ASEAN CPA Secretariat

logo

Adopting Green Technology in Sustainable Finance for ASEAN

1. Green Sectors and Technology Innovation

According to the United Nations Development Programme (UNDP) Taskforce on Digital Financing of the Sustainable Development Goals, to date (2020) banks have invested over US$1 trillion in developing, integrating and acquiring emerging technologies. KPMG estimate that, despite the impact of COVID-19, FinTech venture capital investment in FinTech globally in 2020 totalled US$105 billion, following a record US$165 billion in 2019. ‘Big Tech’ firms, including Apple, Amazon and AliPay, as well as mobile telecoms operators, are also major FinTech adopters and investors. The COVID-19 pandemic has further accelerated the uptake of digital finance, with the use of mobile banking and FinTech apps increasing as customers were required to work (and bank) from home.

In addition to smart phones and banking apps, the Internet of Things (IoT), Application Programming Interfaces (APIs), distributed ledgers (blockchain), artificial intelligence (AI) and machine learning, big data, and data analytics are just a few of the technologies that fall under the umbrella terms “FinTech” and “digital finance.” The pace of change in the financial sector’s operations has been accelerated by advances in digital technology and data science, new policies and regulations (particularly those aimed at boosting competition in the sector), broader economic and technological trends (such as a more flexible labor market and the “digitization” of the economy), as well as changing customer expectations and behaviors (such as increases in the use of digital payments and declining branch foot traffic). In the early stages of development, FinTech was associated with new startup businesses aiming to challenge the position of large financial services firms in the market, but large financial institutions (including central banks and regulators) and other organisations have since adopted many of the tools and techniques of FinTech and digital finance. In Southeast Asia, open banking is still in its early stages but rapidly gaining traction. Several countries in the region, such as Singapore, the Philippines, and Indonesia, are already making significant progress in open banking readiness.

Additionally, there are a variety of FinTech applications that support the more effective and efficient delivery of financial services, such as “RegTech,” which makes use of some or all of the technologies mentioned previously to better manage regulatory compliance, such as customer identification and onboarding, “PayTech,” which makes interbank payments cheaper and faster by frequently using tokenized blockchains, “RiskTech,” which enhances risk identification, analysis, and management, and high-frequency and online trading, LendTech, which uses financial technology to support lending by financial institutions and others, and InsurTech, a combination of insurance and technology, are additional examples.

Another example of how digital and data-driven technologies are being applied to the finance sector is the use of satellite and other remote monitoring techniques (using advanced data analytics) to verify the environmental and, potentially, social sustainability impacts of projects and investments. White label FinTech provider Vacuumlabs[1], for example, offers carbon-tracking technology that combines data on credit card purchases with carbon-tracking data to help customers make more sustainable consumption choices.

FinTech tools and techniques, especially Artificial intelligence (AI) and blockchain, can also be used to support humanitarian projects and objectives. The UN is one of many organisations leveraging blockchain in this way[2]; for example, as a way of disbursing funds to Syrian refugees in 2020. NGOs and companies also use ‘humanitarian blockchain’. Hiveonline[3], for example, uses blockchain to help microeconomies in rural Africa access online payment and banking linked with other data-driven services. One product developed by Hiveonline, ‘myCoop.online’, offers crop forecasting, voucher distribution and business management services for small farmers, and works even in environments with poor internet connections and smartphone coverage.

A related term in common use in green and sustainable finance is ‘CleanTech’ (sometimes also known as ‘GreenTech’), which covers a wide range of technologies linked to environmental management, climate change mitigation and adaptation, and other related areas, including, but not limited to:

  • Renewable energy, e.g. solar, wind and marine, smartgrids, energy storage
  • Energy efficiency, e.g. passive buildings, improving power transmission, improving energy usage
  • Resources, e.g. recycling, reducing/utilising waste products and packaging, developing substitutes for high-carbon plastics
  • Transportation and urban infrastructure, e.g. public transport, electric and hydrogen-powered vehicles
  • Sustainable food production and land use, e.g. agriculture, aquaculture and forestry.

The use of FinTech tools and techniques[4] can be beneficial for the CleanTech sector, and renewable energy in particular. While large, centralized, linear funding models work well with outdated, centralized fossil energy systems, it may be the case that a decentralized network of modular, interconnected units is best for renewable energy systems. Combining AI, blockchain and peer-to-peer funding strategies can direct money toward renewable energy. P2P funding can mobilize savings and investment capital, connect it to these investment opportunities, and assist in scaling up distributed energy generation. AI and blockchain technology can enable the aggregation of distributed community-driven energy generation on a scale where it can connect with energy markets.

