Abstract: Since the global financial crisis of 2008, we have observed a very rapid increase in use of digital technologies in the finance and development of FinTech companies. Similarly, we have observed the impact of climate risk for banking. The aim of the paper is to find out what is the impact of FinTech on achieving sustainable climate and social goals through innovative financial instruments. FinTech may boost the development of green finance, which addresses environmental protection or climate change and has become an opportunity for industrialized countries to achieve sustainable growth. Finally, this paper presents positive and negative impact of FinTech on sustainable growth perspective. To assess the impact of Fintech on sustainable finance, this paper carries out the critical analysis of the newest literature and reports of financial institutions.
<a href="https://dx.doi.org/10.15611/fins.2022.2.05">DOI: 10.15611/fins.2022.2.05</a>
<p>JEL Classification: F36, G14, G20, D20, Q2, Q42</p>
<p>Keywords: banks, new technologies, FinTech,sustainable growth</p>
<h2>1. Introduction </h2>
<p>Since the global financial crisis of 2008, we have observed a new
trend in the financial sector focused on the business model related to
digitalisation and FinTech (Thakor, 2020). Similarly, an emerging topic
in the literature is the impact of climate risk on banking (BIS, 2021).
The FinTech revolution brought new factors that influenced the financial
sector and had an impact on sustainable growth. Apart from the typically
indicated features, such as decreasing costs, FinTech has attracted
increasing attention for its potential in accelerating more sustainable
economic growth. However, FinTech has had both a positive and negative
impact on the sustainable growth perspective. Therefore, the aim of this
paper was to investigate the impact of innovative financial technologies
(FinTech) on sustainable development.</p>
<p>It has been argued that FinTech companies are able to tackle key
environmental and climate issues. FinTech may boost the development of
green finance, which addresses environmental protection and climate
change, and has become an opportunity for industrialised countries to
achieve sustainable growth, due to its ability to reduce information
asymmetry for investors interested in green financial products (Yang,
Su, & Yao, 2021). Merello, Barberá, and De la Poza (2022) also
suggested that FinTech companies are more willing to be involved in
green finance since it has a positive impact on their market and book
value. There are numerous FinTech companies that have already begun
offering green investment opportunities for their clients, or are even
solely focused on such investing (the so-called “Green FinTech”). This
includes different financial innovations, e.g. crowdfunding platforms
(Crowdfundres), blockchain (Climatechain), robo-advisors (VisualVest or
LIQUID), and mobile payment platforms (Alipay’s Ant Forest campaign)
(Dorfleitner & Braun, 2019; Muganyi, Linnan, & Sun, 2021). These
green activities of FinTech companies include: promoting green finance
through green credit or green investment, improving carbon emission
trade, encouraging clients to participate in green finance projects,
promoting environmentally friendly consumption. Although the research on
the impact of FinTech companies on the environment is in its early
stage, the recent results indicate that such companies may have a
beneficial effect on issues such as carbon dioxide emissions (Tao, Su,
Naqvi, & Rizvi, 2022) and the “resource curse” (Zhou et al., 2022).
This is especially evident in the more developed regions, where
establishing FinTech is easier because of the already existing
infrastructure, market regulations or higher availability of capital
(Muganyi et al., 2021; Zhou, Zhu, & Luo, 2022). However, there also
exists a ‘dark side’ of financial innovations, for example due to high
electricity demand and consumption of energy generated from carbon fuels
cryptocurrencies contribute to higher emissions of carbon dioxide (Tao
et al., 2022).</p>
<p>This paper used as a research methodology a critical analysis of the
latest scientific papers and reports of international financial
institutions (published in 2017-2022) on digital techniques and
sustainable financing. Firstly, based on the available literature
(academic articles and reports of international financial institutions
i.e. BIS, FSB, IFC), this paper defines the basic concepts related to
FinTech and sustainable development. Secondly, the authors tried to find
both a positive and negative impact of FinTech on the sustainable growth
perspective. Despite the relevance of the topic, empirical works in this
field remain quite scarce. The paper also addresses the issue of social
gap digitalisation (United Nations, 2021), and contributes to the
literature on the subject by identifying the strengths and weaknesses of
the use of FinTech in sustainable development.</p>
<h2>2. New
technology in the financial sector and sustainable growth: basic
definition</h2>
<p>Technological progress has caused the appearance of new competitors
for traditional banks. There are banks which use FinTech technology as
an additional distribution channel, as well as new banks (neobanks)
which do not have traditional branches. Neobanks are not burdened with
older infrastructure and can use new technology at lower costs, faster
and in a more modern format. Furthermore, one can distinguish between
BigTech and FinTech companies. BigTechs are large companies that operate
