Resolving The Sustainable Finance Conundrum: Activist Policies And Financial Technology

Abstract

The outbreak of the COVID-19 pandemic and its devastating impact on public health and social and economic systems has induced citizens, central banks, and governments to rethink sustainable finance. Still, climate change is not the only challenge human societies face today. Racial, gender, and income inequality and the fate of liberal democracy are as important and should feature prominently in public debate and policy-makers’ agendas. Achieving these policy objectives as encapsulated in the United Nations (UN) Sustainability Development Goals (SDGs), requires substantial investment. The growing field of sustainable finance has sought to provide that funding, but the current funding gap remains enormous. The funding gap is the product of three formidable obstacles: (a) legal restrictions, (b) lack of a reliable mechanism for the monitoring and verification of the actual sustainability impact of green investments and policies, and (c) finance models that narrowly measure investment risk and return. These obstacles act like a dam with regards to sustainable finance flows and the dam may only be breached if public policy takes a stronger role in actively encouraging sustainable investment through tax and regulatory incentives. To implement that policy an accord among G-20 countries, from which most private investment flows originate, is required. A tax that would treat capital flows that do not have a direct or indirect sustainability impact, for example, investments in the carbon fuel industry, as a negative externality would constitute a radical departure from the more benign policies tried so far such as reporting/disclosure and pricing of carbon emissions. To be effective it would require international consensus. While calls for a similar levy were also raised in the aftermath of the Global Financial Crisis and went nowhere, the result of the recent US election in combination with the devastating impact of the pandemic may prove the watershed moment. Moreover, cutting-edge financial technology encompassing artificial intelligence, machine learning and blockchain technology can be critical in terms of boosting sustainable finance and creating a scientifically accurate environment for the allocation of the proposed here green taxes and subsidies among investment portfolios. With the advent of autonomous finance gathering momentum there has never been a better time for such a shift in the mechanics of investing.