2. Applying FinTech Tools and Techniques in Green and Sustainable Finance

Global interest in using FinTech tools and techniques to support the expansion of green and sustainable finance has significantly increased recently. This has included a variety of policy initiatives spearheaded by organizations like the UNDP and UNEP as well as the creation and implementation of cutting-edge, technology- and finance-driven solutions by both new startups and established businesses. Some of the key features and benefits of FinTech for the green and sustainable finance sector include:

  1. Improving access to financial services – the availability of banking, insurance and other financial products and services via smartphones and other devices means greater numbers of individuals and small businesses – especially in the developing world – can access services such as microfinance and insurance to finance mitigation/adaptation activities and enhance climate resilience.
  2. Lowering the costs of delivering financial services – process automation, the delivery of financial services via digital channels and the use of advanced data analytics to better understand and price risk can lower the costs of providing financial services, making previously unbanked/uninsured individuals and small businesses more attractive to providers.
  3. Improving access to capital markets – the combination of FinTech tools and techniques, including digital platforms and distributed ledgers, can allow smaller businesses and projects access to funding that was previously only accessible to larger issuers, by reducing the cost of issuing bonds and other securities.
  4. Enhancing transparency and market integrity – with satellites, drones, smartphones, and other sources of monitoring and verification data, impact data (e.g. factory emissions, deforestation or reforestation) can be verified and published more robustly and at a lower cost.
  5. Promoting competition – start-ups can experiment with innovative approaches to providing financial services that might be difficult or impossible for large incumbents, which may lead to new services promoting sustainability and/or serving previously under-served or marginalised groups.
  6. Targeting investors – advanced data analytics and digital platforms enable issuers and fund managers to target investors who are interested in investing in green and sustainable finance.
  7. Changing consumer behaviour – by combining customer spending data with emissions data, apps can estimate carbon footprints and encourage consumers to engage in more environmentally friendly or socially desirable behaviour.
  8. Improving financial literacy – many banking apps and similar offer budgeting tools and other financial education resources to support financial inclusion and reduce indebtedness.

Changing consumer preferences and values, evolving policy and regulatory interventions, and a growing understanding of climate and broader sustainability risks and opportunities are all contributing to the green and sustainable finance sector’s rapid growth. This raises demand across the spectrum of financial services, including retail and corporate banking, investment, and insurance, for novel solutions, products, and services backed by a variety of FinTech tools and techniques.

2.1.      Retail Financial Services

Some of the most obvious applications of FinTech tools and techniques, at least to the general public, may be found in retail financial services, including services for micro and small businesses, including:

  • Promoting green and sustainable finance to retail customers, and encouraging and supporting behavioural change by providing products and services, such as current accounts and payments, that ‘nudge’ and/or reinforce green and sustainable financial and purchasing decisions (e.g. Ant Forest[5], Capture[6] and the Nordea Carbon Footprint Tracker[7]).
  • Making banking, insurance, and other financial services more accessible, especially in developing markets where smartphones with cameras and fingerprint readers can be used to verify identity, sign up customers, and deliver financial services like payments, credit, and insurance that support financial inclusion and/or climate mitigation and resilience.
  • Promoting lending through microfinance and other organizations to climate-smart sectors like agriculture, forestry, fisheries, and others where traditional methods of credit scoring, loan disbursement and repayment, and environmental outcome monitoring would require expensive branch networks but can be carried out much more affordably with technology.
  • By using the increasing granularity and availability of data about climate risks and opportunities, as well as advancements in data analysis techniques, financial services companies can offer a wider range of environmentally friendly and sustainable products and services (such as green mortgages and loans, climate insurance), even though data quality and availability are still skewed toward the developed world.
  • Channelling retail investors’ savings to support loans or small investments in environmentally sustainable companies and organisations through aggregator and marketplace apps, peer-to-peer (P2P) lending or crowdfunding platforms (e.g. Bettervest[8] and Inyova[9] in Europe).

Platforms for peer-to-peer lending and crowdfunding have expanded significantly in size and number over the past few years. Lending to and investing in green and sustainable projects can be supported by both generalist platforms like Funding Societies and specialized social platforms like KitaBisa. Increased engagement with potential clients and investors in green issues and strategies, as well as the ability to share risk with other investors across a potentially large and diversified portfolio of investments, are just a few advantages that this strategy may have.

