Financial Technology Can Break New Ground in the Transformation towards Sustainable Development
14 December 2016 - Technological innovation is disrupting every aspect of today's financial system, but it could also break new ground in the world's transformation toward sustainable development, according to UN Environment's latest report, "Fintech and Sustainable Development: Assessing the Implications".
Financial technology, known as 'fintech' - including innovations such as mobile payment platforms, high-frequency trading, crowdfunding, virtual currencies, and blockchain - threaten the viability of today's financial sector business models, and the policies and regulations that have shaped modern finance. But in combination, these innovations - given the speed, breadth and depth of their disruptive impact - could also be harnessed to better align financing with sustainable development.
Turmoil and transition guarantee that tomorrow's financial system will be very different, and fintech innovations are putting finance at the core of an increasingly automated global economy with seamless two-way communication. This greater decentralization for financial transactions could in turn help increase the provision of finance for sustainable development, the report finds.
The report is a companion to the second edition of "The Financial System We Need" by UN Environment's Financial Inquiry and assesses how the financial system's core functions are likely to be disrupted by fintech innovations and how they could help - or hinder - efforts to align financing with sustainable development. The report considers ways to:
- Unlock greater financial inclusion by reducing the costs for payments and providing better access to capital domestically and internationally;
- Mobilize domestic savings at a scale that will enable long-term investment directed at the long-term sustainability of the real economy;
- Disrupt the provision of financial protection, risk management, risk transfer and risk diversification for vulnerable and exposed communities, real economy assets and infrastructures, and nature's ecosystems;
- Collect, analyze and distribute information on the financial system and the real economy for better economic decision-making, regulation and risk management;
- Provide financial markets with the level playing field and market integrity needed for long-term real economy investments aligned with the sustainable development agenda.
The report also presents an innovative analysis of how advances in three digital technologies - blockchain, machine learning and artificial intelligence (MLAI) and the Internet of Things (IoT) - could lead to revolutionary innovations for building trust, transparency and traceability for financial transactions and make tomorrow's financial system far more efficient in mobilizing green finance.
Simon Zadek, co-director of UN Environment's Inquiry, said: "The overlap between environment and finance is more obvious than ever. The solutions that fintech promises could not only revolutionize the financial sector but bolster global efforts to safeguard our environment."
Action is needed now to shape the emerging direction of fintech. The report therefore includes some key steps for the 'fintech for sustainable development' journey, such as:
- Ensuring that fintech is an integral part of financial system development plans, particularly at the national level, and especially for developing countries;
- Establishing a platform of leading fintech companies to influence the right enabling businesses, policies and standards to connect fintech with sustainable development;
- Incentivizing fintech alignment with sustainable development by, for example, supporting venture capital and social impact funds to fund start-ups with sustainable development ambitions.
- Creating a challenge fund to create a global community of purpose that can pilot and create replicable solutions over time.
About UN Environment's Inquiry into the Design of a Sustainable Financial System:
The Inquiry is the international platform for advancing national and international efforts to shift the trillions required for delivering an inclusive, green economy through the transformation of the global financial system. Since launching in 2014, the Inquiry has worked with more than twenty countries on national processes, published around 90 reports and working papers and serves as the Secretariat for the G20's Green Finance Study Group. Its landmark 2015 report "The Financial System We Need" revealed for the first time the "quiet revolution" already taking place, led particularly by some developing countries, and its potential to renew the purpose of the financial system in the context of sustainable development. The second edition of "The Financial System We Need" revealed a doubling in policy actions over the past five years to align the global financial system with sustainable development; it called for more effort to turn this momentum into genuine global transformation and made a series of recommendations to help accelerate this process.