platforms enabling direct interaction among large numbers of users and
have many lines of business. BigTech companies usually enter the
financial services market thanks to brand recognition. Their core
business is usually non-financial, nd lending is only part of it, often
a small part (BIS, 2019, p. 63). Notably, technological giants such as
Amazon, Apple and Google, which already operate in the lending market,
have great potential for the development of financial services because
they have access to a huge amount of customer data. For this reason,
there is no single, universal definition of FinTech and it is defined by
the services and products it co-creates (Harasim, 2021; Pawłowska &
Staniszewska, 2021). However, the broad expansion of FinTech
functionality has extended this definition. The Financial Stability
Board (2019, p. 1) defines FinTech as “technologically-enabled financial
innovation that could result in new business models, applications,
processes, or products with an associated material effect on financial
markets and institutions, and the provision of financial services”.</p>
<p>Thanks to the use of digital technologies, FinTech companies can
provide banking services at lower costs than traditional banks and
increase competition in the financial market (Goetz, 2018).</p>
<p>In the EU and in other parts of the world the process of digitising
the public and private lives of citizens have been speeded up because of
the pandemic. Parallel to the development of new technologies, the
concept of sustainable development is developing worldwide. The concept
of sustainable development was introduced by the <a href="http://www.un-documents.net/our-common-future.pdf">United Nations
Brundtland Commission</a> in 1987. Sustainability was defined as
“meeting the needs of the present without compromising the ability of
future generations to meet their own needs” (UN, 1987). Since then,
pressure on the environment has greatly increased, mainly due to the
climate change, transformation of wildlands into agriculture areas,
industrial demand for water and energy, lack of global waste management
and rising global household consumption. Actions undertaken to sustain
resources and environmental quality for future generations are
insufficient. The ongoing climate summits, declarations and protocols
are proof of how policy makers act ineffectively in a global framework.
Unfortunately, developing countries cannot afford expensive new
technologies, although their resources has been exploited by rich
countries for centuries. In fact, only through introducing innovations
and lowering the demand driven by China, India and the West would give
chance to “next generation to meet their own needs”. However, lower
demand ends up with hampering economic growth (Teachout, 2021).</p>
<p>The goals of sustainable growth are incorporated in the agendas of
over 140 countries (UN, 2022). Besides imposing regulations and
declarations there is also a need for financing. The financial market
has provided a solution for financial of social and environmental
projects that do not obtain capital in current corporate or sovereign
budgets, namely Social Impact and Green Bonds. The investors and issuers
of these instruments are mainly players connected to the market or
business activity. In 2007, a group of UN experts published a report
“Innovative Finance for Sustainable Development”. The experts underlined
the insufficient involvement of private sector and public-private
partnerships. They pointed to the transactional costs in fundraising
process as a barrier for many ‘life-changing’ projects. The reason for
these costs is that information asymmetry causes limited access for
entities who seek investment opportunities in the projects supporting
sustainable growth. At the same time, the issuers are unable to reach an
effectively wide range of investors willing to be part of green or
social projects. FinTech enabled the emergence of crowdfunding for
artistic and start-up purposes. The same mechanism can be driven for
ecological or social initiatives, however on a bigger scale. Currently,
only institutions that include sustainable growth goals in their mission
can become intermediaries for such projects, as the scale of financing
is limited to a deposit base or support from governmental agencies.</p>
<p>Understanding and appreciating the gravity of the current
environmental and climate problem has led to the emergence of green
finance. IFC (2017) defines green finance as financial instruments that
provide environmental benefits. Green finance is intended to provide
investment, financing and operating funds for environmentally-friendly
projects. Environmental protection and the effective use of resources
are considered as important as traditional criteria while evaluating the
project (Zhou, Tang, & Zhang, 2020). Through green finance, idle
social capital is distributed to various economic industries such as
renewable energy and green building (Wang, Zhao, Jiang, &
Zheng-Zheng, 2022). The importance of green finance is constantly
increasing as it is seen as an important channel for industrialised
nations to achieve sustainable growth (Muganyi et al., 2021).</p>
<p>A notable example of green financial instruments are green bonds.
Over the last few years, the experience around the world has shown that
they are a key instrument of green finance and can offer sufficient
funding for green investment by balancing costs between current and
future generations (Flaherty, Gevorkyan, Radpour, & Semmler, 2017).
