It is impossible to look back at fintech trends in 2019 without immediately seeing a mental image of the Libra stable coin logo. A few days before stepping into this new decade, Switzerland’s finance minister and outgoing president Ueli Maurer stated that Libra stands no chance of approval in his country, at least, because the central bank will not accept the basket of currencies underpinning it. Despite this unpromising conclusion to 2019 for the year’s biggest story in stable coins, we believe that 2020 will see more stable coins that either have their own explicit SDG-aligned purpose tied or else that render green investment products more efficient.
The growth of stable coins signals a shift for crypto assets from a volatile investment option to a greater maturity, a maturity based on a deeper understanding of how to deploy this significant innovation for public policy-related goals. The maturity of the stable-coin market to take these next steps may also influence fintech more broadly. The fact that the world has reached the saturation point with payment solutions means there is space for a next step, one of building green applications on top of the digital infrastructure, to be taken there as well. Below we zoom in on four trends that point to where specifically green digital finance may be heading in 2020.
1. Artificial Intelligence for Personalized Green Investment Profiles
A personalized experience is what creates loyalty. Just think about the last time you experienced a highly personalized service, such as a training session specifically designed for your back problems, age and training preferences, or the neighborhood restaurant where they know you by name, or the mechanic who knows all your old car’s quirks. Now imagine that kind of experience transported over to the financial sector. Imagine you want to put some of your savings into investments that protect nature, and the investment advisor has prepared a portfolio option corresponding specifically to those goals. It’s a personalization powered by behavioral data that you have allowed to be used for the specific purpose of creating an individual green investment profile, a profile over which you retain ownership and control.
The trend toward robo-advisor-generated investment advice and management services has been growing for a number of years and will continue to accelerate in 2020. Robo-advising will also increasingly direct its attention towards automated sustainability preference profiling. This change will partly be in response to changes to the Mfid II Directive in the European Union requiring the integration of sustainability into investment advice. AI and machine learning can help contain the costs of complying with that directive while at the same time opening an avenue to better understand a person’s green investment preferences. Financial institutions will therefore need to increasingly apply technology to turn the information about their customers' behavior and social and browsing history into personalized sustainability and green investment profiles. AI, Big Data and machine learning can be deployed to design green individual investment portfolios that are both transparent about the underlying assets and that can offer more complex data about proof of impact.
2. Taxonomy – from Classification to Innovation
Sustainable finance is drowning in data yet starving for the actionable intelligence that can translate into decisions to actually direct capital flows towards sustainable assets and projects. Part of the problem historically has been that all of the data was idiosyncratic, without standardized metrics to provide the basis for any sort of meaningful comparison. 2019 witnessed a step towards towards more standardized and therefore comparable data sets that hold the potential to help investors allocate capital towards green assets. Implementation of the EU’s sustainable finance taxonomy will set clear and defined rules for an entire region, rules which many asset managers in other regions may wish to adopt. Until now the smaller cousin of fintech called regtech has mainly been responding to the financial sector’s increasing regulatory compliance costs, costs which have been driven up mainly by the effort combat financial crime. Regtech thus has understandably focused on anti-money laundering and know-your-customer compliance issues. 2020 will see an increase in exploration of how to apply regtech to move beyond AML/KYC compliance concerns to embrace as well the taxonomy compliance requirements. We expect to see regtech deployed first for increased accuracy of regulatory reporting on taxonomy-aligned investments via the use of Big Data, AI and machine learning. Eventually it will expand to tap the internet of things (ioT) for monitoring compliance from the real economy.
3. Blockchain Powered Green Bonds – one will become more
2019 witnessed the first-ever issuance of a blockchain-powered green bond. By the time the Spanish bank BBVA issued this bond last year, Japan’s Fisco Ltd. had already (in 2017) issued the first experiment with selling bonds denominated in Bitcoin. In 2018 the World Bank’s i-bond later entered the market, a collaboration with CBA of Australia.