However, there have been questions raised regarding the safety of investors in P2P and crowdfunding schemes, particularly if they involve intricate projects and high-stakes money[10]. Do retail investors genuinely realize the risks they are taking and that, in the event of a large number of loans or investments defaulting, their capital may be at risk? Risks may be concentrated because of portfolios’ lack of diversification and high correlation. The question of how far and how quickly these approaches might be expanded into riskier or less transparent emerging market segments, such as green and sustainable finance, arises as some financial regulators consider how to best balance support for innovative approaches to delivering financial services with investor protection.

2.2.      Corporate Banking and Capital Markets

With financial markets now looking at sustainability, advanced data analytics can help to better detect, evaluate, handle, price, and unveil climate-related and other sustainability risks. Additionally, this can be applied when evaluating the effects of green bonds or sustainability-related corporate loans to track and confirm the accomplishment of desired project outcomes and impacts. By promoting transparency and disclosure, which helps prevent greenwashing and supports investor confidence and market integrity, the growing availability and capacity to analyze both structured and unstructured data play a significant role in encouraging the growth of the green and sustainable finance sector.

Data is used by environmental NGOs and others to identify instances of greenwashing by financial institutions. A good example of how FinTech tools and techniques can be used to support the development of capital markets is the Green Assets Wallet initiative.

The Green Assets Wallet (GAW) initiative[11] describes itself as a global trust platform to facilitate the financing of credible sustainability transitions through capital markets, enabling investors to access reliable data on environmental performance to support investment decision-making, monitoring and reporting.

GAW hosts data from more than 100 issuers as of June 2021, most of which are located in Europe. These issuers include central banks, financial institutions, energy companies, municipalities, transportation, and waste management. GAW aims to bridge investors with the validation and reporting of potential investment opportunities through a cost-efficient and immutable process with environmental objectives and impact, supporting the expanding market for debt instruments linked to environmental performance (e.g., Green Bonds). GAW accomplishes this using a blockchain-based platform created by ChromaWay with assistance from additional partners, such as the climate research organization and data provider CICERO.

The GAW, an open-source application that enables the validation, monitoring, and reporting of green investments, launched its first version in November 2018. The blockchain platform also accredits validators (such as auditors, certifiers, and regulators) for validating green investments and impact reporting in addition to offering an automated data feed and evidence point for these activities. By doing this, it increases public confidence in the green debt market’s integrity.

AI, distributed ledgers and other fintech tools and techniques can also lower the cost and complexity of accessing capital markets, making it simpler for smaller businesses and projects to issue securities like green bonds or other types of securities. If technology can support smaller-scale capital market issuances, this may help to accelerate the growth of green finance in ASEAN given the difficulties in identifying green and sustainable finance projects of sufficient scale to be financed by “traditional” means, due in large part to the costs of issue.

2.3.      Investment

FinTech tools and techniques may support investment in green and sustainable activities, businesses, and projects more broadly in addition to enabling retail investors to take part directly in lending to and investing in green activities and projects. The development of sustainable investment can be supported in particular by the expanding availability and granularity of structured and unstructured data pertaining to sustainability factors; improvements in data quality, standardization, and verification; and developments in AI and machine learning applied to data analysis.

However, as it becomes more challenging to distinguish the truly meaningful and useful data that can provide insights into financial and sustainability performance from “noise,” it also presents challenges for investors and analysts. A number of technology-driven, data analytics and ratings firms have been established and have grown rapidly in recent years, including Climetrics and Sustainalytics[12], TruValueLabs and Arabesque[13].

Advantages to investors of advances in data availability and analysis include:

  • Creating a more thorough understanding of a company’s or investment’s exposure to climate risks, environmental impact, and sustainability more generally by enabling the use of numerous—possibly hundreds of—structured and unstructured data sources for comparison and analysis, which will improve investment decision-making.
  • The expanding availability of standardized data on environmental performance and sustainability, which makes it easier and more efficient to compare various potential investments.
  • Enabling in-the-moment monitoring and verification of investment performance in terms of desired green and sustainable outcomes, such as tracking emissions data, power consumption, or supply chain sustainability, assisting investors in managing investments more nimbly.
  • Using blockchain technology to validate and provide an immutable record of outcomes, as in the Green Assets Wallet initiative, and the World Wide Generation G17 Eco Platform[14].
  • Creating new ESG index-tracking funds and other sustainable investment vehicles.
  • Automating investment analysis to lower costs, which is crucial for active investment managers who are being squeezed by the rise of cheaper index tracking and other passive investment funds.

2.4.      Insurance

As major institutional investors, insurers can also benefit from the application of FinTech tools and techniques more generally. As risk managers, insurers can benefit from the increasing availability and granularity of data, and developments in data analytics.

