Finding Digital Answers to Global Sustainability Threats

How digital technologies can foster climate action in the context of the European Green Deal and enable global mobilization of SDG impact finance?

According to NASA, the World Meteorological Organization and the National Oceanic and Atmospheric Administration, a scientific agency within the United States Department of Commerce, the last 10 years leading up to the end of 2019, as well as the last winter, has been confirmed as the warmest decade on record. Yet, nature produced another warning for humanity in Australia with the severe 2019–2020 bushfire season that led to the burning of 21% of the country’s forested area. With the devastating coronavirus pandemic spreading across the globe and disrupting the way we live our lives, this gives us an indication of the challenge the world could face if it does not address climate change.

The world’s most prominent answer to these global challenges has been the establishment of the Sustainable Development Goals — also known as SDGs or the Global Goals — and the United Nations 2030 Agenda, which are recognized and expected to be implemented by all countries. However, the Organisation for Economic Cooperation and Development, or OECD, has determined that an estimated $2.5 trillion per year of investment is needed to deliver the SDGs. To achieve these goals in the developing countries that suffer the most from global problems, finance development ought to be deployed smartly and strategically, leveraging private capital mobilization.

On Nov. 29, 2018, U.N. Secretary-General Antonio Guterres initiated the Task Force on Digital Financing of the Sustainable Development Goals with its main aim to recommend and catalyze ways to harness digitalization and accelerate SDG financing. “We have already seen how technology has helped expand financial inclusion — itself an important goal — by 1.2 billion people in just six years,” said Guterres. He continued:

“But we have only just begun to tap the potential of digital finance and investment to meet the broader agenda set forth in the Sustainable Development Goals and the Paris Agreement on climate change.”

In order to give an immediate response to the COVID-19 outbreak, the U.N. Task Force on Digital Financing of SDG’s is aiming to involve the latest knowledge and competence of their members to provide solutions that can slow down the crisis. Meanwhile, the International Association for Trusted Blockchain Applications, or INATBA, has also started similar initiatives. They have been striving to implement the secure and immutable tracking facilities of blockchain technology, which can support organizations and states to advise various stakeholders.

In the final report planned for July 2020, the task force will:

1. Address the most critical questions on the results of the digitalization of financing to achieve the SDGs.
2. Consider how this process will reshape financial and monetary systems.
3. List the main digital-finance limitations and opportunities.
4. Identify the parties in charge of risk management and mitigation.

To encourage exploration and the eventual use of digital technologies in support of climate action, the U.N. Climate Change secretariat has initiated the Climate Chain Coalition, or CCC. Since 2017, it has united more than 200 members from 50 countries, allowing them to share experience on important global platforms — including the World Bank Innovate4Climate and the annual U.N. Climate Change Conference, also known as COP26.

“Climate change secretariat recognizes the potential of blockchain, and it’s a broader ecosystem to enhance climate finance by improving the accuracy of impact assessment and it’s attribution to financiers as well increasing efficiency, trust and liquidity,” said Massamba Thioye, the co-chair of CCC, in a private conversation. He also leads the U.N. Framework Convention on Climate Change, or UNFCCC, secretariat work that explores possible use cases of digital technologies — including blockchain technology, the Internet of Things, artificial intelligence, smart contracts and other Fourth Industrial Revolution technology to enhance climate action. CCC members are looking forward to having space where they can showcase real-life use cases during the U.N.’s landmark climate conference, COP26, in Glasgow, Scotland, this November and online events over the coming months.

Digital tech as a key enabler of the European Green Deal

While the U.N. has been assessing and encouraging innovative approaches to bridge digital tech with SDG finance, the European Union Commission may soon approve a truly ambitious aim to become the world’s first climate-neutral continent by 2050, while decoupling economic growth from resource use.

The European Green Deal implies, among many policy initiatives, the extension of the EU ETS (Emissions Trading Scheme), the establishment of a carbon border adjustment tax and a “Just Transition Fund,” as well as a truly impressive 1-trillion-euro investment. One of the main financial incentives behind the Green Deal is the European Commission’s Action Plan on Financing Sustainable Growth that will be soon powered by the EU Taxonomy.

