2021 challenge, organised as part of Italy’s G20 Presidency, as well as ongoing Banca d’Italia initiatives helpful to green fintech projects such as the central bank’s ‘Canale FinTech’ (‘fintech channel’), Milano Hub innovation centre and a fintech sandbox (the application window for the first cohort of projects closed last month).
City of London Corporation’s senior policy and innovation adviser, Theresa Yurkewich Hoffman, focused her opening remarks on the Digital Sandbox run by the City of London and the FCA. This is now in its second phase, with the current cohort of projects focused on solving three use cases related to environmental, social and governance (ESG) data and disclosures.
“The sandbox has really shown that you can use it to support product acceleration,” she said. “Our first cohort recorded up to 18 months of [product] acceleration, but we’re seeing the same results in the second phase.”
Stymied by silos?
Katherine Foster, community director for the Open Earth Foundation and a fellow of the Social Alpha Foundation – a grant-making platform for supporting blockchain – said that it was important to align international treaties such as the Paris Agreement and UN Sustainable Development Goals (SDGs) with “specific targets across sectors and for specific institutions”.
Foster, who also worked on Project Genesis (see above), said that many public- and private-sector initiatives were stymied by siloed thinking. Despite the arrival of “incredible” emerging technologies, progress and integration were often impeded by “infrastructure gaps, data gaps, credibility issues, efficiency challenges and misaligned incentives,” she said.
She traced this back over the past five years. “Back in 2017-2018 we had this explosion of pilots and proven use cases for identity, conservation, energy, climate finance flows, tracking carbon and offset credits among many others. But the lack of scaling was because we were facing the same issues of silos,” she said.
But there’s plenty of room for optimism, too, in overcoming siloed working, for example in the development of what Foster referred to as ‘end-to-end’ digital green bonds.
In terms of ‘integrated’ use-cases, Foster named examples including Hiveonline (headquartered in Denmark), Evercity.io (Germany) and Blockchain Triangle, a fintech platform that connects issuers and investors to allow for transparent access to climate and infrastructure projects.
‘Hesitancy towards data-sharing’
The opportunities and challenges related to digital data emerged as one of the prominent themes during the webinar, which was moderated by former UK civil servant Siobhan Benita.
European Union (EU) authorities’ plans for a centralised data platform (a European single access point for financial and non-financial information disclosed by companies – to be set up by the European Securities and Markets Authority) was taken by a “mindset to spark innovation” that would help green fintech, Baumann said. Practically, it is important to have ‘digitally harmonised formats’ that can be used by organisations “much more easily than if they have to scan through PDFs”.
Foster flagged the example of the Climate Action Data 2.0 Working Group – a community of data and analytical experts collaborating across organisations – as a development within the climate and emerging technology ecosystem.
Baumann went on to point out that the data-sharing spirit of open banking and ‘open wealth’ (the extension of open banking’s data-sharing principles into asset management) also created possibilities for green fintech.
But data-sharing can be something of a minefield, both from the top down in terms of public policy and regulation – and also the bottom-up in respect of consumer attitudes.
“There’s a lot of hesitancy towards data sharing [with concerns including] how reliable or biased information might be,” observed Yurkewich Hoffman, who said that one use case from the London sandbox was around consumer understanding of green-related data. “I think we need to have more conversations with individuals: be open about the limitations of technology, but also the opportunities,” she said.
Policymakers should broaden their horizons
Despite the challenges, momentum is growing behind green finance projects and investments, helped – at least in part – by government initiatives.
“There are many, many proofs-of-concept and many projects around – Europe is very active,” observed Banca d’Italia’s Giucca.
But panellists emphasised the need for public servants, policymakers and the private sector to collaborate more closely, as exemplified by some of the initiatives discussed.
“I would love to see our policymakers regularly ‘crossing silos’ [learning across sectoral boundaries],” said Foster. “I think an integrated scaling framework is needed – we need to have cross-stakeholder co-creation and capacity-building. We need strategic development to really address the solution gaps, as well as maybe an acceptance of certain newer risks, or at least a capacity to identify emerging risks and uncertainty and new business models. There is a whole new landscape evolving as well that we have to recognise and deal with.”
Yurkewich Hoffman made a similar observation. “Generally, public policy still tends to be reactive compared to proactive” and often aimed at “short wins”. But, she said, the urgency of climate change increased the need for authorities to support innovation more often and more quickly.
WATCH THE WEBINAR (1hr 15min 8sec)