FinTech tools and techniques can be used to support impact underwriting in developing countries by giving communities that are particularly at risk from climate change and related extreme weather events access to insurance. This will increase the communities’ resilience to climate change. The combination of lower costs and wider distribution, claims management via smartphones, index insurance linked to remote data monitoring and providing automatic pay-outs, and products and services aimed at individuals, smallholders, and small businesses in the developing world (referred to as “microinsurance”), can support new, lower-cost models of insurance that also support financial inclusion. Insurance companies like Ayo and BIMA collaborate with mobile phone providers in the developing world to provide a variety of insurance services to their customers using already established distribution channels. For ASEAN, the World Bank’s 2021 Climate Risk Country Profiles have cited Vietnam, Thailand, Indonesia, and the Philippines as the countries that rank among the highest in the world for flood and typhoon risk, among other natural hazards; and each have a differing level of resilience. Yet, we observe a stark void for climate insurance, which actually opens significant opportunities for insurance and InsurTech companies.

3. Challenges and Costs of Green Digital Technologies

The green and sustainable finance sector can grow more quickly and be more closely aligned with sustainable goals by utilizing FinTech tools and techniques. From an environmental and sustainability standpoint, FinTech does have costs and difficulties. FinTech is neither good nor bad in and of itself, as is the case with many technologies. FinTech tools and techniques may be used to deliver negative outcomes, either intentionally or unintentionally, or to support positive outcomes for customers, communities, and society at large. Since FinTech has the potential to support green and sustainable finance, Green and Sustainable Finance Professionals should be aware of its benefits and drawbacks when working with or advising clients or colleagues.

One of the key criticisms of the FinTech sector is its increasing energy consumption and associated greenhouse gas emissions. To support the growing use of digital technology, it is necessary to build the necessary infrastructure ― particularly the data centers which are necessary to support cloud computing ― which in turn require electricity to provide power and to cool the buildings. A data center can, of course, be powered by renewable sources of energy by purchasing all of its electricity from renewable sources, which can reduce CO2e emissions by about 30 times[15].

This is not necessarily a criticism of FinTech alone, though, as other organizations of all kinds (including traditional financial institutions) also increasingly rely on computing power and/or contract it out to cloud service providers. Additionally, they need electricity to light, heat, and cool offices. Furthermore, many established organizations had sizable carbon footprints due to the extensive employee travel for both business and commuting, at least prior to COVID. Therefore, FinTech does not necessarily need to be more environmentally friendly than “traditional” finance; it ultimately depends on how and where the electricity needed to deliver digital finance is produced.

Adopting FinTech tools and techniques could be expensive and difficult, which could have a detrimental effect on sustainability, such as:

  • Difficulty in supporting vulnerable customers – Some groups of vulnerable customers (e.g. the elderly, or individuals with learning difficulties or other disabilities) may find it hard to use digital technologies to access financial services. Where these services are only available via digital channels, customers can be unintentionally excluded from such products and services (e.g. from a green investment platform only available via smartphone and tablet).
  • Limited sustainability-related data availability – An investment decision based on sustainable finance requires extensive environmental data, which is currently limited in scope. It may not be possible to adopt digital finance to overcome sustainable finance barriers as long as there are no standards and methodologies for translating behavioral data into environmental performance data, even when datasets are in place and value is placed on utilizing data to increase investment in sustainable outcomes. There are also costs associated with the adoption of such data, as well as limitations in the ability to understand and analyze it[16].
  • Unconscious bias in AI and machine learning – AI-enabled systems need to be trained with data sets in order to develop and learn. Because of this, the decisions made by automated systems will be based on the quality of the data provided, and there is a chance that the data may contain unconscious biases if it is derived from real-world scenarios that have already occurred. For instance, information from credit scores may show that certain regions have a lower default rate for mortgages and other loans. Even though an AI/machine learning system might link this to a number of variables, including ethnicity, this could lead to judgments and outputs that are biased in favor of or against particular societal groups.
  • Lack of transparency – While the use of advanced data analytics applied to structured and unstructured datasets can be used to enhance monitoring, verification and transparency in green and sustainable finance, the use of AI and machine learning to analyse data can lead to a ‘black box’ scenario which is where outcomes and decisions cannot be explained to those impacted by such decisions, which can lead to a loss of trust.
  • Loss of data control and privacy – Many FinTech products and services are based on the availability and analysis of large datasets. A number of high-profile incidents have occurred of individuals’ data being used by technology companies for purposes that individuals had not consented to, and/or were unaware of (e.g. Facebook/Cambridge Analytica), as well as significant data losses (e.g. Experian). Without suitable data governance and control, data obtained for the purpose of supporting climate change mitigation, adaptation and other positive, desired sustainability outcomes might be used – intentionally or unintentionally – for other purposes.
  • Social costs – As evidenced, for instance, by the decline of branch networks in financial services, particularly in developed markets, FinTech tools and techniques, particularly increased automation, can result in job losses and/or increased job insecurity. Communities may be upended if customers who are unable or unwilling to use digital channels find it harder to access banking and other services. At its most extreme, the automation of a significant portion of customer-facing and back-office processing jobs has the potential to seriously disrupt the financial sector and the communities that depend on it.
  • Potential for greenwashing – The rapid growth of FinTech products and services supporting green and sustainable finance means that there is an increasing risk of greenwashing, where the benefits of a new product are overstated in order to secure investment and/or grow market share.

