Sharing Date26 Dec, 2023
Climate change, technological progress, and the ongoing digital revolution represent significant global trends that wield considerable influence on societies globally and shape the trajectory of our future. The climate crisis, largely a result of unsustainable human activities and economic practices, overdependence on fossil fuels for energy, environmental degradation, and the overexploitation of natural resources, poses a profound threat to our planet. Concurrently, the digital transformation is redefining societal interconnectedness, reshaping individual interactions, and revolutionizing the delivery of diverse services. This digital revolution’s impact extends beyond reshaping individual interactions; it is fundamentally altering how businesses operate, influencing the broader landscape of the economy, societal norms, and business methodologies. Crucial actors in this transformative process encompass cutting-edge digital technologies such as artificial intelligence (AI), machine learning (ML), big data, and the internet of things (IoT). These technologies have played a pivotal role in reshaping social dynamics, automating tasks, expeditiously processing and analyzing vast datasets, enabling a myriad of service offerings, and progressively infiltrating various sectors, including finance.
In recent times, it is unsurprising that sustainability and digitalization have taken center stage in both international and EU policy discussions. Within the European Union, significant strides have been made through notable initiatives and legislative measures in these realms. Particularly, key focus has been placed on the Digital Finance Strategy[1] and the Sustainable Finance Action Plan[2,3]. The Digital Finance Strategy addresses the imperative for a digital overhaul in the financial sector, aiming to establish a comprehensive regulatory framework that facilitates the seamless integration of distributed ledger technologies (DLTs) and crypto-assets within this domain.[4] Conversely, the Sustainable Finance Action Plan aims to enhance the funding mechanisms supporting the transition to a sustainable economy. This initiative outlines strategic actions across four pivotal areas: transition finance, inclusivity, resilience, and the financial system’s contribution to global ambitions.[5,6] In this regard, the recognition of the financial sector’s crucial role in advancing the shift to a low-carbon economy and addressing the impacts of climate change is widespread. This sector can contribute significantly by offering capital, directing resources, and endorsing green finance initiatives.
But where might we discover the convergence of sustainable and digital finance? Can we explore the concept of “sustainable digital finance”, and if so, what precisely does this term entail?
Well, the answer seems easy to give if we consider that the more interconnected and interactive the ecosystems are, the more digitalization becomes a crucial tool to improve sustainability. The view that digitalization is one of the driving forces of development, just like sustainability, has become widely discussed recently.[7] With this in mind, it is possible to say that the concept of “sustainable” or “green” digital finance, in a broad context, encompasses the utilization of digital technologies, commonly known as FinTech, to attain specific ESG (Environmental, Social, and Governance) goals or advance sustainability initiatives within the financial sector.
The concept of green digital finance has arisen from the envisioned innovations that technology, particularly within the realm of FinTech, can contribute to advancing environmentally friendly initiatives. While green finance and digital finance have developed independently over the years, the amalgamation of these terms into a unified strategy known as “green digital finance” represents a novel approach. Although a universally accepted definition is still pending, The Green Digital Finance Alliance propose that sustainable digital finance can be construed as “intended application of digital finance towards financing as well as supporting the related institutional and market arrangements that contribute to the achievement of sustainable development”.[8] The advent of cutting-edge technologies such as blockchain, artificial intelligence, machine learning, big data, and the IoT has introduced unprecedented opportunities for enhancing financial services overall and, more specifically, for bolstering green finance initiatives.[9]
These technologies, especially with the development of digitalization, also create an opportunity for wider coverage and lower credit costs. This potential enables financial products to be self-sustainable by increasing the inclusiveness of credit and also increases the capacity to attract private funds. While facilitating access to green/sustainable digital finance makes a significant contribution to environmental goals (especially mitigation and adaptation), it also brings with it the potential to support increased financial inclusion by encouraging overall credit growth.[10] On the other hand, the integration of digitalization also has the potential to reduce costs and increase the efficiency of green loans by using existing data to facilitate the risk assessment process.[11] In addition, the integration of sustainability and digitalization also has the potential to contribute to the UN Sustainable Development Goals and successfully achieve the Paris Agreement targets.[12]
Nevertheless, the classification of FinTech activities as genuinely environmentally friendly or sustainable prompts the question of how such categorization can be achieved.
Broadly speaking, the discourse often revolves around the notion of alignment with ESG criteria to designate certain services, activities, products, or investment types as environmentally friendly or sustainable. The primary challenge lies in the multitude of labels and indicators that variably define, categorize, rate, and measure ESG factors. This ambiguity poses a significant hurdle for decision-makers, financial institutions, and companies of various sizes.
In addition, it is imperative to delve into the environmental ramifications of these technological advancements and assess their sustainability.
This leads us to consider another issue encapsulated in the realm of sustainable digital finance: the integration of environmentally friendly practices into financial technologies, commonly referred to as the “greening” of financial technologies.
Reflecting on the quest to make financial technology more sustainable or green presents a challenging task, given the absence of universally accepted concepts and the multitude of ESG metrics, indicators, and benchmarks. Currently, there is a dearth of attention and research on ensuring the sustainability of digital transformation within the financial sector. Nonetheless, certain considerations can be highlighted to move closer to the goal of sustainable digital transformation in finance:
- Developing specific universal frameworks or criteria to assess and measure the environmental footprint of digital technologies in the financial sector.