Towards the close of 2019 The Central Bank of China issued a blockchain-powered $2.8 billion small and medium enterprise finance bond. Coupled with emergence of the central bank digital currency, China can digitize even the payment and settlement of digital bonds, which the World Bank i-bond and the other issuers’ blockchain-powered sustainability bonds did not do, for reasons including regulatory unclarity. China’s green bond market has followed a hockey stick trajectory since its emergence. A report issued by Climate Bonds in late 2019 documented that 40 percent of the USD 14.5 billion was aligned with international standards. Regulators continue to improve market integrity in China through a series of measures and to stimulate market growth through policy tools. Leveraging the data capabilities of blockchain, in combination with IoT for automated data harvesting of proof-of-impact reporting from the underlying asset, offers investors real-time credible data. Even if the first end-to-end digitized green bond proof of concept does not become reality in China in 2020, then it may happen in another country in Asia, a region that spent 2019 laying the groundwork for crypto assets by clarifying the regulatory guidelines governing them.
The more the green bond market can be viable for smaller issuances, the more democratized it could become. This is a trend likely to intensify during 2020, and Europe could be a pretty solid guess in terms of a frontrunner region. This partly due to friendly regulation introduced in 2019 that allows companies to issue securities up to a value of EUR 1 million without the need of a prospectus. This makes it cheaper and easier for small and medium enterprises to access capital markets. As well, the EU’s taxonomy (described in #2 above) has arrived to clarify green assets at more or less the same moment that people (mainly youth) were taking over the streets in a large outcry for greater climate action, powerful evidence of demand for a greener future, which will of course require a credible way to finance and evaluate it. Germany leapt into a blockchain future in 2019 with a DLT strategy that positions it in a sustainability agenda and with the cryptocurrency law adopted by the German Parliament on November 29th laying the groundwork for potential green securitized token offerings in 2020. It can be a new way of offering people the opportunity to act and set the standard for more nations to follow.
4. Fintech will Find its way to the Forest
Ant Forest remains the Green Fintech champion with 500 million users having planted more than 100 million trees. 2019 saw the first Ant Forest replicator outside China, with GCash Forest in the Philippines run by GCash, Ant Financial’s partner in that country. The aim is to plant 365,000 trees in 365 days. Meanwhile in the Netherlands, the challenger-bank Bunq launched their Green Card where a tree is planted for each 100 euro spent. It was oversubscribed in no time. The data capabilities of fintech to automatically link consumption to individualized off-setting via tree planting is a trend that is set to grow further in 2020.
Consider also EcoTree which invites people to become tree owners through investing in trees via a digital wallet and to receive returns once the tree reaches maturity and the forest is renewed. The tree asset has an expected appreciation of 2 percent annually. Innovatings like these will increasingly use digital technologies for proof-of-impact reporting or even to give each tree its own QR code, using drone surveillance and blockchain to keep track of tree assets. The trees themselves will be rooted in the ground but their life-cycle data will live in the cloud, updated and available in real time.Questions about the localization of the efforts will become increasingly relevant to enable the tree planting to be financed via locally-owned digital wallets and to create tree-planting and other jobs in the local communities.
2020 will see more fintechs harnessing people power to help increase tree cover for carbon capture. One individual tree might not make a difference—but if hundreds of millions of people plant one tree each, the impact could have global significance. Different models and their impacts will be a subject for exploration in 2020. We want to understand whether the best options involve enabling people to become investors with investments securitized by the tree assets, or whether de-risking via technology and tools such as first loss, or some other approach, might work better.
Conservation finance needs new public-private partnership models. The examples above suggest that the two most necessary ingredients—technological innovation and citizen interest—are there waiting to be fully leveraged. The public sector will increasingly be part of this design discussions to pave the way for new forms of public-private partnership models in the lead up to COP15 to the UN Convention on Biological Diversity (CBD) as well as to make a final decision on a post-2020 global biodiversity framework in Kunming, China in October.