DIGITAL FINANCING AND THE SDGS

Digitalization can have a transformative impact by empowering people in financing. The Task Force has focused on how the fundamentals of digitalization can support financing that meets the needs and priorities of the people it is intended to serve, by empowering them as savers, lenders, borrowers, investors, and taxpayers. These priorities are collectively represented by the SDGs, the shared agenda adopted by all United Nations Member States.
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The Financing Gap

Mobilizing sufficient financing remains a major challenge in implementing the 2030 Agenda for Sustainable Development”. So concludes the UN’s Inter-Agency Task Force on Financing for Development (IATF) in its 2019 annual report. The Sustainable Development Solutions Network estimates the shortfall as US$400 billion per annum to 2030 for 59 less developed countries. The United Nations Conference on Trade and Development (UNCTAD) estimates the shortfall as being of the order of US$2.5 trillion per year to 2030 for developing countries, with US$5-7 trillion per year investment required over the same period globally. Digitalization will make a difference if it helps to overcome barriers to financing the SDGs.


The gap does not arise from a lack of finance.
The gap does world is awash with money. With increased volatility and uncertainties, private capital is increasingly focused on finding safe harbour and even minimal financial returns. The likely economic downturn in the face of the coronavirus is driving the cost of capital even lower after a decade of historically unprecedented zero and negative interest rates across tens of trillions of dollars of privately held assets. Governments with robust borrowing capabilities are responding to the emerging economic crisis with an expansionist period of debt-based public spending.

“The financing for sustainable development is available, given the size, scale and level of sophistication of the global financial system.”

UN Secretary General’s
Strategy for Financing the 2030 Agenda 
 

 

Financing is not aligned with the SDGs because of lack of data and standards, misaligned incentives and regulations, and gaps and weaknesses in the institutions and markets through which finance is deployed. These flaws are well understood. Most obvious is the lack of low cost, trustworthy and timely data that enables SDG-related risks and impacts to be taken into account in private and public financing decisions. Other flaws are more structural, such as weaknesses and gaps in capital markets and the multilateral trading system. Financial and capital markets fail to take SDG impacts into account because of perceptions that such action would reduce financial returns. This is reinforced by short-termism, missing and costly data, and weak or absent standards and definitions.

Yet other problems concern the impact of climate and other environmental factors on the availability and cost of capital in, for example, climate-stressed countries, particularly Small Island Developing States and Least Developed Countries, with the shortfall estimated by one study as already amounting to US$62 billion per annum. For public finance, institutional weaknesses perpetuate a cycle of insufficient and poorly-used resources, and citizen distrust, despite a growing pool of domestic savings in many developing countries

Much is being done to overcome barriers to financing the SDGs, but we are still not on course. Many initiatives are actively seeking to overcome these flaws and inequalities in capabilities. Many are private sector led and focused on improved risk assessment, such as the Task Force on Climate-related Financial Disclosures. Others are government-led, such the European Commission’s Sustainable Finance Framework. There have been advances in international tax information exchange and related measures to address financial crime and money laundering. Despite such efforts, financing remains misaligned with the SDGs.

Today’s digitalization of financing is already delivering financing for the SDGs. The DNA of digital finance – more and better data on risks and impacts, cheaper and wider accessibility of financial services, and innovative products and services – is already being harnessed to finance the SDGs.

 

 

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More and Better Data

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.

 

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Reduced Transaction and Intermediation Costs

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.

Digital financing has broadened access to financial services for millions of low-income customers and MSMEs around the world. Banks across Asia, Africa and Latin America have offered services to millions of previously underserved customers. For example, in:

  • China, MYbank uses Alipay’s technology to serve millions of SMEs with loans taking less than three minutes to apply, one second to approve and needing zero human intervention. The lending model comes with a steady non-performing loan ratio of about 1 percent.
  • India, fintech start-ups such as LenddoEFL and CreditVidya offer collateral-free, credit lines, augmented with social media, psychometric, big data, and geo-location information.
  • Kenya, Equity Bank used ATMs, mobile branches and agents to reach a previously unserved customer base. In Indonesia, BTPN has over 250,000 agents.
  • Latin America, Mercado Libre provides SME loans, one third of which would have been assessed as ‘high risk’ based solely on traditional credit bureau information.
  • Mexico, Banco Azteca has grown its customer base from 0 to 8 million in 5 years by connecting electronic banking to large retail chains.
  • The Solomon Islands, National Provident Fund’s “You Save” account enables people to pay money into their retirement savings accounts using a simple three-digit code to transfer airtime credit.
  • Major banks are applying machine learning to assess credit risk. While initially this was concentrated on consumer credit and large corporations they are now also beginning to apply this to the SME sector.