Many of these expenses and difficulties apply to financial services generally, not just to the green and sustainable finance industry. Unconscious bias in AI and machine learning has already been observed, as evidenced by the fact that black and Latino borrowers pay higher interest rates in the US mortgage market. FinTech tools and techniques, however, have the potential to hinder rather than advance the development of green and sustainable finance in some cases, such as when they limit access to climate insurance due to digital exclusion or when they enable greenwashing. Therefore, when using or recommending FinTech tools and techniques, green and sustainable finance professionals should take proactive measures to ensure that potential issues are identified early, disclosed, and, where possible, mitigated.

4. Conclusion

The production, use, and termination of digital technology may have unintended consequences for the environment. Global data centers and distributed ledger technologies have significant energy demands as well as environmental impacts related to the extraction of raw materials used in their production.

New standards and regulations may be required in the future in order to support the expanded use of some technologies that are still in the early stages of development. Digital assets, present certain risks, including cybersecurity and regulatory concerns. Additionally, decentralized finance is also associated with risks, such as the possibility of illicit financial flows and tax evasion. Coordinated standards and regulations will be required to guide growth in these areas.

 

[1] A global concern needs a global technical solution: https://vacuumlabs.com/doconomy/

[2] People’s Money: Harnessing Digitalization to Finance a Sustainable Future.  https://unsdg.un.org/sites/default/files/2020-08/DF-Task-Force-Full-Report-Aug-2020-1.pdf

[3] Sustainable digital finance for the next billion: https://www.hivenetwork.online/

[4] For Sustainable Finance: Harnessing Digital Technologies  https://greendigitalfinancealliance.org/

[5] Alipay Ant Forest: Using Digital Technologies to Scale up Climate Action: https://unfccc.int/climate-action/momentum-for-change/planetary-health/alipay-ant-forest

[6] Planet-friendly living, made possible: https://www.thecapture.club/capture-for-you

[7] Nordea (2021). Bring the Environment into Your Wallet. https://www.nordea.fi/en/personal/our-services/online-mobileservices/co2-tracker.html

[8] Bettervest: Investing in Impactful Projects Without Compromising Financial Returns  https://impakter.com/bettervest-crowdfunding-invest-in-impactful-projects-without-compromising-financial-returns/

[9] How Inyova invests with impact: https://inyova.ch/en/impact/

[10] Financial Stability Implications from FinTech. Financial Stability Board, Basel. https://www.fsb.org/wp-content/uploads/R270617.pdf

[11] Green Assets Wallet (2021). We make it easy to invest in a prosperous and sustainable future on Earth: https://greenassetswallet.org

[12] A consistent approach to assess material ESG risk: https://www.sustainalytics.com/esg-data

[13] Launching our Climate and Regulatory Solutions: https://www.arabesque.com/s-ray

[14] World Wide Generation (2021). Fast Track to Purpose Protection Prosperity: https://www.worldwidegeneration.co

[15] Greenpeace reports in 2020 that Amazon’s data center emissions are about 44.4 million tons, while Google emitted only 1.5 million tons of CO2e by using renewable energy.

https://www.greenpeace.org/usa/microsoft-google-amazon-energy-oil-ai-climate-hypocrite/

[16] Digital technologies for Mobilizing Sustainable Finance: Applications of Digital Technologies to Sustainable Finance. http://unepinquiry.org/wp-content/uploads/2018/10/Digital_Technologies_for_Mobilizing_Sustainable_Finance.pdf

Authors:

Dr Hazik Mohamed

Stellar Consulting Group (Singapore)

E-mail: hazik@stellarcg.com