ARYZE spoke to the Executive Director of Green Digital Finance Alliance, Marianne Haahr. She shared her insights on Green Digital Finance, Sustainability, Technology, Fintechs, Regulations, and Policymakers. Marianne has a science degree in Cultural Geography from the University of Copenhagen and a Master’s degree in International Human Rights And Democratization (EIUC).
Marianne started her career building climate projects in Western and Southern Africa. Firstly, she began building adaptation processes and Microfinance Solutions for NGOs in a non-commercial space. As time went on, Microfinance Institutions started becoming investable, and they acquired more commercial potential.
We asked Marianne to elaborate further on this transition:
I witnessed Microfinance Institutions suddenly starting to scale much faster. Normally in the NGO world, you have to apply for grants to continue the workflow constantly. Still, with the more business model attached, it started scaling much faster, so I became very interested, especially in what the impact space could look like. While it is not necessarily fully commercialized at this stage, it is well on its path to reaching that point.
After this period working with NGOs in Africa, Marianne went on work on a Think Tank called Sustainia, running innovation labs across continents. This was before the Sustainable Development Goals (SDG UN) came to life. Marianne and her team worked with a large number of Norwegian large companies and the UN Global Compact. Back then, they realized that many CEOs were putting too much emphasis on sustainability from a risk perspective, so they envisioned the World Economic Forum´s Annual Global Risk Report as one of the main institutions to help shift that focus because sustainability is not so much about market development, but it is more about risk mitigation.
Therefore, Sustainia invented the Global Opportunity Report together with the UN and Business Leaders, with the mindset that behind any crisis, there is an opportunity for innovation and sustainability. This truly started creating a new paradigm around sustainability in terms of market development, and the introduction of SDGs by the UN just further accelerated the process.
What is Green Finance?
To understand Green Finance, we must first address the terms of investment versus divestment. When we speak of investment in finance, we refer to the action of buying a financial asset with the idea that it will provide further income or benefits, whereas divestment is the opposite of investment. It implies withdrawing and withholding funds from a problematic sector, hereby weakening its legitimacy and ultimately generating pressure for change. According to a study performed by the not-for-profit organization 350.org, there is an ongoing global shift where more funds are divesting from fossil fuels; This is driven partly by the UN-sanctioned mandate on Sustainable Development Goals, aimed at achieving global economic prosperity through environmentally and socially sustainable investment.
Accordingly, global businesses have discovered a significant opportunity to engage in sustainable projects and initiatives. Particularly, debt financing in the form of green, social, and sustainability bonds have emerged as the most popular ways of funding. We asked Marianne to explain in her own words what Green Finance is all about :
Basically, Green Finance is the allocation of capital into green assets or green projects. For example, you can have your pension money in a pension fund. They decide with your consent to invest your money so it can grow into windmill parks, renewable energy through solar cell roll-out, and that the return that you get as a pension policyholder will then have enabled capital to be deployed to help the energy transition. Whereas, if you have a pension fund that does not allocate your capital to green investments, then they will allocate your capital to investing in large shipping companies that are driven by ordinary fossil fuels or simply building out the regular infrastructure that has reasonable amounts of returns and will secure your pension but will still lock us into a situation where the assets that are financed will incentivize the continued use of fossil fuels and thereby the continued warming of the economy.
But what is the current state of Green finance in the global financial system and how can we overcome the inherent barriers ? Marianne replied :
The Global Financial System is made of retail finance and capital markets. If you look at the capital market, then you have basically equities and bonds. If you look at the global bond market, only 2% of funds are allocated to green projects and assets out of the entire trillion dollars bond markets. In the equity funds (ETF) that have a sustainable profile, we find that the allocated amount of funds is less than 1 %, so it is a minuscule portion of everyone´s pensions money and debt that our states are issuing as sovereign debt or debt that businesses are issuing as capital that is being raised for a greener future.
One of the barriers to overcome is associated with how green bonds are currently structured in our legislations. Green bonds need to fulfill a series of requirements and thus are more bureaucratic and costly than traditional bonds. This is where we need technology to step in and improve existing conditions. With green bonds, you need to report and prove the investment´s impact to justify its viability because its credibility needs to be certified, which requires third parties and manual processes. One solution could be to make it more cost-efficient to issue green bonds, therefore turning it into a more attractive alternative to the consumer when faced with the choice between acquiring green or non-green bonds.
How does the Green Finance Alliance promote a greener future?
Marianne believes that although the Financial System is currently digitizing very rapidly, it does not necessarily advance in a direction in which it aligns the financial systems better with green objectives at a higher level than we have previously seen in the analog financial system. The Green Digital Finance Alliance is a private-public partnership between the UN Environment Programme and Ant Financial to leverage digital technology to scale green finance. Their mission is to make every citizen globally a green-asset owner, and as a non-profit organization, catalyzes to inspire change and push it further in the market.
We asked Marianne what the day to day work looks like, withinside the Green Finance Alliance, she answered :
We work on policy dialogue, mainly at a global level. Our methodology is based on mapping out the green digital finance market practices that have the largest potential impact to scale and the regulatory barriers standing in the way of that scaling. We also have another pillar of work, called “Experimentation to scale,” where we do market demonstration projects to bring partners together. Usually, we finance it through blended financing of philanthropic capital that we contribute to the partners.
For example, we have one extensive market demonstration project live when working with a fund under the Paris agreement that pays the six central African countries that house the second-largest rainforest in the world. Basically, what that fund is doing is paying these governments of The Congo, Gabon, etc., to keep their threes in the ground by compensating them with a carbon credit through climate negotiated funds. What we are working with them on is that on the other side of the world in China, we work with the ANT Forest, which is a green app on the Alipay wallet that analyzes 18 of your daily behaviors and give you an automated foot carbon print, for example, if you bike to work it will reward you with green energy points. Once you have accumulated enough points by changing your lifestyle, ANT Forest will convert it into a real tree that they will plant in inner Mongolia.
