Kenya and Copenhagen connecting on sustainable Fintech
In Kenya the central bank used fintech to innovate government securities to convert sleeping savings into active investments. In China automated credit scoring of SMEs include scoring the greenness of the company. Examples the UN Task Force is touring the world to learn from to inform the Secretary General’s recommendations at the General Assembly on how to make fintech a tool align the financial system with the Sustainable Development Goals and the Paris Agreement.
The Paris Agreement and the Sustainable Development Goals both come with price tags. In the European Union alone, there is an annual investment gap amounting to almost EUR 180 billion to achieve its climate and energy targets. This requires a significant redirection of capital toward green finance.
In its current design the financial system is not fit to deliver. Only one percent of the trillion-dollar bond market is green bonds and annually 7 trillion dollars are locked up in savings not in sustainable assets.
Only one percent of the trillion-dollar bond market is green bonds and annually 7 trillion dollars are locked up in savings not in sustainable assets.
The green economy is nascent and for it to flourish there is an urgent need for a financial sector with a strong green and sustainability focus. A transformation that cannot be brought about only by scaling a few selected instruments as green bonds and green loans.
In addition, it requires re-thinking the design of financial instruments through fintech innovation with an inbuild green logic. Or fintech innovations with an ability to digitize existing green investment instruments to make them the most efficient, the cheapest and thereby the default choice.
It requires re-thinking the design of financial instruments through fintech innovation with an inbuild green logic.
Digitization can help address some of the main barriers to scaling green and sustainable finance including offering automated harvesting of green metrics, new ways to unlock the 7 trillion in sleeping savings through new types of green investment instruments, lowering the costs of validating green and sustainable projects and new ways aggerating and credit scoring smaller projects.
Plugging in to scale up
The Kenyan Central Bank governor Dr. Patrick Njoroge is not only visiting Denmark Tuesday to see the fintech innovation landscape but also to discuss regulatory and institutional innovations. Part of the discussions will be to explore the intersection between fintech and sustainability. Aiming to get at a greater understanding of how to plug sustainability into fintech and how to plug fintech into scaling sustainable finance.
At the level of Central Banks something just happened last week that may become a game-changer to this agenda. The Network for Greening the Financial System (NGFS) composed of 30 central banks and 5 observers, including the Danish National Bank, issued its first comprehensive report in Paris on the 17th of April this year.
At the level of Central Banks something just happened last week that may become a game-changer to this agenda.
It confirms that climate change is a source of structural change in the economy and therefore falls within the mandate of central banks and supervisors. Hence, the job description of central banks is enlarged from focus on certain levels of inflation to also target a certain kind of environment.
The question is how fintech can be deployed to help central banks deliver on the four concrete ways the report recommends to go about greening the financial system which are : 1) Integrate climate-related risks into financial stability monitoring and micro-supervision 2) integrate sustainability factors into own-portfolio management 3) bridge the data gaps and lastly building awareness and 4) build intellectual capacity and ensure technical assistance and knowledge sharing.
One way is to show how to collect green metrics in ways that are machine readable, to avoid running into the same problems as in sustainability disclosure on companies which is a mix of dirty data, ranging from a text description in an annual report, to quantitative data points but on a wide range of different indicators.
That is just one way Central Banks can champion ways to integrate digital technologies into the work of greening finance.
A number of central banks are ahead of the curve by already integrating green intent into their work.
A number of central banks are ahead of the curve by already integrating green intent into their work. Looking at those experiences through a digital lens is a valuable first step and guidance for how to implement the four recommendations in a digital way.
Unlocking savings for a fit future
There is sufficient capital to deliver on the SDGs by 2030 – a true paradox. Seven trillion dollars is locked up annually in savings. A burning question is how to channel these funds into SDG assets, projects and businesses.
In Copenhagen next week the Governor of the Central Bank of Kenya will share lessons learned from the M-AKIBA innovation, a mobile only government security to channel domestic savings into investments.
Also, in Europe a number of regulators are staring to innovate policies and regulation to tap into this wealth. Not that these policies and regulatory measures all explicitly integrate a green or sustainable intent, but they open up for the deployment of capital in that way.
One example is France launching its PACTE action plan a few weeks ago that will orient French Citizens’ savings towards company’s equity capital to fund future growth and innovation.
An action plan that integrates an increased sustainability focus into companies. It opens up for new ways to deploy fintech to increase investments into green and sustainable companies. Smaller companies can be aggregated into sustainability bonds issued on the blockchain tokenizing equity shares such as one example.
Another example is Switzerland’s proposal for a legislation currently in consultation introducing a new form of uncertified transferable securities called “DLT uncertificated securities”. It opens up for an entirely new innovation space for designing fintech instruments to scale green and sustainable finance.
It opens up for issuing smaller digital green bonds for people to get involved in putting their savings into green transition by for example installing solar cells on schools or retrofitting old building to become energy efficient. Just few examples of how the different participants in the system can move green and sustainable finance forward in new and innovative ways.
Kenya and Copenhagen in Conversation
Kenya is the motherland of mobile money. What comes after mobile money is where real transformation potentially starts to happen.
It is a new infrastructure that has allowed the central bank to issue the first mobile only bond, it is paving the way for new types of micro-insurance and for access to credit for cash-strapped SME’s and for the current rapid roll-out of solar energy enabled by fintech pay-as-you go business models.
Dr. Patrick Njoroge is recognized for his work at the central bank because he has been part of a public sector that has actively worked to enable these innovations to emerge and scale.
Why would he invest a few days in coming to Denmark? Well, it was actually also the first question asked the staff at the Central Bank asked when I phoned to invite him.
After discussions about what Denmark is on the fintech scene and how it is a nation with a highly digitized public sector, the Governor felt there were real substantive issues to be discuss and exchange around between Copenhagen and Kenya around how high digitalization rates influence monetary policy, learnings from sandboxes (which both countries have) and discussing with fintech innovators on use cases outside of the Nordics.
Marianne Haahr is Director of the Sustainable Digital Finance Alliance (SDFA) a nonprofit working to scale sustainable finance through deployment of fintech. SDFA is also knowledge partner to the UN SG’s Task Force for Digital Financing of the Sustainable Development Goals.
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