Financing sustainable development is one of the most significant challenges of our times. Fintech offers the prospect of a more efficient, accessible and less vulnerable financial system – but brings potential risks at the same time.
The annual funding gap for the United Nations Sustainable Development Goals (SDG) is, unfortunately, a lot of money – trillions of dollars.
Although in the past years, dozens of countries have gathered each July to present their national plans to achieve their SDGs and have rolled out impressive blueprints, almost none of their plans included realistic budgets or revenue sources. While estimates of the development investment gap are typically in the trillions of dollars, official development assistance is only hovering around USD 140 billion per year.
It seems like the only way to close that gap is with the help of the private sector – in particular, by urging companies to account in their decision-making for environmental, social and governance issues relevant to the SDGs.
Moreover, the most effective way to help close this funding gap is to find solutions to catalyze substantial investment from the private sector.
Now, green financing is a solution to attract more private investment for SDGs. It aims to increase the level of financial flows from banking, micro-credit, insurance and investment to sustainable development priorities.
One of the impressive examples of the achievements of green financing is the establishment of The Sustainable Digital Finance Alliance – originally named the Green Digital Finance Alliance. The alliance was launched by Ant Financial Services and UN Environment Program (UNEP) to address the potential for digital finance and fintech-powered business innovations, to reshape the financial system in ways that better align it with the needs of sustainable development.
The benefits of digital finance, which include a broad range of technologies such as big data, artificial intelligence, blockchain and the Internet of Things (IoT), are enormous. Upgrading in this area can increase the capabilities of actors throughout the financing value chain, at reduced costs, to factor in environmental risks, opportunities, incentives and choices, as well as enhance the effective use of policies, regulations, standards and fiscal measures.
For example, mobile platforms, including mobile money, person-to-person (P2P) and crowdfunding allow for easy payments with or without traditional bank accounts, new-investment opportunities for lenders and sources of capital for borrowers.
Furthermore, blockchain enables ‘smart contracts,’ which allow automatic execution if certain conditions are met, without the need for a third party.
In addition, big data, machine learning and artificial intelligence and cloud computing enables the aggregation and analysis of large amounts of increasingly complex data from many different sources. This is dramatically increasing and automating decision-making capabilities – the essence of financial success – at low costs.
However, such positive outcomes are not an automatic consequence of digital finance and fintech-powered innovations, and there are also potential risks and unintended consequences.
Several challenges for green digital finance could be listed. From an environmental perspective, digital technologies create unintended side effects through hardware and software production, use and termination. Of particular concern are energy demands from global data centers as well as the environmental impacts associated with the extraction of raw materials used for producing these new technologies.
Furthermore, different sets of crime-related risks associated with the use of digital technologies create threats to protecting sensitive consumer and corporate financial data. Several of the technologies are still nascent and scaling such technologies in the coming years will require new standards and regulations from public institutions.
All in all, digital green finance provides significant opportunities; however, harnessing this potential with the financing needs of sustainable development will require the collective ambition, innovation and persistence of the world’s financial institutions, policymakers and citizens.