The impact of digitalization on sustainable finance
Digital finance makes large amounts of data available more quickly at lower costs, increasing transparency and access to information related to sustainable investments. It also promotes greater inclusion and innovation, increasing opportunities for citizen participation in the financial value chain and unlocking new sustainable business models. – Digital Technologies for Mobilizing Sustainable Finance 2018
With sustainable finance increasingly gaining momentum around the world, a number of national and international actors have started to look at the effects that digitalization is having in this context. As we know, companies around the world are gathering vast amounts of data, much of which can be used to predict and analyse behaviours and likely outcomes of business- and political decisions. This is highly relevant in the case of developing the Sustainable Finance agenda, especially when it comes to the question of developing taxonomies for different types of investment. As you are probably aware, the EU is currently working on finalizing a taxonomy on sustainable activities, aimed at providing investors and the financial markets with a list of criteria that should facilitate sustainable investment.
One of the points that Nordic Financial Unions has been raising on numerous occasions with the EU legislators, is the limited attention that is currently being paid to Social and Governance issues in the work to develop a taxonomy. One of the latest examples of this, is the ‘rebranding’ effort that the EU Commission has gone through on Sustainable Finance, now just calling it Green Finance, while still claiming it is not only about environmental concerns. Even though the foundation for sustainable finance rests firmly on the UN Sustainable Development Goals, which calls for action to be taken not only on Environmental issues, but also on Social and Governance issues. In NFUs opinion, focusing on environmental aspects only risks promoting investments that potentially end up causing harm both to individuals and societies around the world, while getting a green ‘check-mark’ for being environmentally friendly. In our opinions, this sets a dangerous precedent and will ultimately make the transition to ‘green’ more difficult in the long run, as the individual person feels left out.
Yet one of the reasons that is often presented to us, both from the side of regulators and from the asset management industry, is that they lack comparable data, that would allow them to make the same kind of progress on a social taxonomy as for the environment one. And this is where the current debate about digitalisation’s role in sustainable finance comes in.
Digital change will have impacts – some of them helpful, others detrimental – on every single SDG, ranging from poverty alleviation to resource efficiency, from governance to energy and mobility systems, from employment to transnational partnerships. Digital technology is speeding up fundamental societal and economic change (Sachs et al, 2019).
The World Economic Forum further develops on this point when they write;
The trillions of dollars required to achieve the Sustainable Development Goals cannot derive from the public sector alone, and this is where the new operational and financial models made possible by the digitalization of finance hold such promise. But most of the creative thinking remains to be done about how the upstream effects of the digital revolution, especially on capital markets, can advance the SDGs. The management expert Peter Drucker once distinguished between efficiency, or doing things right, and effectiveness, or doing the right things. If the digital revolution serves only to make financial systems more efficient, it runs the real risk of serving as a force multiplier for the status quo, where capital continues to flow to the people and projects it already reaches, but faster and in larger quantities, further entrenching the divide between the haves and the have-nots. (World Economic Forum, 2019)
This point about making sure that digitalization is used for the benefit of all is extremely important, and one that we as trade unions always push to support. Certainly, we are against abuse of data collection and unwarranted monitoring, yet we believe that if handled correctly, the increasing amounts of data being collected could also provide the information that we often hear is missing to make a truly all-encompassing taxonomy of ESG friendly investments. This would potentially involve companies starting to collect new sets of data, e.g. trade union density; number of working hours; time dedicated to training and upskilling; compliance with health and safety guidelines; etc. Both collection and subsequent comparison would be greatly improved by the increase in digitalization taking place and would ultimately be of great benefit for workers and societies around the globe. This is why we as trade unions must continue pushing to be part of discussions when deciding how to implement digital change in companies and why we as NFU will continue to push for a stronger social angle in the current negotiations about sustainable finance and the taxonomy, using the digitalization trend to our advantage rather than letting ourselves be limited by it.
And this reorientation of focus from purely looking at environmental concerns to also prioritising the social and governance aspects, would not only benefit trade unions, workers and societies, but also the financial industry at large. By ensuring that greater investment flows to projects and businesses that priorities all three elements of ESG, some of the negative stigma that has surrounded the financial sector since the 2008 crisis, of only catering to the rich, would be lifted. When people around the world see benefits, directly impacting their lives, from investments in their local communities caused by redirected investments, they would realise that some of general misconceptions about the financial industry are wrong. Which I think for many of our members, dealing every day directly with clients, will be a great relief.
So, in conclusion, let’s agree that much work remains of convincing legislators to properly promote all three elements of ESG. Yet it is an effort that I think if we pull off and that will reap many benefits, not just for our members, but for society in general. And if this requires pushing for properly regulated digitalisation to play a bigger role in benchmarking, then that might be a good avenue worth pursuing.