Financing sustainable development: Is fintech the solution, problem, or irrelevant?
By Simon Zadek
Digitalization is transforming financial and capital markets, of that there is no doubt. Less clear is how we can best harness this disruption to ensure financing for the Sustainable Development Goals (SDGs) and the goals of the Paris Agreement on climate change. The newly-established U.N. Secretary General’s Task Force on Digital Financing for the SDGs is designed to figure out answers to this question, and to actively catalyze arising opportunities and mitigate associated risks.
Digitalization is far more than turning everything we know into ones and zeros. Gathering, moving, and using more data will make it faster and cheaper. This increased digitalization drives fundamental changes in business models, markets, and the design of physical infrastructure, and enables new policy and regulatory options. It covers a growing technological ecosystem, including artificial intelligence, the “internet of things,” blockchain, and cryptocurrencies, as well as the more basic but all important mobile payment platforms.
Digitalization will disrupt and recast the $300 trillion global financial system as part of its impact in reshaping the core of the real economy. It is already changing the ways we pay for everything from food to energy to health care. Beyond that, it will change these goods and services themselves, our understanding of their relationship to us, and so how we value our options in making choices. As Jack Ma asserted in Davos this January, tomorrow’s digital economy offers us a way to address many of our global and local goals, from decent livelihoods to tempering the pace and effects of climate change.
Digital financing could boost the GDP of emerging economies by $3.7 trillion by 2025. Yet its impact on sustainable development is less certain. Financial inclusion is most clearly associated with digital finance, or fintech. There have been significant advances at this nexus, catalyzed through the leadership, for example, of the U.N. Secretary General’s Special Envoy on Financial Inclusion, Queen Maxima of the Netherlands. It was a welcome sight to see financial inclusion as a core theme running through Singapore’s annual Fintech Festival last November, one of the world’s largest gatherings of fintech folks.
More broadly, fintech could help in ensuring that financing decisions take greater account of social and environmental externalities: from climate risk to community impacts to labor standards. For example, U.N. Women is using blockchain to strengthen financial autonomy and security for women. Crowdsourcing is being used to fund distributed solar technology, made accessible to poorer communities through the use of mobile payment systems, increasingly linked to valorization through tokenization.
On the other hand, the digitalization of finance may have serious downsides. It automates financing decisions, risking systematic exclusion of poorer, higher risk, or just unusual would-be borrowers or insures. Digitalization might increase the transparency of financial decisions, but could equally open new opportunities for illicit financial flows, including those that reduce resources available for financing sustainable development. Digitally-driven increases in the pace of financing decisions can increase the profitability of volatility trading, putting a premium on liquidity and, as Michael Lewis pointed out in his best-seller on high-frequency trading, “Flash Boys,” penalize long-term investors.
Policies, regulations, and standards, alongside technology and market innovation, will be needed to encourage the upsides and mitigate the downsides of digital financing. Yet today, the first generation of rules governing digital financing are mainly about financial stability and consumer protection, with an increasing focus on measures to encourage financial inclusion. Few have connected the dots, with financial regulators and policymakers having parallel but disconnected workstreams on sustainable finance and fintech.
The nexus between fintech and different aspects of sustainable development is likely to vary considerably, highlighted by a recent report to the G-20 by the Sustainable Digital Finance Alliance and by the T-20 Policy Brief on sustainable finance. Overcoming barriers to infrastructure investment may benefit more from innovations using blockchain than from the internet of things, while the internet of things may well be key to unlocking the circular economy. Some SDGs, such as access to education, may not be advanced through digital finance, while others, such as access to clean energy, may depend on it. Humanitarian assistance stands to benefit from the extensive use of digital finance, perhaps including cryptocurrencies, while AI and the use of big data may enable unique and productive e-identities to be established for growing numbers of displaced people.
The U.N. Secretary General understands full well the central importance of securing the necessary financing for the 2030 Agenda. So much so, that he formally launched a strategy on financing the 2030 Agenda at the 2018 U.N. General Assembly. One of the three pillars of this strategy is digital financing, the other two being the related areas of international financial and economic policy, and supporting member states in advancing national plans for financing sustainable development. The Task Force on Digital Financing of the SDGs is the vehicle he has chosen to advance understanding and catalyze practice.
The task force, launched in November, is being implemented by the United Nations Development Programme (UNDP), supported by the United Nations Capital Development Forum (UNCDF). UNDP’s Administrator, Achim Steiner, is co-chairing the task force alongside Maria Ramos, the Chief Executive Officer of the South African financial services company, Absa Group Limited. Joining the two co-chairs will be a highly diverse group of about 20 task force members, spanning the public and private sectors, countries and continents, and expertise and interests.
The task force will address three core questions during its expected 18-month life. First, it will seek to better understand the opportunity opened up by the digitalization of finance, across different aspects of the 2030 Agenda, parts of the financial system, and across geographies and technologies. Second, it will identify barriers in realizing the opportunities, and possible downsides of digitalization, and agree on ways and means to overcome and mitigate them, respectively. Third, is the question of who needs to do what across the public and private sectors, where action is needed, both locally and internationally, including what should be the key roles for the U.N. itself.
The task force will, of course, produce a final report of findings and recommendations to the Secretary General, as well as intermediate products along the way. That said, the task force will do more than think, plan, and suggest what might be done. It will seek to crowd in diverse actors and innovations that will take forward the agenda in practice long after the work has been completed. Members will provide strategic guidance throughout its life, but the network effects it creates through open engagement, dialogue, and learning will be its lifeblood and energy.
Fintech is at an early stage of recasting the nature of finance and money and its role in development. It will open up many new ways to catalyze financing for the 2030 Agenda, as well as create challenges that need to be addressed through collective action in pursuing policy goals. The task force provides a unique opportunity to better understand and shape these outcomes as they emerge before they become consolidated into new norms.