As the climate crisis worsens, governments and organisations are increasingly looking to green finance as a way to raise funds for sustainable projects and infrastructure.
Yet despite growing investment in the sector, green finance is stifled by inefficiencies and irregularities, preventing it from bridging the substantial gap in finance needed to address the environmental challenges facing the world. A new blockchain-based infrastructure has the potential to transform the system.
The urgency to channel more investment into green projects is particularly acute in Asia. Within Southeast Asia, the investment gap for sustainable infrastructure projects is estimated at US$200 billion annually until 2030. Mobilising capital investment is critical if the region is to meet its development goals.
In response, leaders in Asia are prioritising green finance in the hopes it can support their sustainable goals while at the same time helping them capitalise on a growing, innovative sector. Hong Kong is moving to leverage its international capital flows to grow into a regional carbon trading centre, while Chinas central bank has made green finance a priority for its latest five-year plan.
However, after more than a decade of government-backed support and public attention, green finance is still not delivering the seismic changes needed to alter the climates trajectory.
Green finance is becoming increasingly sophisticated. As it becomes more complex, though, it becomes harder to trace the financial flows and ensure investment is reaching its desired destination. In addition, the impact of projects needs to be reported back through this network to ensure governments and investors are informed of the results.
Interoperability is also proving problematic as the definition of “green” is constantly evolving. As countries develop their own methods for classifying, measuring and reporting projects, green finance risks becoming a disjointed ecosystem of national projects that lack compatibility.
Recent accusations of greenwashing are damaging trust in the sector. Whether knowingly or through lack of due diligence, funds labelled as “green” have been shown to be anything but, increasing the level of scepticism around green finance.
Significant changes are needed to ensure stakeholders get the transparency needed to rebuild confidence in the sector. Blockchains – decentralised ledgers of data shared across a system that provide an immutable record of activity – can address data gaps and provide high-quality data when applied to green finance.
One of the main takeaways from last years UN climate change conference was a call for financial institutions to build emissions assessments into their investments. By incorporating basic sensors in infrastructure projects, blockchain systems can incorporate data from the monitoring and reporting process.
Pairing this data with a blockchain database can give bond issuers access to a traceable, transparent real-time audit trail that records the environmental impact of their investment.
Asias position at the fore of blockchain-based innovation, coupled with its need to turbocharge green finance, has resulted in a recent wave of activity aimed at embedding the technology into the green ecosystem.
In Hong Kong, the Bank for International Settlements Innovation Hub is using distributed ledger technology to explore the tokenisation of green bonds. Dubbed Project Genesis, the initiative uses blockchain technology, smart contracts and digital assets to enable investments in small denominations combined with real-time tracking of environmental outputs.
Digital technology embedded throughout the value chain cuts costs and time, resulting in a more efficient, traceable and transparent process. More funding reaches green projects and more impact is generated, providing strong results to report back to stakeholders.
Singapore is also leveraging its growing expertise in blockchain technology to enhance its position as a green finance hub. The Monetary Authority of Singapore has created a Regulatory Sandbox to provide a government-sanctioned space for companies to pilot tech-enabled green bond exchanges.
Change needs to happen fast if we are to mitigate the risks a changing climate presents. Blockchain technology has the potential to alleviate many of the challenges impeding green finance. By delivering transparency and traceability, the technology can help build trust in the sector and stimulate further investment.
Asia is already leading the change when it comes to innovation in this space. By backing pilots and being open to experimentation, governments have provided much-needed impetus.
The next challenge is encouraging adoption at scale throughout the sector to capitalise on their benefits and foster the international collaboration that is critical for interoperability across markets. Government support from a funding and regulatory perspective will be crucial if Asia is to reach its climate goals.
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