The Task Force highlighted three fundamental features of digital financing: more and better data, reduced transaction and intermediation costs and the emergence of innovative business models.
Better quality, more granular data allows assessment of social, environmental and financial risks and impacts. Satellite data, sensors, cloud computing and artificial intelligence, provide information on everything from food production to people’s movements. This allows risks associated with climate change such as floods, rising sea levels, heat stress, wildfires and hurricanes, as well as carbon emissions and deforestation to be factored into calculations and scenarios automatically to influence financing decisions. Such data can underpin SDG-related products, market rails such as decarbonization indexes, regulatory performance disclosure and stress testing requirements.
Specialist data analytics tech firms, such as Truvalue Labs use AI to scrape, analyse and interpret alternative data to uncover trends and risks before they manifest themselves. Banks increasingly use big data to segment their customers, assess risks, and prevent fraud. Public authorities are also using big data to identify tax evasion. For example, Russian, Armenian and Italian tax offices use analytics from patterns in reported transactions to identify suspected cases of Value Added Tax (VAT) fraud to better target tax audits.
Wider availability of data on social, economic and environmental impacts has enabled new sustainable financing instruments. Availability of investor relevant data on environmental and social risks and opportunities supports their incorporation into financial decision-making. For example Refinitiv manages a database of over 7,000+ global companies and over 400 metrics, including ethical screening criteria, percentage of women in senior positions, CO2 and other emissions. Green bonds, with a global issuance value of US$770 billion by the end of 2019, rely on better and cheaper data to track use of proceeds. Likewise for impact investing which hit US$715 billion in 2019. ‘Gender lens’ investing is also growing.
Better data has also enhanced blended financing approaches, as funders diversified their risk-mitigation (e.g. guarantees, risk insurance, subordinated structures) and impact-rewarding methodologies (such as early-stage grants for impact models and social impact bonds). For example, Brazil’s national development bank BNDES is transitioning from being direct financier to mobiliser of finance with the issuance of a green bond in 2017 and the Sustainable Energy Fund. BNDES will focus on carrying risks the private sector cannot readily take on and demonstrating project viability to attract further investment.
There is increasing experimentation with the use of distributed ledgers for government transactions. By 2018, there were 202 blockchain initiatives in the public sector across 45 countries in areas including identity validation, personal records, benefits payments, land registries, contract and vendor management, voting, and streamlining interagency processes.
More transparent and reliable data can enable SDG impacts to be factored into production and consumption decisions. Digitalization enables affordable and accurate tracing of global supply chains from sourcing of materials, to manufacturing and distribution. The potential and market for this is being tested through new applications like Everledger for diamonds and Provenance for food, clothing, and other consumer goods empower companies to make sustainable sourcing decisions. Consumer facing apps, such as HowGood or Giki, aggregate sustainability information and make it accessible to users who scan products while shopping.
Pathfinder Initiative: