As the effects of climate change continue to worsen, the need for sustainable finance to be scaled up increases. And thanks to technological advances, this is now possible
With climate change becoming a global emergency, the time for talk is over. “It is now or never” is the expert view of the world climate council IPCC.
With such high stakes, everyone needs to play a part. But some fundamental questions remain around green finance, especially green bonds. Experience shows there are many ‘shades of green’ and sustainable finance must be scaled rapidly to ensure that all finance is genuinely green. Let`s consider how technology tackles these challenges and helps to democratise green finance.
Although the global financial system is transitioning to make green investment the norm, progress has been slow and green bonds currently only account for around two percent of global fixed income assets. Clearly this is not good enough and time is not on our side.
Fortunately, a great deal of thinking has already been done – we have the methods and technology to make green finance universally appealing to drive uptake and make it mainstream. Let us explore the lifecycle of green bonds to see how technology overcomes some common challenges.
Green bonds need to grow but experience shows bond issuance is highly complex and fraught with contradictions. The global green bonds market is enduring growing pains that limit progress and highlight some universal challenges.
These must be addressed as priority to make green bonds attractive to all potential stakeholders.
Digital technologies are transforming how we collect, manage, and store data and turn it into actionable business information. The internet-of-things (IoT) opens a new world of opportunity, where smart devices transmit their performance against predefined criteria, such as environmental impact. Blockchain enables physical assets to be replaced by digital assets, such as smart contracts, which are immutable and cost effective.
These technologies choreograph all parties on a single platform, so the number of intermediaries required to manage the green bonds lifecycle is greatly reduced. The platform delivers fast, accurate reporting on the use of green bond proceeds to prevent misuse and to show all stakeholders that investments are indeed driving improvement and are not simple greenwash.
Digitalisation redefines the economics of the entire green bond lifecycle. With a ‘single version of the truth’ on the blockchain, there is no need to check data accuracy and quality – all relevant information is constantly synchronised. With a dramatically lower cost structure, barriers to entry are dramatically reduced and green bonds can be issued by smaller organisations, such as SMEs.
In the age of crowdfunding and peer-to-peer lending, it is quite feasible new platforms will be adopted not just by smaller companies but by communities of retail investors to finance micro projects.
Consider the case of a company or a community wishing to fund a solar roof or local windmill. Green bonds can be issued and distributed on, for example, a bank’s green investment platform. Such sustainable investment opportunities can be made available in small denominations to a broad spectrum of retail investors who also want to make an impact.
Around the world, regulators – such as the EU Commission – are looking for ways to align finance with the physical world. Initiatives like the European green deal unlocks new green and inclusive investment opportunities to strengthen their market resilience. There is a universal desire to prevent greenwashing and direct investment toward genuinely green projects. But there is also growing awareness that every business operates in an ecosystem and must collect data on the green credentials of its suppliers, partners, and customers.
Smart solutions – such as the green bonds management platform in project Genesis – provide practical proof of a new way to manage this volume of complex data, accurately, cost-effectively, and simultaneously.
The technology is proven, available now, and can be adopted with minimal outlay. Companies should think big and start small. But above all else they must start now – the carbon clock is ticking.
Read GFT’s new white paper ‘The immutable green – blockchain redefines green bonds management’ here.