Since the Global Financial Crisis of 2008, financial services are less trusted ‘to do what is right’ than any other part of the business community, although most people trust banks to safeguard their money and their data. Most citizens distrust how governments use their money. Over half (57 percent) of the respondents of a multi-country survey say governments serve the interest of the few, while less than a third (30 percent) say that governments serve the interests of everyone. Citizens spending behaviours too often do not reflect their concerns about their children’s futures, inequality, environment and climate.
Digitalization offers a historic opportunity to overcome these shortfalls, gaps and weaknesses in aligning a new generation of financing instruments, markets and institutional arrangements with the SDGs.
Digitalization of finance is essential in the fight against organized crime, a US$4 trillion global business which destroys value for the private and public sectors, and society itself. Digitalization can improve tax collection and make public financial management more effective and transparent.
Cheap, credible data is a pre-requisite in growing the multi-trillion-dollar market for green and sustainable ‘use of proceeds’ bonds, and in integrating climate risk into the world’s financial and capital markets.
Digital finance has become a critical lifeline during the crisis for billions of people. Innovations and investments have underpinned rapid scaling of support to vulnerable groups, from extending the reach of social safety nets and health systems to new ways to secure digital livelihoods and undertake mutual support within families and communities.
Governments are using digital payment platforms to operationalize social safety nets and extend the reach and effectiveness of health systems. Businesses are depending on ecommerce for their continued existence. People are reaching for the digital world to communicate with their families and friends, to buy what they need, and where possible to continue their work and livelihoods.
The move to conduct business, entertainment, education, health and other public services online is being accelerated. Digital financing will make social safety nets involving cash transfers easier and cheaper to manage. Public and philanthropic efforts to support those in need have also turned to the world of digital financing, leveraging crowdsourcing to raise funds and target transfer payments to support people in need.
This surge in the digital world amplifies the opportunity and the need for it to be harnessed in the longer-term pursuit, and financing, of sustainable development.
Digitalization opens new routes for embezzlement and fraud and provides ways to hide illicit financial flows. Cybersecurity threats increase. Biases in algorithms or underlying data sets may reproduce discrimination. Digitalization may increase short-termism in financial markets. Digitalization increases the likelihood of a new generation of highly concentrated financial markets because of its tendency to provide ever-increasing benefits to scale. It may reduce autonomous economic policy space through the loss of control over macroeconomic and monetary policy.
Repurposing finance to serve citizens in supporting inclusive sustainable development requires smart and purposeful market and governance innovations. Digitalization can enable financial products to take better account of sustainable development risks and opportunities. Market actors, both existing and new, play a critical role in developing financial products that take the SDGs into account, both in terms of environmental and social risks and positive impacts that customers and users care about. Governance innovations will be needed to incentivize and, where necessary, require these developments, as well as mitigate risks from digitalization itself.
There is a short-lived window of opportunity to achieve systemic change. Catalysing major change becomes possible during critical junctures of disruption. The opportunity arises when historic circumstances converge to create the perfect storm upsetting the status quo and opening routes to create something better. Peoples’ actions, rather than technology or fate, determine the outcome of these moments. The nexus of finance, digitalization and the transition to an inclusive sustainable development is a case in point.
Failure to act would be a wasted opportunity and risk finance’s divergence from the needs of citizens for an inclusive, sustainable development. Acting with purpose and ambition, on the other hand, opens the possibility of overcoming barriers to securing financing for the SDGs, whilst mitigating risks associated with digitalization of finance.