Digital agriculture platforms such as HeveaConnect, a digital marketplace for sustainably processed natural rubber, offers trade financing and insurance to rubber producers. Similarly, DigiFarm and AgriBuddy provide finance in addition to agricultural inputs farming information and product markets. This not only offers access to financing but tailored services that enable economic advancement of MSMEs and women and youth education and employment.

Using digital finance can be a key step towards formalization for the two thirds of the global workforce that is engaged in the informal economy. Mobile money accounts can be a first step towards access to finance, social safety nets, and formalization of small savings and microinsurance, which aggregated can provide a source of capital for SDG implementation on a broad scale.

The UN Secretary-General’s Special Advocate for Inclusive Finance for Development (UNSGSA) CEO Partnership for Economic Inclusion has catalysed Mastercard and Rabobank to scale up a digital platform that connects small-scale farmers with buyers, provides mobile payment tools, and builds transactions records to give people a financial track record. The Better Than Cash Alliance, a partnership of governments, companies and international organizations is working to accelerate the transition from cash to digital payments to advance the Sustainable Development Goals. Central Banks are considering issuing their own digital currencies in order to support financial inclusion, operational efficiency, financial stability, monetary policy effectiveness, and financial integrity.

Banks, mobile operators, digital platforms and fintech start-ups are using big data to expand access and lower the cost of credit, reduce application times, and offer existing debt refinancing alternatives. A recent Consumer Financial Protection Bureau study found that digitally enhanced scoring resulted in 27 percent more loan approvals with 16 percent lower interest rates across all customer segments. Research finds that digital finance in developing countries increases savings behaviour.

In developed countries, new fintech-enabled entrants are offering substantially higher interest rates on deposits, often double or triple those offered by traditional banks. Robo-advisors have expanded people’s access to well-diversified asset pools by lowering capital thresholds and cutting out expensive financial advisors.These services charge as low as 0.25 percent of assets managed compared to 0.75-1.5 percent by traditional intermediaries.

Marketplaces and exchanges can link producers and consumers concerned with sustainability, facilitating sales of carbon credits, biodiversity offsets and ethically sourced and labelled products. IHS Market’s Environmental Registry is the world’s largest and allows buyers and sellers to track environmental projects, list, issue, transfer and retire credits for carbon, water and biodiversity. Other digital exchanges such as Puro, AirCarbon or ClimateTrade are supporting the decentralization and scaling of carbon markets. Some online platforms specialise in sign-posting sustainability: a wide range of generalistand specialized ethical and sustainable digital marketplacesare targeting consumers in developed countries and emerging markets such as Indonesia. These platforms have given consumers wider options for aligning their investment and consumption decisions with their values.

Cheap digital money transfers facilitate both private remittances and public assistance disbursements, supporting greater economic security. Remittance providers like WorldRemit, allow people to send money home cheaper and faster than incumbents. Companies like TransferWise are partnering with banks to offer compelling remittance products, while mobile money seems positioned to transform the remittance market. The G20 and Bank of International Settlement’s Committee on Payments and Market Infrastructures cross-border payments initiatives are addressing barriers to cheaper and faster cross border payments including remittances.

Governments and humanitarian agencies use electronic transfers to distribute social payments, improving efficiency and transparency and reducing leakage. Digitalization has saved India’s government an estimated US$22 billion to date, and Mexico saw US$1.3 billion annual savings after digitizing its treasury functions. UNHCR, WFP, UNICEF and UN Women who collectively deliver over half of global humanitarian cash assistance have digitized transfers in contexts where connectivity, payment infrastructure and digital financial services were available and are currently working on scaling up and harmonizing their approaches.

