The United Nations has set out to utilize global resources in collaboration with important financing partners such as global, multilateral institutions, regional development banks, member countries, and the private sector to mobilize the approximately $3 trillion financing needed to meet the Sustainable Development Goals (SDGs) 2030 Agenda. Though some may view extreme climate risks as longer-term, the current effects including extreme weather events, water crisis, the loss of biodiversity, and the resultant unintended consequences such as illegal migration arising from global inequalities are symptoms of a crystallization of the climate crisis. A United Nations study shows that by achieving the SDGs, the world could create at least US$12 trillion of market opportunities and 380 million new jobs, with climate change efforts saving at least US$26 trillion by 2030. Big finance has renewed calls for a financial green revolution backed by global multilaterals acting as insurers or first-loss absorbers to encourage the transition to sustainability for developing economies rather than awaiting new loans or debt write-offs.
A critical step towards achieving the financing of the SDGs is the payment systems upon which transaction settlement will be based. For example, remittances by diaspora contributed 9% of GDP in 2015 and in many countries, diaspora remittances equal or exceed Official Development Assistance (ODA) providing greater consistency compared to portfolio debt and equity flows. As part of the SDGs, the United Nations has a target to reduce the costs associated with remittances through formal channels from an average of 6.5% in 2020 (lowest in history) to 3% by 2030. There is, thus, a great need for faster, cheaper, and safer means for these remittances to reach the micro-beneficiaries to spur increased velocity of money, enhanced activity and economic redistribution. Access to finance remains a prerequisite for sustainable development. Financial inclusion efforts globally could address the financing gaps for the world’s poorest, including women, who own a growing number of Micro, Small, and Medium Enterprises (MSMEs), yet possess relatively lower share of global wealth. Globally, payments systems are often strictly supervised due to the systemic risks posed and thus have significantly higher entry barriers and global cooperation is needed to converge goals and make tangible progress.
Money as a medium of exchange has evolved over 10,000 years from barter, commodity money, and coins to paper money. In 2009, Paul Volcker described the ATM as the only useful invention by banks in the last 20 years. Despite the significant importance to the payments system of ATMs, credit cards, and even cheque books, smartphones have led to widespread adoption of mobile money and e-wallets. Distributed Ledger Technology (DLT) and cryptography continue to inspire an explosion in bitcoin and stable coin usage. Some countries have even considered adopting cryptocurrency as a second national currency. The rise of dematerialized payments would have a significant impact on the payments system globally. In this piece, we explore possibilities for a blended approach in the financing of the payments architecture supporting the SDGs.
A critical step towards achieving the financing of the SDGs is the payment systems upon which transaction settlement will be based.
The financing architecture for the SDGs are the “blood vessels” through which infrastructure projects are made sustainable — e.g., the collection of taxes and payment for public goods are enhanced through digital collection tools. The SDG financing is also the mechanism through which aid, cash transfers, and remittances would facilitate increased benefits to the micro-population. In order to explain the developments taking place across payment systems in relation to the SDGs, we will consider the methodology developed by Bain as a spectrum or a maturity model for ESG and Impact commitment as set out below.
The model begins with the traditional investor in the banking sector who invests seeking the most efficient frontier of risk and return and aiming to maximize shareholder value. The traditional investor does not really care about internalizing the external or social costs of business and without regulation (e.g., carbon taxes), would take advantage of regulatory arbitrage, and exploit the environment. This analysis is further emphasized and its importance is enhanced in the context of blended finance, which is an important tool for the financing of SDGs using a mix of concessional and private capital to pursue early stage, venture capital, or private equity projects with a mix of social and financial returns. Large scale implementation of sustainable projects to limit global temperature rise to 1.5 degrees Celsius compared to pre-industrial periods require massive investments that would revolutionize existing systems and would be seen in the context of Impact Investment projects with ESG opportunities. This is the role played by Fintech companies which continue to pursue the digitization of money with the associated impact model of TechFin companies pursuing a strategy of monetizing data.
The investments needed in the payments industry to catalyze SDG benefits to citizens will definitely take the form of impact investments. To accomplish the objective of financial inclusion, lower costs, and enhance affordability of remittances, central banks would need to adopt a hybrid digital currency model that provides back-ups for intermediaries, thus preventing a crowding-out of financial intermediaries and enabling the infrastructure for interoperability with financial systems across the globe. A reasonable return would have to be paid to attract private capital using a combination of seigniorage and philanthropy. For example, The Bill and Melinda Gates Foundation, Rockefeller Foundation, and Mastercard Foundation would provide catalytic capital to fund financial inclusion objectives in a sustainable manner so that costs are not pushed to the final consumers. These concessional funds would act as first-loss pieces supported by government funding and political risk insurance provided by multilaterals, such as The World Bank Multilateral Investment Guarantee Agency (MIGA). Private capital deployed on these projects would provide expansion funds while still generating a reasonable return to shareholders.
In conclusion, we see that there is a spectrum of activities with the potential to address the financial inclusion challenges inherent in the developing countries, incorporate small business owners and entrepreneurs into the economic tax net, and broaden long-run government revenues. These initiatives will enhance financial inclusion, promote investments in fragile economies, and address the contradictions and counterclaims of greenwashing addressed at some entities in the developed capital markets. The race towards greener, digital, cleantech assets, an end to poverty, eradication of hunger, good health for all, clean energy, clean water, zero hunger, and other SDG targets will not take a dash but rather a long marathon with SDG 17, “Partnership for the Goals”, playing a most critical role as all stakeholders act as collaborators rather than competitors towards a common objective. The COVID-19 pandemic accelerated digital transformation resulting in a rapid advancement and global wave of adoption of digital money by central banks to maintain the central issuance of currency. These retail Central Bank Digital Currencies (CBDC) have the potential to provide greater benefits to the payments system and to consumers. However, a hybrid model facilitated by financial intermediaries, rather than a direct model, would prevent disintermediation while limiting anonymity through initial identification and subsequent expiry, minimizing privacy risks, encouraging private sector participation, and building trust in the system.