- Evaluating the environmental and sustainability impact of key digital technologies, such as DLT and blockchain, which are increasingly integral to the financial industry.
- Identifying and examining existing use cases and best practices in achieving sustainability within the digital transformation of the financial sector.
Besides all these, it is also essential to acknowledge and address the challenges that might arise.
The primary hurdles in green digital financing encompass deficiencies in digital infrastructure and the vulnerabilities of current technologies. Additional obstacles include a limited comprehension of sustainable digital finance, fragmented communication between stakeholder groups, insufficient global collaboration concerning cross-border risks and opportunities, and a restricted appreciation and application of sustainability data in financial decision-making.[13,14]
Conducting thorough research through collaboration among governmental bodies, international organizations, private sector and NGO’s is essential for building awareness regarding the potential, opportunities, and risks associated with integrating digital technologies into sustainable finance. At the national and regional levels, the establishment of multi-stakeholder platforms would be crucial, bringing together policymakers, financial sector stakeholders, sustainability advocates, and FinTech communities. These platforms can serve as focal points for discussions and collaboration specifically focused on the sustainability aspects of digital finance. Encouraging investments in digital technologies that promote sustainable finance, on the other hand, is equally crucial. This can be achieved by integrating sustainability features into the existing FinTech ecosystem and enhancing the visibility and transparency of emerging sustainable digital finance solutions. To further this agenda, the development of standardized tools and instruments for translating financial transaction data into environmental data would be beneficial. Additionally, creating easily accessible online and mobile-based sustainable financial products, scaling virtual technology platforms that connect sustainable assets with investors, and fostering collaboration between innovative sustainable digital finance solutions and regulatory bodies are crucial steps for fostering a sustainable digital finance ecosystem.[15]
Overall, it is apparent that there exists considerable scope for a more expansive discourse regarding the concept of “sustainable digital finance”. Despite the presence of various notions, definitions, and objectives, there is a noticeable absence of a shared understanding and a unified narrative. Consequently, it becomes imperative to establish a robust conceptual framework. This undertaking is not only fundamental but also holds significant importance in addressing other pertinent inquiries, such as: To what degree can digital innovations in finance contribute to the attainment of the SDGs and the transition towards a climate-neutral economy? In what ways does the integration of digital technologies into finance enhance the sustainability of the financial system? What types of digital tools have demonstrated utility and effectiveness in realizing these objectives so far?
Resources:
1) European Commission (2020a). Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions on a Digital Finance Strategy for the EU. Retrieved on December 2023 from https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52020DC0591
2) European Commission (2020b). Renewed sustainable finance strategy and implementation of the action plan on financing sustainable growth. Retrieved on December 2023 from https://finance.ec.europa.eu/publications/renewed-sustainable-finance-strategy-and-implementation-action-plan-financing-sustainable-growth_en
3) European Commission (2021). Strategy for financing the transition to a sustainable economy. Retrieved on December 2023 from https://finance.ec.europa.eu/publications/strategy-financing-transition-sustainable-economy_en#strategy
4) European Commision. (2020a), Loc. cit.
5) European Commision. (2020b), Loc. cit.
6) European Commision. (2021), Loc. cit.
7) Zatti, F. (2023). “¿ Sostenibilidad de la finanza digital o digitalización de la finanza sostenibles?”. Esa es la cuestión. In Congreso Internacional Sostenibilidad y Derecho del Sistema Financiero. Libro de actas (pp. 247-251). RDSFin
8) The Sustainable Digital Finance Alliance. (2018). Digital Technologies for Mobilizing Sustainable Finance: Applications of Digital Technologies to Sustainable Finance. Retrieved on November 2023 from https://unepinquiry.org/wp-content/uploads/2018/10/Digital_Technologies_for_Mobilizing_Sustainable_Finance.pdf
9) Singh, V. K. (2022). Regulatory and Legal Framework for Promoting Green Digital Finance. In Green Digital Finance and Sustainable Development Goals (pp. 3-27). Singapore: Springer Nature Singapore.
10) Devidze, N. (2022). Current State of Green Digital Financing and the Associated Challenges. In Green Digital Finance and Sustainable Development Goals (pp. 29-50). Singapore: Springer Nature Singapore.
11) Financial Stability Board (FSB). (2017). Financial stability implications from FinTech, supervisory and regulatory issues that merit authorities’ attention. Retrieved on December 2023 from https://www.fsb.org/wp-content/uploads/R270617.pdf
12) Instituto Superior de Educación e Innovación en Responsabilidad Social. (2022). Finanzas verdes y digitales. Retrieved on December 2023 from https://blog.edufors.com/2022/05/13/finanzas-verdes-y-digitales/
13) The Sustainable Digital Finance Alliance. (2018), Loc. cit.
14) Financial Stability Board (FSB). (2017), Loc. cit.
15) The Sustainable Digital Finance Alliance. (2018), Loc. cit.
