Developing countries are the unlikely drivers of green finance innovation and they are also leading the way in the use of fintech such as mobile payments. But collaboration is key to making green finance work at scale, said panellists at the Singapore, Green Finance and the Collaborative Challenge event last week.
Jointly organised by Singapore Management University (SMU), the United Nations Environment Programme (UNEP), and the Singapore Institute of International Affairs (SIIA), the dialogue featured speakers from the finance sector and national and international regulatory bodies sharing their views on how collaboration can make money work for the public good.
Green finance, or investments that contribute towards a sustainable, low-carbon and climate-resilient economy, has been touted by experts as a way to drive carbon reduction strategies and achieve sustainable development goals.
Simon Zadek, co-director, UNEP Inquiry into the Design of a Sustainable Financial System – which engages, informs and guides policy makers, financial market actors and other stakeholders in the transition of the global economy to a low carbon, green economy – told the 100-strong audience that much of the innovation in green finance is not coming from where the major capital pools are, but from developing nations such as Mongolia, Kenya, Bangladesh, Chile, Peru and Colombia.
Fellow panellist Nuru Mugambi, director of communications and public affairs at the Kenya Bankers Association likewise said there had been a change in the way emerging markets are being viewed by the developed world.
“When you look at the amount of innovation taking place, especially in the financial technology (fintech) space on the back of mobile technology, you realise there’s a lot of opportunity for the developed world to learn from the developing world,” she said.
In developing countries, the lack of infrastructure has led to technological leapfrogging in how people use the Internet. Rather than desktop or laptop computers, mobile phones have become the favoured devices to communicate, search for information and perform financial transactions.
This is especially the case in Kenya, where 82 per cent of the adult population owns a mobile phone – either a feature phone or a smart phone – and mobile phone-based funds transfer service M-Pesa is a daily way of life.
M-Pesa was originally a payment platform for microfinance owners with no access to banks, and transactions for 2015 on this platform totalled US$28 billion or the equivalent of 44 per cent of Kenya’s GDP for the same year, making M-Pesa the world’s leading mobile money service provider.
Banking institutions viewed M-Pesa as a threat at the beginning, Mugambi noted. But the sector began to embrace the platform as adoption increased, eventually integrating M-Pesa into their operations and helping to create a financial ecosystem around it.
Kenyans can now get credit, save money, make business payments, and soon even access bonds and pay bills via their mobile phones.
Panel discussion moderator Ann Florini, academic director, Master of Tri-Sector Collaboration, professor of Public Policy, School of Social Sciences, SMU, pointed out that besides solving the banking exclusion problem, M-Pesa is also addressing the issue of access to electricity in a sustainable way.
The creation of the mobile money system enabled the rise of M-Kopa, which sells household-level solar lighting systems through an installment plan that is paid for via mobile phone.
Mugambi said that collaboration tends to drive the growth of companies like M-Kopa because securing funding is an area in which fintech typically struggles. “You have a concept and it has potential, but you don’t have the money to scale it, and you don’t have the regulatory system in place,” Mugambi noted, referring to a common problem.
Luckily for M-Kopa, its last round of fundraising attracted the interest of Al Gore-founded fund Generation Investment Management, Virgin’s Richard Branson, and AOL co-founder Steve Case.
When you look at the amount of innovation taking place… you realise there’s a lot of opportunity for the developed world to learn from the developing world.
Nuru Mugambi, director of communications and public affairs, Kenya Bankers Association
How Ant is building a forest
China’s mobile payments platform Ant Financial Services is another example of how collaboration has enabled mobile-based fintech solutions to take off. It launched a carbon emissions calculation and offset feature within its Alipay app in August 2016.
Zadek, who is also visiting professor DSM senior fellow in Partnership and Sustainability at SMU, said the experiment, called Ant Forest, was the product of a joint effort by UNEP and Ant, and informs users of the amount of carbon emissions they have prevented through making online payments or other daily activities such as taking public transport instead of driving a car to work.
Once a user has accumulated a certain level of carbon emissions reductions, Ant’s partner organisations plant a real tree in Inner Mongolia. China.org.cn, a state-backed news portal, reports that so far 520,000 trees have been planted through the scheme.
Like M-Pesa, Ant Financial Services began as a small merchant payments platform specifically for an e-commerce site.
“The difference,” said Zadek, “is it has (450 million active) users. It runs 170 billion transactions a year and at its peak usage, which is in the Chinese New Year period, it runs at 83,000 transactions a second.”
In a major show of leadership, Ant Financial Services is also set to become the first Chinese company to drive a global public-private partnership that will be announced at the 2017 World Economic Forum this month.
Green finance’s dirty little secret
Collaboration is green finance’s “dirty little secret”, according to Zadek. An estimated US$5 to 7 trillion is needed each year to finance climate mitigation and adaptation efforts, as well as address the sustainable development challenges laid out in the United Nations’ 2030 Agenda for Sustainable Development.
“It’s completely inconceivable that public finance will play a major role in meeting those targets. The answer has to be private money,” he said.
Although the question of how to make green finance work appears to depend mainly on policy, regulation and market innovation, “we find almost no cases where it’s not about collaboration”, Zadek said.
Stock exchanges have a key role to play in encouraging the business sector to get on board with green finance, stressed Mohammed Omran, executive chairman of the Egyptian Exchange, chairman of the Federation Euro-Asian Stock Exchanges and professor of finance at the Arab Academy for Science and Technology.
He added that the US$7 trillion needed to achieve sustainable development and climate action will come not only from the banking sector but from the private market too, and that the world needs stock exchanges to help shift investment flows to the green economy.
“That’s why I expect that in the next three to five years, rather than a comply-or-explain scenario for environment, social and governance (ESG) guidelines, they will become compulsory,” he said.
Presenting a view from the banking sector, DBS Bank CEO Piyush Gupta said two emerging trends are making green finance more compelling.
Advancements in technology, he said, has made the financing of green fintech more economically viable; the cost of generating clean energy is lower today and thus is a more attractive investment option.
I expect that in the next three to five years, rather than a comply-or-explain scenario for environment, social and governance guidelines, they will become compulsory.
Mohammed Omran, executive chairman, Egyptian Exchange
Meanwhile, sustainable development has moved into the mainstream, and into the boardroom, he said.
DBS rolled out a set of comprehensive ESG policies last year for the first time, and in 2015 the Association of Banks in Singapore released guidelines to align the financial sector’s activities with social development goals.
Banks are interested in being aligned with national and international level policies as “finance doesn’t live in a vacuum”, said Gupta. “Finance and financial services work in the context of society and economies.”
When a member of the audience asked what it would take for the finance sector to dial down investment in fossil fuels, Gupta said that if a government chooses to include oil, coal or gas in the country’s energy mix for the future it is a “very hard decision” for any bank to steer clear of such large financing opportunities.
This shows the need for everyone - banks, government and the financial system itself - to be on the same page to reduce investment in unsustainable options, he said. “It’s very hard for the financial system to operate in and of itself, independent of international and national agendas.”