The taxonomy will allow investors to know whether the investment is green or not, assess SDG-associated risks and transform financial inflows to economic activities and projects that are beneficial for sustainable development. It connects the European Green Deal with the needs of the real economy by establishing a classification system that enables the categorization of economic activities and sectors that play key roles in climate change mitigation and adaptation.

Digitization may become the key enabler of the EU Taxonomy by employing Industry 4.0 integrated systems for both software and hardware to ensure that various sectors of the economy meet the eligibility criteria. EU officials and documents have also emphasized other effects of the digital transformation and application of technologies, such as AI, IoT and blockchain technology, toward the successful implementation of the Green Deal.

EU claims for the digital SDG finance domination

On Jan. 14, 2020, the Blockchains for the European Green Deal event was organized in Brussels by the European Partners for the Environment in partnership with the CCC. The main statement announced and agreed upon by participants was the necessity of integrating blockchain technologies to bring innovative approaches and address the SDG’s implementation — which would be both transformational and essential for the EU. The European and U.N. officials, experts and representatives from high-tech companies who attended the event have agreed on collaborating toward common standards, the open-source software and data that would adhere to the EU’s policies.

Similar messages were announced from the stage of another high-level event called Connecting the Dots: Digitalization, Finance & Sustainable Development, which was held on Jan. 27, 2020, and organized by SDSN Germany, Sustainable Digital Finance Alliance and U.N. Task Force on Digital Financing of the SDGs in cooperation with the Frankfurt School of Finance & Management. The event’s main focus was the potential of new technologies to contribute to the achievement of SDGs by promoting financial innovations and digitalization.

The President of the European Investment Bank, Werner Hoyer, who delivered a key-note speech at the event, stated earlier in Davos, Switzerland, that “the world’s future economy must marry digitalization and innovation with climate action.” In his speech, he underlined the necessity of the EIB to become a digital climate bank and a financial engine of Europe’s leadership on climate action. His comments were supported by Simon Zadek, the Sherpa of the U.N. Secretary General’s Task Force on Digital Financing of the Sustainable Development Goals; Adolf Kloke-Lesch, the executive director of SDSN Germany; and Sabrina Schulz, the head of Berlin Office for the KfW Group. Schulz especially pointed out that KfW Group is becoming a transformational climate bank closely involved in the digitization of climate finance and already leveraging blockchain opportunities in this field.

The role of digitization in bridging the SDG finance gap

The aforementioned facts and statements witness that there is a global consensus on the pivotal role that digital technologies can play in the mobilization of the development and private finance needed to successfully attain U.N.’s SDGs. Based on the latest publications and consultations with key stakeholders, we have listed some of the main effects of digitalization on SDG financing:

1. Digitalization will empower infrastructure frameworks for climate action and multi-stakeholder engagement

Taxonomies and standards are advantageous tools that make capital markets analyze and acknowledge investment opportunities to enhance the goals of environmental policies. The creation of holistic digital frameworks that combine both software and hardware tools may help to ensure that economic activities match the proposed standards and rules.

Application of blockchain technology for the EU carbon border adjustment mechanism may help to ensure that European products are not at risk of carbon leakage or disadvantaged by more carbon-intensive imports from other countries. Providing unprecedented transparency and traceability, it will also help to ensure that the price of imports reflects more accurately the carbon content and better assess the overall greenhouse gas emissions, as well as their reduction potential along the supply chains to successfully execute the Green New Deal.

As another example, the European Blockchain Services Infrastructure, in partnership with the CCC, is currently working on a unique object identification initiative — a data and digital technology innovation infrastructure, or D2I2, for multi-stakeholder climate action coordination and incentivization. The framework is being set to deliver a global digital services infrastructure for climate action, including digital identities, services, resources (financial, intellectual, etc.) and other domains. This could bring the necessary data architecture and tools that will allow us to implement taxonomies faster and more successfully.

