The recent Economic Survey notes that India is the second largest emerging market for green bonds after China. Despite this, the report concludes that ‘scarce financial resources’ continue to be a constraint in meeting India’s commitments under the 2030 Sustainable Development Goals (SDGs) and the Paris Agreement.
Preliminary estimates suggests that India requires at least $2.5 trillion (at 2014-15 prices) for meeting its climate change actions between 2015 and 2030 under the Paris Agreement. Similarly, the financing gap to achieve the SDGs in developing countries is estimated to be $2.5-3 trillion per year.
However, existing financing options is not channelled to develop at the scale and speed required to achieve the commitments under the SDGs and the Paris Agreement. Perhaps, this investment gap has prompted the Reserve Bank of India to advocate a “policy action to establish an enabling framework that promotes green finance eco-system in India” in its recent ‘Report on Trend and Progress of Banking in India (2018-19)’.
The RBI’s report underscores the global recognition of sustainable financing as a potential avenue for mobilising funds for the SDGs.
As policymakers and businesses deliberate on measures to tap the potential of sustainable financing, there is a global momentum towards exploring the applicability of new financial technologies (fintech) in the context of such financing. In fact, the United Nations Secretary General specifically constituted a Task Force on Digital Financing of Sustainable Development Goals in November 2018, with a mandate to recommend an action plan for harnessing digitisation for accelerating the financing of SDGs.
Similarly, in 2018, the Financial Conduct Authority (FCA) in the UK launched a Green FinTech Challenge to support technological innovations in the green finance sector. Successful applicants will benefit from a range of services such as admission into the regulatory sandbox, direct support from the regulator, bespoke cohort engagement terms, etc.
Technological disruptions in the financial sector can be tapped to mobilise and promote sustainable financing in several ways. Globally, one can witness several such initiatives that illustrate the role that fintech can play to propel sustainable financing. Big data and machine learning may be useful to standardise green reporting, making it easier to monitor green investments. Digitisation can reduce the challenges associated with search, monitoring and verification costs for sustainable projects.
For instance, digital sensing technologies such as satellites, drones, etc., can be used to monitor compliance with sustainability metrics across investments, thereby reducing cost in monitoring and reporting. The Spatial Finance Initiative has been researching on ‘spatial finance’ which seeks to integrate geospatial data and analysis in financial decision-making.
A Swiss company Carbon Delta, has developed a Climate Value-at-Risk (VaR) assessment method to quantify climate change risks across investment portfolios, enabling climate change to be factored into investment decisions. It uses a combination of publicly available and proprietary data and machine learning to determine such risks. Such technological capabilities can reduce the information asymmetry that exists between companies and investors and between regulators and financial institutions. This will be instrumental in dealing with concerns of ‘greenwashing’ or false claims of environmental compliance, as pointed out in the RBI report.
Similarly, digital platforms can facilitate green capital issuance and create opportunities for expanding the access to such financing solutions. Green bond issuance requires increased levels of audit and reporting. Platforms can pave the way for investors to have access to external audit and standardised reports.
By automating periodic reporting requirements in green transactions, platforms enable reports and other information to be distributed in a centralised and timely manner to all investors. For instance, Green Assets Wallet, which is a blockchain-based platform, offers validation of green commitments and provides a framework for issuers to report on impact, reducing information asymmetries and increasing efficiency and transparency in green transactions.
Big data and artificial intelligence can be used to calculate the carbon footprint of financial transaction data, which enables individuals to assess the environmental impact of their purchases. Such technologies pave the way to nudge consumers to more sustainable consumption purchases and promote investment in greener production. For instance, SolarCoin is a digital asset and currency designed to support solar energy deployment.
The SolarCoin Foundation rewards solar energy producers with blockchain-based digital tokens at the rate of one SolarCoin per MWh of solar energy produced. The coin can be traded for government currencies on cryptocurrency exchanges or spent at businesses that accept them.
While Indian regulators like the RBI and SEBI are designing frameworks to promote innovation in the financial sector, such initiatives may also be connected with broader sustainable development goals. The RBI’s call for a policy action to design a framework for green financing is a welcome move. Amongst other things, the proposed policy action should explore the possibility of leveraging innovative technologies for promoting sustainable financing. This calls for an action plan to design such policies, regulations, and standards to tap the potential and mitigate the downsides of digital financing for sustainable development.
The writer is a Senior Resident Fellow at Vidhi Centre for Legal Policy. Views are personal.