Blockchain the Digital Enabler: Better Enforcement of Green Finance through Blockchain
The crypto market is now becoming a major driving force in environmental and climate finance. The implementation of Paris Climate and Sustainable Development Goals (SDGs) requires a global yearly investment of $3 trillion. Funds from the public sector and development assistance are unable to support such a large sum. In a report by Ernst & Young (EY), the current sustainable bond markets only covers a fraction of the investment fund needed for the SDG goals, private capital markets and corporations play a major role to facilitate a sustainable economic transformation in the global economy.
What is Green Finance?
Mr. Ravi Menon, Managing Director of the Monetary Authority of Singapore (MAS) announced that “MAS is working on a comprehensive, long-term strategy to make sustainable finance a defining feature of Singapore's role as an international financial centre, just as wealth management and FinTech have become.” Green Finance is the development of financial products that work toward environmental sustainability with investable returns. Environmental externalities are now internalized and risk perceptions adjusted to support environmentally friendly investments.
Green Finance Projects
How does Blockchain Technology expedite the transition to Green Finance? With the world focusing on Environmental, Social, and Governance (ESG) factors, financial intermediaries face pressure to push towards sustainability. MAS recently announced Project Greenprint, a technology platform geared towards the development of green Fintechs to promote a green financial ecosystem. The adoption of blockchain-powered infrastructure plays an important role to support and hold sustainable green bonds accountable. Green bonds are debt instruments that orchestrate the channelling of funds into new and existing projects offering environmental benefits. Blockchain can effectively increase the traceability of bond issuance, automation of manual processes, and aid in climate data research.
Blockchain’s role in boosting Green Finance
Virtual assets offer Green Finance traceability through Tokenisation - enabling percentage ownership of assets while eliminating territorial barriers and intermediaries. A blockchain record has immutability, it cannot be altered, changed, or forged. These built-in features ensure the credibility of transactions and are essential to track an asset’s history. This provides accountability that Green bonds execute their promised environmental impact. Through the use of the distributed ledger, Internet of Things (IoT) devices and Artificial Intelligence could be utilised to improve traceability and provide real-time investor reporting. FundsDLT reengineered the investment fund distribution value chain based on distributed ledger technology covering the entire investment cycle, improving information and data flows and involvement in the distribution chain.
- Automation of manual processes
Automation of manual processes allows securities to be distributed in smaller units, investors can diversify their investment portfolios across different bonds due to smaller subscription units and the freedom to be traded on exchange platforms. Blockchain-based smart contracts are cost and time-efficient solutions for issuers. Considering the Green investment market’s unrealized potential, tokenization can expand the availability of capital supply to green bond issuances. Furthermore, blockchain technology can greatly reduce typical denominations of green bonds.
- Collection and Analysis of Climate Data
Blockchain’s ability to facilitate large amounts of comprehensive data between different data sources could aid the collection and analysis of climate data. Allowing for a gauge of the global economic impact of climate change and thus, the identification of high-risk areas. This helps inventors and banks assess and make decisions regarding capital allocation. For example, Blockchain technology can facilitate the flows of Greenhouse gas data to establish Greenhouse gas inventories. National inventories convey the volume of a countries’ greenhouse gas emissions. In addition, smart contracts are in development to monitor data from forest-relevant activities to assess the volume of emissions.
Digital technologies could increase the efficiency and credibility of green bonds, directly increasing its potential to pilot the ecological transformation. Financial intermediaries seem to be collaborating in a bid to make our environment more sustainable. More emphasis will be placed on keeping compliant and regulatory measures will be tightened. Regtech will surely grow with industrial trends and play a role in the assessment of the industry’s environmental impact.
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