At a recent event on green fintech hosted by the Paulson Institute and the Research Center for Green Finance Development of Tsinghua University, leading experts discussed some of the pilot projects currently being tested in China for green finance. The advent of fintech, blockchain, big data, and artificial intelligence (AI) is providing certainty and confidence in the green financial system through greater transparency and verification – all essential for a high quality financial system. The ability to consume large amounts of data is already allowing firms to quantify and qualify green behavior. And the popularity of video games is allowing firms to gamify and promote sustainable habits for individuals.
One of the clear messages from the event is that China is using these new tools to promote financial incentives to change behaviors. And in this case, it is for the better.
In Zhejiang province, for example, 35 banks have started a pilot project to collect real time data on firms operating in the province to calculate their environmental risk. Based on the data analysis, each firm is given a score for their “sustainability performance.” While not released publicly, the banks have access to the state owned enterprises operating in the province as well as to a full range other types of data that allows them to calculate the firm’s environmental footprint. For small to medium sized firms, who tend to have less available data, it is possible to use third party data to generate an environmental profile. The goal is for each firm in the province to have a sustainability score or ranking.
There are several benefits to these environmental rankings. They create public pressure on a firm to improve its behavior. Also, the “greener” the firm, the more opportunity there is to receive financial benefits through lower interest rate loans, fundraising from green bonds, and attracting investment from the growing number of green private equity funds chasing truly green investments. Analyses from the Huzhou pilot project have shown that there is a direct correlation between economic performance and a higher environmental score. In other words, green firms are a better investment.
In addition, firms that have scored well on the environmental risk analysis qualify for an online sustainable marketplace. Firms can organize a virtual road show for their green projects and investors or banks providing loans can be reassured that the firms on the site have been verified as a reliable green investment. Almost 12,000 firms have joined this marketplace, which has reduced the speed of which they receive loans as well as reduced their cost of finance given that all the pre-qualification work has been conducted. This platform allows them to seek investment easily without having to leave the province – and the firm’s performance is verified by the data.
Another experiment being tested uses blockchain and AI to ensure custody in the green supply chain, especially for insurance purposes, but also for food safety. In the case of an organic salmon farm, insurance was extended to prevent against loss from disease or natural disasters. Through remote sensing and facial recognition, owners can track the individual salmon (yes, facial recognition does work for fish) to confirm their health – even down to pests that might infect the salmon. The remote sensing also helps to ensure that the organic chain of custody is kept intact. If a storm hits and the barriers break resulting in the salmon swimming free, AI allows them to track the salmon but also provide a reliable record of what was lost – as the data can not be changed or altered – to provide a reliable record for insurance purposes. And blockchain can be used to guarantee the organically raised salmon are not substituted with regular salmon during the shipping process.
Finally, a number of fintech experiments are exploring how to use its online capabilities to promote sustainable behaviors. An initial success has been Ant Financial’s Ant Forest app, which allows individuals to track their daily carbon footprint to build a virtual tree, which is linked to the planting a real tree on the player’s behalf by the company. While gamifying this sustainable behavior as attracted 500 million players and resulted in over 122 million trees planted; it is also providing data on sustainable habits that can be commercialized. Researchers in Zhejiang, including Ant Financial are seeking how to define a “sustainable” firm, which is especially important for small and medium sized enterprises, so that lending institutions can provide much needed access to preferable loans for these private sector companies.
China is piloting, testing, and showcasing a vast number of fintech based projects for green finance of which there are many interesting experiments being conducted. The energy and resources devoted to experimenting with these emerging technologies is plentiful from the private and public sectors across a variety of industries for different applications. As these and other projects become more developed and achieve scale, green finance only stands to benefit.