 

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Innovative Business Models

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.

Parametric insurance products can support greater resilience to climate change. Index insurance is a model which triggers automatic pay-outs to farmers based on automated satellite readings and weather and rainfall meters. Public- private initiatives are experimenting to remedy challenges of imperfect coverage, liquidity constraints and lack of trust among farmers, and improve contract design and marketing to reach more people. The World Bank’s Global Index Insurance Facility (GIIF) has supported the rollout of index-based insurance for over 27 million smallholder farmers and micro-entrepreneurs across Africa and Asia. Central banks are implementing policies to enable digital product innovation for SMEs and micro businesses to mitigate and build resilience to climate change, including climate-risk insurance, post disaster reconstruction and pay-as-you-go renewable energy.

Specialist crowdfunding and P2P platforms are democratizing sustainable investments, primarily in easily financialized SDG areas, such as renewables and sustainable infrastructure. Crowdfunding platforms like Bettervest and Oneplanetcrowd channel investments to community and small businesses’ renewable energy projects. Sustainability robo-advisors, like Betterment that specializes in sustainable investments and Ellevest that applies a gender investment lens are another option for conscious investors. These AI-based products offer reduced commissions with low capital thresholds and integrate users’ risk-adjusted returns preferences with their social and environmental priorities, based on companies’ environmental, social, and governance data.

Digitalization enables circular economy, sharing and usership-based models for car and bikes, office space, household equipment, clothing, food rescue, which can optimize processes to reduce cost, waste and environmental impacts. These innovations allow citizens with limited resources to get on-demand access to products or services. These are as relevant in East Africa, where Hello Tractor provides on-demand access to farming machinery, as in Europe with co-use of cars and bikes, office space, household equipment, and clothing.

Sharing models have had positive SDG effects on the economy through increased productivity and supplementary income streams, and on the environment through reduced production and waste. However, they can also provide highly contingent and insecure employment and income streams which risk leading to higher levels of inequality, exploitation and poverty.

Digital assets are starting to redefine how and what value is captured, offering a transparent, verifiable means for backing and exchanging values that traditionally were not priced in the financial system. Natural capital-backed digital assets, such as CarbonCoin, BioCoin or CedarCoin, are experiments in offering citizens the opportunity to invest in outcomes like reforestation and conservation. Applications and initiatives such as RecycleBank and JouleBug and ‘city coin’ developed by Colu use ‘gamification’ strategies to link real world sustainable behaviours through online ‘points’ to rewards and discounts.

While many of these are early stage enterprises, they demonstrate the potential for innovation using digital finance towards sustainable development challenges.

 

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Gender and Digital Financing

The Task Force considered how digital financing can and is impacting on particular SDGs, including those relating to gender. For more information read the Working Paper published by UN Women on Leveraging Digital Finance for Gender Equality and Women’s Empowerment

Key highlights: 

Digital finance improves women’s access to secure, affordable financial services and can better enable investors to direct investment towards women’s empowerment.

  • Digital services overcome barriers women face in accessing finance, such as lack of collateral or formal bank records. Mobile payments providers for small businesses, such as Kopo Kopo in Kenya, offer merchants cash advances, based on digital transaction records. The business owner repays electronically based on the day’s revenues. Pay-as-you-go systems reduce time spent fetching wood or water and ecommerce opportunities can be compatible with family responsibilities.
  • Building digital capabilities: In Tanzania and Mozambique a partnership between TechnoServe, the ExxonMobil Foundation and Vodacom is trialing a combination of mobile savings account with business skills training for urban businesswomen, using a combination of face to face access and interactive mobile learning platform. The training leads to women saving and taking out microloans through mobile accounts.
  • Data for smart gender budgeting: Austria is a world leader in gender budgeting with requirements to set and report against gender-related outcomes and integrate them into performance contracts, and impact assessments. A web portal publishes sex disaggregated data and budget information and offers a gender and diversity atlas.
  • Digitalization can support the collection of sex-disaggregated data critical for informing gender-sensitive public and private investment strategies. ‘Gender lens investing’ includes investment strategies that aim at advancing women in finance and corporate leadership, supporting products to improve women’s lives, and improving women’s treatment in the workplace. More sex-disaggregated data can further improve the ability to better serve women clients. It also contributes to growing evidence on the positive relationship between gender equality and financial performance.
  • The digitalization of social protection programmes can positively impact the way women participate in economies. It can provide women with independent access to predictable income streams and give female recipients greater control over how the money will be used within households.