Building on the aforementioned Unique Object Identification — together with digital identities of persons and institutions — the D2I2 consortium has been working toward the development of a digital climate action documentation and coordination language and coordination system that will enable the development of digital tools for engagement mechanisms like those envisaged by the European Climate Pact or Climate Neutral Now initiatives. Such a digital framework will allow stakeholders to digitally specify and sign their pledges and climate action suggestions with concrete, monitorable information with all the relevant parameters uniquely identified.

Through such a global challenges mapping platform, individuals, schools, cities and companies will be empowered to digitally sign a climate pact with their local, sub-national, national or global community, specifying intended and recommended climate action with digital identities based on uniquely identified and localized objects, services, resources and outcomes — thus, opening unprecedented opportunities for multi-stakeholder engagement in climate action.

2. Collection and analysis of real economy data will help to better assess risks and investment outcomes

Once collected directly from the ground, the impact data will answer the question if the corporates and financiers are really changing their investment practices to execute a long-term thinking approach and to increase reporting transparency and public accountability for real targets behind the environmental, social and governance policies.

The real economy data acquisition can be done with drones, satellites and IoT — wireless sensors that collect different kinds of real economy data (electricity, water, heat consumption, etc.). Satellites are mainly used for soil, air, vegetation water quality assessment, identification of illegal activities, acquisition of historical data on fires or floods for future forecasting, and analysis. AI and cameras enable advanced condition project monitoring and forecasting techniques, which will enable us to decrease operational and maintenance costs, as well as to better predict the outcome of the project.

In Davos, several leading international players like Refinitiv, the World Economic Forum, FinTech4Good and the U.N. formed an alliance with the main aim to accelerate the mobilization of capital into sustainable finance. This alliance will provide fundamental ESG data access and extra alternative data sets that may be considered the key drivers to help investors make sustainable investment decisions and positively contribute to the U.N. SDGs 2030 Agenda.

Amid the COVID-19 crisis, digitalization may help to tackle numerous current challenges and advise citizens on the symptoms of infection, to better manage medical data across organizations and countries, and to track donations for medical supplies and medicine. Firstly, it can abate misinformation through constant and automatic synchronization, which makes it almost impossible to manipulate or change any kind of information relevant for crisis mitigation and adaptation. Secondly, it could establish successful communication between various organizations like hospitals and research centers, along with secure donations and medical supplies, making the whole process transparent and enhancing public confidence in the system. Finally, digital impact finance tools will have great potential for the SDG impact-oriented optimization of public, post-pandemic economic stimulus packages, which can be expected to be launched soon by governments all over the world on a huge scale.

3. Digitalization will make impact investments more accessible and financially attractive

Access in developed and developing countries to low-cost finance from the capital market is critical to attaining SDGs. However, financiers will not invest in projects simply because this is the right thing to do morally. They will do it if there is enough trust and economic sense.

The majority of investors still use Excel spreadsheets to calculate impact-related metrics and manage their portfolios — which takes both time and money. A lot of financiers’ money is also wasted on ensuring that oversea investments match impact investment criteria, have low ESG risks and provide the correct information on SDG impact.

Digitization significantly lowers transaction costs by introducing portfolio management automation, building trust, avoiding unwanted intermediaries and allowing to enter the climate finance market more freely while ensuring the alignment to major taxonomies and standards.

Decentralized finance brings new revenue opportunities through tokenization of real assets or securities — equity, debt, revenue sharing instruments, etc. — as well as enabling their fractional ownership and usage. This allows for significantly smaller investment sizes and thus enables access to finance for SMEs that are currently excluded from the international SDG finance due to the limitations of existing policies and procedures.

DeFi can potentially increase profitability and liquidity of impact investments by seamlessly issuing impact derivatives — carbon credits, renewable energy certificates, etc. — and secondary trading of digital assets. However, this potential may only be unlocked by the introduction of clear governmental regulations in the digital finance sector and the emergence of regulated platforms for secondary trading.