Why not also offer them to plant a tree in central Africa through this fund? This is now made available to the citizens through climate negotiated mechanisms and technology.
Why does China invest on Green Digital Finance?
Green finance has become paramount for expanding the financial industry in China, and the Green Finance agenda is thus of utmost importance for its government. In December 2015, the People´s Bank of China (PBC) released the Public Notice of the People´s Bank of China, introducing green financial bonds in the inter-bank bond market, which created a financing venue for financial institutions to raise funds to support green industry projects through the bond market. China has experienced a vast expansion in their economy in the past decades, which has led them to reap the benefits of industrialization, which has resulted in more space for innovation and fintech to evolve and integrate its services in the country. For example, The Alipay wallet in China is very successful and has great amounts of data on China´s citizens’ behaviors. Nevertheless, there has also been a more negative impact of industrialization.
Marianne believes that one of the main reasons why the Chinese model of Green Finance is so advanced can be traced to the negative impact that rapid industrialization has had on its population’s health. The average Chinese citizen is more likely to be concerned with finding ways of tackling environmental issues because they are directly impacted by collateral problems such as severe air pollution, so this tangibilization of environmental issues, tips the scale of perception from a seemingly abstract entity to a genuine and tangible difficulty that affects individuals collectively.
Climate risks are also financial risks
We find ourselves in the middle of a transition from a fossil fuel-based economy to a bio-based economy. Although fossil fuels (coal, oil, gas) still play a dominant role in global energy systems, the general public is increasingly becoming more aware of the negative impact that they have on the environment because fossil fuel emissions, when burned, produce carbon dioxide (CO2) and are one of the major accelerators of global climate change. In fact, a new Pew Research Center survey finds that 65% of Americans prioritize developing alternative energy sources, compared with 27% who would emphasize expanded production of fossil fuel sources.
Ben Caldecott, among other fellow economists from the University of Oxford, mentions the term “Stranded Assets” in a Discussion Paper published in January 2014. These are assets that have suffered abrupt devaluations due to a series of poorly understood environmental-risks provoked by climate change, such as real-estate portfolios exposed to sea-level rise and flooding, which can be devastating to the assets. The financial sector must prepare itself for risks related to climate change and other environmental hazards.
Marianne is confident that the impact of climate change will evoke significant structural adjustments to the global economy. When asked about how this would be feasible, she replied :
Climate risks are also financial risks. Banks need to adjust to this reality by planning climate scenario analysis capabilities and treating climate risk as a financial risk, not merely a reputational one. Climate change affects the financial system through physical risk associated with property damage and infrastructure and transition risk, resulting from alterations in technology, climate policy, and consumer and market sentiment during the shift to a more bio-based economy.
This will naturally have a major impact on the global economy because of the high degree of interconnectedness in which we live nowadays and the nature of the problem, which transcends frontiers.
Democratizing the Green Finance market
To foster sustainable global growth through green finance, financial flows need to be redirected from brown fossil-fuel-based investments into sustainable green investments. Therefore, there must be an incentivization beneficial to all the actors within our social systems (regulators, legislators, fintechs, and civic society). Generally, policymakers and regulators are on a learning curve to understand how they can incentivize that to happen.
But where should we start enabling these pathways of change to democratize the Green Finance market and make it accessible to everyone ?
I believe there is a huge policy desire for more fintechs to innovate for sustainability because only a very few percentages of fintechs are doing that at the moment. Simultaneously, there is a recognition on behalf of the policymakers that they are far removed from the market and do not necessarily have the right mechanisms to stay up to speed with what needs to happen constantly.
On the fintech side of the equation, depending on the jurisdiction, there is a big frustration in the slowness of policymaking and regulation. Nonetheless, there is also a huge desire on their behalf to do more and benefit from more incentives for really going into the green agenda. The fact that at the level of the incumbent, it is still something sitting on the side, I mean green bonds still accounts for less than 3 % of the total bond market, so under these conditions, it makes sense that fintechs are not likely going to stumble on green bonds when trying to innovate and solve pain points.
So, we need to send clear policy signals, which is more from the policy side than the regulatory side, for instance, assessing whether we should have lower capital requirements for banks that loan to green projects or tax breaks for investors invest in greener companies.
We need systemic change and measures that make the operating costs for fintechs lower, so we really start to incentivize the change we want to see. Historically speaking, when it comes to Finance, it is regulation that has shifted behavior by keeping the citizens well informed and better equipped to make choices. For example, if you buy meat at the supermarket, there is no CO2 label on it, so how would you as a citizen know about this?
Nowadays, citizens have more agency through digital platforms than ever before. Marianne believes that it is important for us as individuals to organize and take responsibility for our environment. When asked about how we can put this into practice, she replied :
Citizens need to be empowered with information about their investment preferences. In the European Union, it is now required by law that your bank asks you about your financial preferences, for example, on whether you want to allocate your pension money on a green bond or not. The problem is that this is not widespread knowledge and the bureaucracy behind green assets makes them less attractive to the consumers.
Subsidies can offset this type of bureaucracy involving green bonds. For instance, in Japan, they know that green assets are more costly, but because they want to scale them, then they subsidize them. We can speak to our pension funds advisors about where exactly we would like to allocate our funds, hereby promoting the Green Finance market’s democratization and showing that there is a demand for these services and a need for their development and accessibility.
To learn more about Marianne Haahr, connect with her on LinkedIn, or check out the website of The Green Digital Alliance. If you’d like to read more about crypto, blockchain, and tokenization, check out our blog or visit our website.