It is critical that digital financing solutions are grounded in the reality of the challenges women faced. Lack of affordable devices, data, skills and social norms such as online harassment prevent women accessing the digital world.

The Alliance for Financial Inclusion (AFI) has developed a Policy framework for women’s financial inclusion using digital financial services. It includes guidance on policy, regulation, infrastructure and demand side capabilities and consumer protection. UNSGSA is collaborating with Melinda Gates and the French Minister of Finance to promote a major G7 Partnership for Women’s Digital Financial Inclusion in Africa. Efforts to improve sex-disaggregated statistics include work by UNSGSA, UN Women, Data2X, World Bank, AFI, IMF.

 

 

 

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Climate and Digital Financing

The Task Force considered how digital financing can support investment in climate change mitigation and adaptation.

Key highlights

 

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Digital Financing and Covid-19
  • Digital money transfers are enabling governments and individuals to provide immediate support to people. Concern about physical transmission of the virus on banknotes is accelerating the shift to digital payments, which risks excluding the unbanked.
  • Digital financing support to SMEs includes emergency collateral-free digital loans and digital processing of trade financing such as by DBS and Standard Chartered. In China, Ant Group partnered with over 100 banks to launch the Contactless Loans initiative to support SMEs to recover from Covid-19. It is using blockchain-powered supply chain finance to enable SMEs to apply for loans from banks based on their receivables from large enterprises.
  • Crowdfunding platforms are raising funds for medical supplies and emergency relief. Yelp, a business directory with crowdsourced reviews, and Intuit QuickBooks partnered with GoFundMe to allow businesses affected by the Covid-19 to launch fundraisers and accept donations. Ecommerce platforms. have been developed that sell goods locally for immediate or future consumption.
  • Innovative digital insurance products are being launched to provide coverage for those affected by coronavirus. WeSure, the insurance arm of Tencent developed insurance products including free Covid-19 insurance for Chinese citizens under 65. Riskcovry, a Mumbai-based start-up, introduced coronavirus insurance in-a-box solution for businesses that want to offer hospitalization and lost wages coverage.
  • Fiscal transparency will play an important role in ensuring government accountability for spending on crisis response and recovery. Portals like Recovery.gov and Fuerza Mexico that tracked relief and reconstruction activities following 2017 earthquake in Mexico can serve as models and provide lessons.

 

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Digital Financing for All SDGs

Digital finance helps to channel more resources toward all of the SDGs, albeit through different pathways. Goals in areas such as sustainable infrastructure, energy, water, transport, and financial services, are more easily financialized because they have paying users. Digitalization helps direct existing public and private investments but also empowers individuals to invest in sustainable infrastructure and utility services by reducing information gaps.

Digitalization allows transaction visibility and traceability of production, employment, and business conditions related to economic SDGs, such as decent work, manufacturing, agribusiness, sustainable production and consumption. Such transparency, coupled with lower cost of services delivered through digital platforms, supports expanded provision of affordable and tailored financial services. Digitalization also supports unconventional mechanisms for financing economic activities that bypass the traditional financial system, such as crowdfunding or (community) crypto-currencies and facilitate sustainable consumer purchases.

Digital financing can target reduction in the negative effects of global consumption and production patterns on environmental SDGs. Satellites, sensors, publicly available scientific data and ESG disclosure help capture and integrate information about climate change, biodiversity loss, pollution and disaster risks into financing decisions, for example via green securities and sustainable robo-advisors. Digital platforms support carbon markets, which grew fivefold between 2017 and 2019, reaching US$215 billion. Objective, automated verification through data tokens can support scaling of carbon trading.

