(Nov 11): Mikkel Larsen, chief sustainability officer at DBS Group Holdings, sees fintech’s purpose as more than making banking accessible and convenient to millions with a mobile phone. Increasingly, fintech - which has made banking easy through smartphones and been a force for good by fostering financial inclusion in emerging Asia - can through Sustainable Digital Finance (SDF) also provide solutions to the most pressing global problem of our times like sustainability and climate change.
DBS contributed to a publication, Sustainable Digital Finance in Asia, along with the Sustainable Digital Finance Alliance, an organisation founded by Ant Financial Services and UN Environment. “SDF is about financing technologies that allow banks to have a positive environmental or social impact,” Larsen says.
DBS’s carbon footprint from its banking activity is tiny. “The reality is 99% of ourcarbon footprint comes from who we lend to. If I want to have the lowest footprint I shouldn’t be lending to aviation, agriculture and shipping because all three are carbon-intensive,” Larsen says. Think Olam, Singapore Airlines, SIA Engineering and ST Engineering.
“What we can do is help. We can help these clients reduce the carbon intensity and that’s what we’ve been doing in automobile, shipping and agriculture,” Larsen continues. “The real economy is carbon intensive. So, you can choose to make a positive impact by redirecting your finance to those that are less carbon-intensive.”
For instance, the increasing use of electric vehicles can resolve some of the emission issues. “Shipping and aviation are much harder, as the weight of those vehicles is much heavier. I think there is some breakthrough in aviation but shipping is a really hard problem. Many shipowners are trying to shift from bunker to [liquefied natural gas], which is a transition fuel,” Larsen says.
Sustainable digital finance
By using technologies, data can be captured by sensors in the environment and structured to integrate sustainability into existing products and services.
As Larsen tells it, there are three ways in which SDF can have a real impact. “First is financial inclusion. There are 1.7 billion people who don’t have access to basic banking products,” he says. Access to basic financial products — such as bank accounts and loans — through a digital bank can help to improve lives.
Second is sustainable finance. DBS has collaborated with organisations to use technologies such as distributed ledger technology (DLT), application programming interface (API) and artificial intelligence, along with reams of data to track-trace the origins of a product to determine whether it was produced sustainably. “Sustainable finance is where you redirect funding using technology and data to get money to move in the right direction where it wasn’t before,” he explains. If you have the right data, this creates a higher impact than using just financial information.
“It’s about track-tracing, so you know where products come from,” Larsen adds. Track and trace is a system that determines the inputs and processes that go into a product. For the purposes of SDF, this is a challenging process, as data on the impact on the environment is incomplete.
There is some success with rubber in the manufacture of tyres. The bank has partnered with Halcyon Agri Corp, a rubber producer, to use DLT to track the production of rubber from the origins of the tree all the way to the tyre. “If you could trace the rubber, all the way from source and, ultimately, as it makes its way into our tyres, and if you can create that transparency and there is proof that the rubber comes from a plantation that has sustainable practices and where they don’t cut down trees, the consumer is willing to pay a premium for this,” Larsen says. “We’ve seen it happening. And it can be applied to cocoa, coffee and fish.”
Third is sustainable practices to create bankable products. “This is where you use technology and data to nudge people to do the right things,” Larsen explains. To commit to sustainable practices, banks like DBS need to focus on what Larsen describes as missing data.
“If you don’t have data you don’t know what’s doing good or not. You actually know very little about the environmental and social impact of any investment product you buy. We want to use data to have deep conversation so that our clients can make a decision. And we think about how we can redirect funds, how we can work with our institutional and corporate clients, our private banking clients and our larger retail clients.”
Blockchain to track and trace
HeveaConnect - the DBS-Halcyon Agri digital marketplace for rubber - aims to connect farmers, rubber producers and tyre manufacturers in an integrated ecosystem, offering a convenient one-stop shop for participants in the natural rubber supply chain. Through HeveaConnect, natural rubber producers and consumers can track pricing and supply information and transact directly on the platform, promoting greater price transparency in the industry. Other offerings provided include access to value-added services such as financing, insurance and logistics.
