Green finance goes digital – how technology brings sustainable finance within reach
With climate change becoming a global emergency the time for talk is over. “It’s now or never” is the expert view of the world climate council IPCC . With such high stakes everyone needs to play a part. But some fundamental questions remain around green finance, especially green bonds. Experience shows there are many ‘shades of green’ and sustainable finance must be scaled rapidly to ensure that all finance is genuinely green. Let`s consider how technology tackles these challenges and helps to democratise green finance.
Although the global financial system is transitioning to make green investment the norm, progress has been slow and green bonds currently only account for around two percent of global fixed income assets. Clearly that’s not good enough and time is not on our side.
Fortunately, a great deal of thinking has already been done – we have the methods and technology to make green finance universally appealing to drive uptake and make it mainstream. Let’s explore the green bonds lifecycle to see how technology overcomes some common challenges.
Universal green bond challenges
Green bonds need to grow but experience shows that bonds issuance is highly complex and fraught with contradictions. The global green bonds market is enduring growing pains that limit progress and highlight some universal challenges. These must be addressed as priority to make green bonds attractive to all potential stakeholders.
- Green bonds are big-ticket. Typically they are issued by large companies in big denominations. For green finance to become mainstream, bonds and other forms of green credit must be available to smaller companies—including SMEs—and private investors.
- There are many shades of green. Investors and other stakeholders need to know that their proceeds support genuinely environmentally sustainable projects. While standards are evolving, it can be difficult to establish the credibility of projects and it’s crucial to protect against greenwashing. The disconnect between investors and their investments must be bridged by immutable, real-time information.
- Data volume is high and complex. Green bonds present a huge informational challenge. Common problems include an absence of relevant data, poor data reliability, and subjective interpretation. Total accuracy, transparency and standardisation of information are essential to build momentum and confidence.
A smart mix of technologies to transform green bonds management
Digital technologies are transforming how we collect, manage and store data and turn it into actionable business information. The internet-of-things (IoT) opens a new world of opportunity, where smart devices transmit their performance against predefined criteria, such as environmental impact. Blockchain enables physical assets to be replaced by digital assets, such as smart contracts, which are immutable and cost effective.
These technologies choreograph all parties on a single platform, so the number of intermediaries required to manage the green bonds lifecycle is greatly reduced. The platform delivers fast, accurate reporting on the use of green bond proceeds to prevent misuse and to show all stakeholders that investments are indeed driving improvement and are not simple greenwash.
Green bonds for all
Digitalisation redefines the economics of the entire green bond lifecycle. With a ‘single version of the truth’ on the blockchain, there is no need to check data accuracy and quality – all relevant information is constantly synchronised. With a dramatically lower cost structure, barriers to entry are dramatically reduced and green bonds can be issued by smaller organisations, such as SMEs.
In the age of crowdfunding and peer-to-peer lending it is quite feasible that new platforms will be adopted not just by smaller companies but by communities of retail investors to finance microprojects. Consider the case of a company or a community wishing to fund a solar roof or local windmill. Green bonds can be issued and distributed on, for example a bank’s green investment platform. Such sustainable investment opportunities can be made available in small denominations to a broad spectrum of retail investors who also want to make an impact.
Build a green ecosystem
Around the world, regulators – such as the EU – are looking for ways to align finance with the physical world. Initiatives like the European green deal unlock new green and inclusive investment opportunities in order to strengthen their market resilience. There is a universal desire to prevent greenwashing and direct investment towards genuinely green projects. But there is also growing awareness that every business operates in an ecosystem and must collect data on the green credentials of its suppliers, partners and customers.
Smart solutions – such as the green bonds management platform in project Genesis – provide practical proof of a new way to/ is a promising way to manage this volume of complex data, accurately, cost effectively and simultaneously. The technology is proven, available now and can be adopted with minimal outlay. Companies should think big and start small. But above all else they must start now – the carbon clock is ticking.