Progress on social SDGs hinges to a large extent on the ability to effectively manage public financing and assess performance of institutions. Digitalization improves availability of data on public services and citizens’ ability to review and demand accountability. Digital finance reduces remittance and e-transfer costs and enables e-service provision. It also supports innovations such as gender lens investing, P2P international giving, micro-insurance, or bias-detecting algorithms. Analysis of macro level data shows that access to mobile phones is positively associated with multiple indicators linked to social development, such as lower gender inequalities, enhanced contraceptive use, and lower maternal and child mortality.

 

Economic Environmental Social



More and Better
Data
  • Transaction records
  • Credit scoring
  • IoT data / smart metering
  • Supply chain tracking
  • Open government data
  • Crowdsourced project accountability data
  • Open finance
  • Satellite imagery
  • IoT data / smart metering
  • ESG data
  • Data tokens for climate impact
  • reporting
  • Gender-disaggregated data
  • Open public finance data
  • Transparent public records
  • Crowdsourced project
    accountability data
  • ESG data
Cheaper Intermediation
and Aggregation
  • Mass-market digital finance
  • Pay-as-you-go utility financing models
  • Digitalized value chain / trade finance
  • Fair trade, ethical, sustainable ecommerce /
    digital marketplaces
  • Digital exchanges for carbon credits / bio-diversity offsets
  • Platforms for climate project financing
  • Aggregation / securitization of assets
  • Green banking products
  • Remittances / humanitarian transfers
  • Digital marketplaces / ecommerce platforms
  • Mass-market digital finance
  • Digital education / health care financing schemes
  • E-government services
Disintermediation and
New Business Models
  • Crowdfunding / P2P lending
  • Gamified ‘green’ consumption
  • Circular economy models
  • Fractional asset ownership
  • Digital currency-based project finance /
    community services
  • AI-enhanced tax optimization
  • E-trading of natural capital backed digital assets
  • Remote verification insurance and financing
  • Gamified sustainable behaviours
  • Sustainability robo-advisors
  • Gender-lens crowdfunding & investing robo-advisors
  • Bias detection algorithms
  • Robotized m-education / health
  • Digital micro-insurance
  • Participatory budgeting
  • Algorithmic illicit flow tracking
  • Digital donation platforms
Economic

More and Better
Data
  • Transaction records
  • Credit scoring
  • IoT data / smart metering
  • Supply chain tracking
  • Open government data
  • Crowdsourced project accountability data
  • Open finance
Cheaper Intermediation
and Aggregation
  • Mass-market digital finance
  • Pay-as-you-go utility financing models
  • Digitalized value chain / trade finance
  • Fair trade, ethical, sustainable ecommerce /
    digital marketplaces
Disintermediation and
New Business Models
  • Crowdfunding / P2P lending
  • Gamified ‘green’ consumption
  • Circular economy models
  • Fractional asset ownership
  • Digital currency-based project finance /
    community services
  • AI-enhanced tax optimization
Environmental

More and Better
Data
  • Satellite imagery
  • IoT data / smart metering
  • ESG data
  • Data tokens for climate impact
  • reporting
Cheaper Intermediation
and Aggregation
  • Digital exchanges for carbon credits / bio-diversity offsets
  • Platforms for climate project financing
  • Aggregation / securitization of assets
  • Green banking products
Disintermediation and
New Business Models
  • E-trading of natural capital backed digital assets
  • Remote verification insurance and financing
  • Gamified sustainable behaviours
  • Sustainability robo-advisors
Social

More and Better
Data
  • Gender-disaggregated data
  • Open public finance data
  • Transparent public records
  • Crowdsourced project
    accountability data
  • ESG data
Cheaper Intermediation
and Aggregation
  • Remittances / humanitarian transfers
  • Digital marketplaces / ecommerce platforms
  • Mass-market digital finance
  • Digital education / health care financing schemes
  • E-government services
Disintermediation and
New Business Models
  • Gender-lens crowdfunding & investing robo-advisors
  • Bias detection algorithms
  • Robotized m-education / health
  • Digital micro-insurance
  • Participatory budgeting
  • Algorithmic illicit flow tracking
  • Digital donation platforms