“Imagine doing this for fish, describing the batch of different fish, where the head goes somewhere and the fillet goes somewhere else. The fish starts as one project but ends up in different products. All these different products can be traced using DLT,” Larsen explains.
Banks have started to help with the deployment of satellites and blockchain technology to increase the auditability and transparency of value chains to verify that products are produced sustainably. For instance, DBS and Agrocorp International are collaborating to provide an end-to-end cross-border blockchain trade platform for a commodity supply chain network comprising farmers, exporters, traders and end-customers. Benefits include the ability to offer supply chain participants real-time updates on commodity prices and delivery information, and trade financing approval for orders coming in from anywhere in the world. With the implementation of the blockchain platform, Agrocorp and its counterparties can also enjoy a more seamless and secure transfer of goods ownership and payments.
Initially, the blockchain platform will connect about 4,500 farmers in Agrocorp’s network in Australia to end-customers such as supermarkets and restaurants. With access to real-time pricing and supply information, suppliers and end-customers are currently able to carry out “live” transactions at any time and track the delivery of orders on-the-go, allowing both sides to better manage their stock inventories.
Agrocorp plans to broaden the reach of the blockchain platform from Australia to its other key origination markets like Canada, Myanmar, Ivory Coast and Ukraine in the next 12 to 18 months. The commodities trading company also intends to increase the variety of commodities traded on the blockchain platform from pulses such as mung beans and chickpeas to cereals, cotton, edible nuts and oilseeds.
In September, DBS announced a multi-tier financing facility on a logistics blockchain platform named Rong-E Lian to help small and medium-sized enterprises (SMEs) in China get quicker access to trade financing.
Another example of tracking and tracing in which DBS is not involved is conflict diamonds.“You need the data to show whether the mine the diamond is from is good or bad. But the very first thing you need is capturing the data,” Larsen says.
SDF needs data, hence the need to “democratise” data or making data available to everyone “so we can understand where the money is flowing”.
Data allows banks to provide tailored investment products that create not only a financial outcome but also achieve specific environmental outcomes.
Private wealth has an important role in mobilising capital into SDF products. Banks can use data analytics to build personalised investment portfolios for high-net-worth clients based on their sustainability preferences. This may introduce a source of more “patient capital” from impact investors who still seek financial returns.
Fintech can be used to certify and monitor the origins of capital market instruments such as green bonds. Digitalising bond offerings brings down the cost of obtaining and reporting environmental data for green bonds, allowing many more companies - especially SMEs - to meet the requirements to issue green bonds. Although Asian greenbond issuance reached US$43.4 billion in 2017, only a very small portion of green assets is financed by capital market instruments certified as “green”.
Elsewhere, banks may open additional APIs to collaborate with external partners that is committed to designing new green products. Alternatively, banks — which have customers’ data through their transaction accounts — can analyse data on individual consumers’ consumption patterns and lifestyle choices. Algorithms can structure this data and turn it into individualised environmental footprints from consumption, compare trends across peer groups and demographics as well as develop peer competition incentives using social media.
“We don’t have a vocabulary to discuss the social and environmental impact. If I said DBS made $5 billion this year, it means something. If I said we made 10 tonnes of carbon this year, does that make a difference for you?” Larsen wonders.
In the future, though, companies are likely to start capturing and reporting data on the environment. Emitting 10 tonnes of carbon will have meaning for investors, Larsen suggests.
“We need to democratise data to make it understandable for everyone; we also need the equivalent of IFRS [International Financial Reporting Standards] and FASB [Financial Accounting Standards Board] to give sustainable environment standards on what companies report. If I’m having a glass half-full day, I would say it took financial standards that long to get to [IFRS]. So, we will get there with sustainable environmental standards. [But] if I’m on a glass-half empty day, we are nowhere near,” he notes.