4. Digital technologies can bring new challenges yet to be addressed

The U.N. Task Force lists some risks and challenges of digitalization, such as digital divide, systematic exclusions that may bolster some examples of discrimination, biases in algorithms, and also a great environmental footprint, resulting from high energy demand for proof-of-work blockchain transaction confirmations. Some of those limitations are being dealt with by the technologies of the next generation that are now being delivered to the market.

For example, the development of Web 3.0 protocols such as Cosmos, Polkadot and Parity Substrate have brought sufficient advantages in comparison to their predecessors: new energy-saving consensus mechanisms, the absence of a central point of control, a reduction in hacks and data breaches, seamless integration with IoT and long-awaited interoperability.

The interoperability of blockchain technology allows us to avoid such problems like double accounting enabling cross-blockchain transfers of any type of data or asset. This would enable us to ensure that impact results are attributed fairly and not claimed by many investors at the same time. However, there are still regulatory, security and market immaturity associated risks that need to be considered.

5. Digital technologies may help to abate greenwashing of introducing new investment instruments

The green bond market is growing at a fast pace and has already reached over $240 billion. However, there are challenges, such as complex issuance processes due to the requirement of an additional layer of “green performance” data, a lack of transparency and the risk of “greenwashing.” While Africa and the Association of Southeast Asian Nations, or ASEAN, are recognized as the most promising markets for green bonds, the issuance volume remains comparably low due to the lack of trust and clear guidelines on green bonds issuance, as well as a lack of investor awareness.

Smart contracts running on a blockchain may play their role in solving these issues. They are pre-programmed digital forms of agreements and are executed automatically when certain conditions are met. The smart contracts enable building decentralized applications and protocols with far more sophisticated functionality than simply sending and receiving cryptocurrency such as Bitcoin (BTC).

The logic of any existing or future green bond framework or methodology can be described in the form of smart contracts and their integration with impact monitoring solutions. The impact is then automatically monitored, recorded on a blockchain with high transparency and immutability, and then attributed to the relevant financier. This opens doors to the issuance of programmable SDG bonds and blended finance instruments with their financial parameters linked to the impact data acquired directly from the project site.

Conclusion

The recent high-level announcements and events made earlier this year witness that we are currently facing the merger of two growing trends: digitalization and impact finance. The pivotal role of digital technologies in bridging the $2.5 trillion SDG investment gap and attainment of a broader U.N. 2030 Agenda has been officially acknowledged by the international bodies, states, corporations and financiers who are starting the phase of active adoption.

Moreover, their deployment for enhancing SDG finance could become a new global competitive factor and a potential key enabler of the latest policies, taxonomies, methodologies and standards, bringing more transparent data architecture and democratized digital infrastructure to implement Agenda 2030.

To reach the full potential of digitalization, it is necessary to combine various Industry 4.0 technologies. Monitoring technologies such as drones, satellites and IoT enable trusted real economy data acquisition. Blockchain technology may store the acquired data, providing unprecedented transparency and immutability, while AI will help to analyze it and use the processed data for decision making.

The new generations of digital technologies that are already being deployed provide answers to critical technological constraints, which previously prevented their wide adoption: a big environmental footprint, limited scalability and interoperability. However, there are still some limitations such as software risks, digital divide and autocracy that have yet to be addressed.

Digitization may solve the growing greenwashing challenge by enabling the accurate measurement and attribution of SDG contributions made by multiple financiers. It can also help to mobilize private capital while increasing the financial attractiveness of impact investments by the introduction of new financial tools and liquidity opportunities, as well as more effective ESG risk assessment and management.

Unprecedented crises like climate change and its growing consequences, new deadly viruses, rising sea levels or extreme weather events force us to immediately rethink global economic and social systems. During the COVID-19 pandemic and even prior to that, digitalization has shown us successful examples of faster transparent evaluation and distribution of resources to where they are most needed. These early examples may serve as the building blocks of a more sustainable and prosperous future for our world. However, if there is any way out of the current situation, we’ll certainly only be able to find it all together, and digital technologies will help bring down the dividing walls by allowing us to better understand and trust one another.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

This article was co-authored by Alexey Shadrin, Tom Baumann, Marina Spitsyna and Miroslav Polzer.