A wake-up call on digitalisation

Simon Zadek, former sherpa of the UN Secretary General’s Task Force on Digital Financing of the Sustainable Development Goals, and chair of finance for biodiversity, asks how digitalisation and financial technology create space for catalytic opportunities such as the mobilisation of global domestic savings, but could also affect countries’ ability to achieve UN Sustainable Development Goals
IFF China 2021 5-02
IFF China 2021
This article is part of The IFF China Report 2021

António Guterres, the UN secretary-general, launched the Task Force on Digital Financing of the Sustainable Development Goals (SDGs) in November 2018. The group was asked to identify and recommend ways in which digitalisation could be harnessed to better align financing with the UN’s SDGs. Two years later, in August 2020, the Task Force published a report, People’s money – Harnessing digitalization to finance a sustainable future, which has proved a wake-up call to many.

The report found that digitalisation is playing an important role in aligning key aspects of global finance with the UN’s SDGs, and is already a feature of our global economy and of our global financial system, in both private and public finance. It would not be possible to have US$1 trillion worth of green bonds if large-scale datasets and rapid real-time data flows were not becoming the norm. Nor can carbon markets exist without a sophisticated digital infrastructure. Equally important is that financial and product innovation are driving new ways of financing in both education and health, not simply at the larger institutional scale, but also at the individual level – even at the lower levels of income. 

Catalytic conversion

Simon Zadek - IFF China 2021 headshot 5-02
Simon Zadek

The Task Force has packaged its recommendations into an action agenda in three parts: catalytic opportunities, sustainable digital ecosystems and inclusive international governance.

First, the opportunities. The real question is, how does one make money flow in different ways? The Task Force has identified five ways, which it has called major catalytic opportunities. These are not only large opportunities – each dealing with trillions of dollars per year – but, if addressed aggressively at scale, will also move other parts of the financial system, public and private, into greater alignment with SDG outcomes. The first catalytic opportunity is to mobilise the growing global pool of domestic savings – now worth US$23.3 trillion a year – to long-term development finance, even in the least developed countries. In Bangladesh, for example, only 6% of domestic savings flows into long-term development finance. The Task Force’s recommendations highlight the smart use of mobile devices, new ways of packaging financial products at scale to create investable resources, and the use of blockchain and other mechanisms to improve deployment of funds. This is despite traditional weaknesses in capital markets in almost all developing countries.

The second opportunity focuses on funding for small and medium-sized enterprises (SMEs), the world’s largest suppliers of jobs. Each year, the SME sector requires huge amounts in lending and borrowing to support growth. Banks have largely failed to provide that, not least because the sums are relatively small, the due diligence costs relatively high and delinquency rates are elevated. Algorithmic lending has demonstrated we can shift from this stop-go, insufficient flow of funding to a much more rapid deployment of much larger volumes, largely by using big data and artificial intelligence (AI). This will allow the undertaking of due diligence and credit assessment at minimal incremental cost, leading to rapid decision-making and lending patterns that are usually zero collateral. 

The third opportunity is embedding SDG data in financial and capital markets. Today, $185 trillion in financial assets is sitting in global capital markets. An estimated $30 trillion of that is already subject to some kind of environmental, social governance screen. Innovations such as big data, AI and robo-advisers are dependent on cheaper, faster, smarter data linked to financial service innovation. They can then move sustainability criteria more effectively and at greater scale into capital markets, both as a means of more effectively pricing risk, taking those various SDG factors into account, but also with a growing impact on the investing community and blended finance. Those digital innovations are allowing a far more effective assessment of impact associated with different financing, not only financial risk pricing. 

The fourth opportunity calls for a radical increase in transparency and accountability to taxpayers to improve the effectiveness of public finances. And the fifth looks at consumer spending – now amounting to $47 trillion a year – and making it more sustainable. Clearly, with more online purchasing, greater opportunities remain to provide information for citizens to make consumption decisions more aligned with their broader interests, as well as their particular interest by particular products and services. 

Digitalisation is already playing an important role in aligning key aspects of global finance with the UN’s Sustainable Development Goals

The rise of fintech giants

In many countries, all manner of interesting fintech innovations promise to be profitable, but do not necessarily support those countries in achieving the SDGs. Therefore, the second level of the action agenda is a recommendation to align sustainable digital finance ecosystems at national level, from infrastructure through to governance rules, regulations, and so on.

The third level of the action agenda is international governance. As fintech and the digitalisation of finance begins to drive much higher levels of market concentration, a small number of very large fintech platforms are emerging, whether from native financial sector sources or spin-outs and diversifications from social media platforms or e-commerce platforms. These large fintech platforms can have very significant spillover effects across borders and impact many SDG outcomes. They should be governed in the right way to ensure such basics as financial stability and anti-money laundering are in place.  

To implement the action agenda, we should keep two aspects in mind. The first is the upside potential of digitalisation, which needs to be understood in the context of potential barriers, difficulties in realising them and also the potential risks of increased levels of digitalisation going forward. Clearly, the challenges are how to both overcome those barriers and mitigate those risks. Digitalisation in itself does not automatically offer the upsides identified in those catalytic opportunities, but needs to be mediated by appropriate policy and market innovation, collaboration, co-operation and public-private partnerships to drive those digital opportunities in a progressive or positive direction.

Today, we are already challenged to ensure that good governance ensures global finance flows to where it is needed most and speaks to the broader public good – now and in the future. 

Higher levels of market concentration in favour of fintech giants are beginning to become a reality. The challenges lie in managing their rise – particularly international and cross-border governance of fintech’s evolution. Hopefully, the work of the Task Force reflects the extraordinary opportunities, innovations, leadership and entrepreneurship that already exists in the market, and highlights areas that can be improved to achieve greater things. 

 

This article is part of The IFF China Report 2021, which draws mainly on content provided by China-headquartered think tank, the International Finance Forum, and is published in association with Central Banking.

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