Fintech and Sustainable Finance: Key Drivers of Europe’s Financial Future

Written by: Paul North | Head of Product Management EMEA, BNY Mellon Asset Servicing

Will the nexus of financial technology and sustainable investment form the most important development for financial markets over the next decade?

Paul North

Anyone who has been to an investment industry conference or read the financial media over the last year will be aware that two underlying themes have dominated conversations: sustainable investment and the impact of digital technologies.

From the vantage point of early 2019, both issues appear likely to have an ongoing and significant impact on the investment industry during the 2020s. Indeed, it may be best to consider the two themes together. There is a strong argument that it is the connection between financial technology and sustainable finance that will form the single most important development for financial markets over the next ten years.

It is that hypothesis - that the intersection between Fintech and sustainable finance may become a key driver of financial markets in Europe during the next decade - that will be debated at one of the key sessions at this week's BNY Mellon Tax and Regulatory Client Forum. Now in its seventh year, the annual conference in London attracts over 250 attendees from more than 20 countries from both our asset manager and asset owner clients.

New financial tools and technology could be the key to creating a sustainable development revolution - what the venture capitalist and social investor Sir Ronald Cohen described last year in his paper On Impact as the 'impact revolution'. He suggests that while in the 19^th century investors focused on returns and in the 20^th century they shifted to measuring risk and return, in the 21^st century investors will adopt a new paradigm of 'risk-return-impact'. This does not mean reducing returns in favor of impact, but rather maximizing both profit and impact at normal levels of risk for the benefit of society as a whole. It involves new and established enterprises targeting social and environmental challenges in innovative, often technological, ways.

By reducing costs and boosting efficiency, digital technologies such as distributed ledger, machine learning, artificial intelligence and the Internet of Things have the potential to:

• mobilize green finance and enable poorer people around the world to access clean energy through innovative projects that offset carbon emissions or funds lost solar power;
• unlock greater financial inclusion for those seeking funding for new businesses that will deliver both impacts and financial returns;
• mobilize domestic savings at scale by providing channels or platforms for retail investors to access impact investing opportunities;
• collect, analyze and distribute information on both financial performance and impact performance for better economic decision-making, regulation and risk management;
• provide financial markets with the level playing field and market integrity needed for long-term real economy investments aligned with the sustainable development agenda.

New technologies such as distributed ledger, the cloud, machine learning and natural language processing have the potential to make a positive impact on sustainable development. These technologies can help reduce the costs of building and operating new platforms. They will be needed to create, collect, store, analyze and visualize the new datasets that will come with the growth of impact investing and they will automate and simplify complex processes. The application of these technologies are already being explored and adopted across the financial services industry. Perhaps they will be the building blocks that help accelerate the evolution of the new paradigm for capital markets that Sir Ronald Cohen envisages.

We are expecting a lively discussion on the intersection between Fintech and sustainable finance at our Tax and Regulatory Client Forum this week. It is a debate that is likely to be continued at investment industry conferences and in the business and wider media over the next few years.