Since the inaugural issue of the Climate Awareness Bond by the European
Investment Bank, green bonds (both corporate and public) have become
more and more popular. Globally the green bond market grew by an average
of 50% per year in the period 2015-2020 (Spinaci, 2022).</p>
<p>FinTech contributes to the development of green finance by reducing
information asymmetry for investors who value natural assets (Yang et
al., 2021). This may lead to unlocking access to new sources of finance
and investment from a larger investor base for environmentally friendly
projects (Dorfleitner & Braun, 2019). There are already existing
several initiatives in Europe that analyse how FinTech can be used to
enhance green finance (the Climatechain in France tries to determine the
potential of blockchain technology in achieving the goals set by the
Paris Agreement; CrowdFundRES initiative analyses the challenges faced
by renewable energy projects and provides guidelines regarding
regulatory frameworks). </p>
<p>Crowdfunding is a financing mechanism in which entrepreneurs, small
businesses or projects gather the necessary funds from a large number of
contributors through the crowdfunding platform (Belleflamme, Lambert,
& Schwienbacher, 2014). The main advantage of crowdfunding platforms
is the fact they have lower fixed and transaction costs than larger
financial institutions. Similarly to robo-advisors, one can distinguish
green crowdfunding platforms that offer green financing options or are
exclusively dedicated to sustainable financing. There exist several
crowdfunding platforms that specialise in sustainable crowdfunding –
Oneplanetcrowd (the Netherlands), Abundance (the United Kingdom), and
Ecrowd (Spain). Some of the green crowdfunding platforms are dedicated
to narrower fields, for example, financing renewable energy projects,
such as: Lumo (France), Enerfip (France), Bettervest (Germany), Econeers
(Germany) or Trine (Sweden). Despite the increasing significance of
crowdfunding for environmentally friendly projects, the scale remains
small. Larger crowdfunding platforms, such as Kickstarter, lack precise
categories for sustainable projects.</p>
<p>The category of FinTech that plays an increasingly important role in
green finance are entities based on blockchain technology. Blockchain
can be defined as a distributed ledger which records and stores
transactions across a peer-to-peer network. Transactions are verified by
each node of the network and are compiled in a block. Then they are
added to the existing block of chains in a permanent way certified by
cryptographic signatures. The main blockchain applications in green
finance include peer-to-peer financing and investment platforms,
peer-to-peer trading platforms and measurement, reporting and
verification (MRV) of impact data (Dorfleitner & Braun, 2019). As
regards the peer-to-peer financing and investment platforms, a notable
example is Cryptoleaf which is a platform specialised in financing green
projects. Examples of green peer-to-peer trading platforms include:
Climatecoin, Poseidon, WePower and SunContract. Another branch of
blockchain-based companies are those providing services of MRV of impact
data. Companies such as Green Assets Wallet and IXO facilitate the
validation of the green impact of a given project.</p>
<h2>3. FinTech,
green finance and sustainable development: new trends</h2>
<p>The Paris Agreement, adopted in 2015, stated that currently the
greatest challenge faced by governments is their ability to achieve
environmentally friendly and economically sustainable strategies,
technologies and innovations. The relationship between technological
progress and ecological environment has two sides. On the one hand,
technological progress has been a source of environmental degradation,
and on the other, it is suggested that technological advancement may
become a solution to various environmental problems.</p>
<h3>3.1. Sustainable bonds markets</h3>
<p>The constant growth of green and social impact bonds market creates
opportunities for FinTech solutions. Currently, bonds are mostly issued
by local issuers (governmental agencies/governments, ethical
banks/trusts, large-scale non-financial corporates, NGOs) for sectoral
investors operating on the same market. The diversity of goals, values,
maturities, ratings and sales methods create a certain barrier for
unspecialised investors, hence providing a niche for FinTech to support
sustainable growth in creating a standardised marketplace for Social
Impact Bonds (SIB) and green bonds, where institutional investors have
access to projects from around the world. To demonstrated how
unintegrated these markets are, it is worth mentioning that specialists
face problems with the accurate estimation of the market size. An
attempt to unify the data can be a step forward towards building
fundations for one funding platform for diversified bonds available for
diverse investors. Growing GSS+(Green, Social, Sustainable and Other
Labeled)<a href="#fn1">1</a> debt volume above USD 1tn in 2021
proves that despite the pandemic, the market remained active. What is
more, Covid-19 pushed public and governmental attention to environmental
issues, which clearly seen in the rapid upsurge of green bonds. This
market reached USD 2.8tn cumulative volume. However, in terms of the
number of bonds issued in a particular market, the highest position
belongs to social bonds; these were smaller projects diversified
geographically.</p>
<p>Sustainability and social bonds reached a similar level of
outstanding volume – approximately USD 0.5 tn. However, sustainability
goals gathered approximately double the funding per one issuer (Climate
Bond Initiative, 2021, p. 8). The data presented in Table 1 and Figures
1 and 2 are drawn from reports for the Climate Bond Initiative.</p>
<p>It should be noted that green bonds are mainly issued in EUR due to
the green targets set by the European Commission that members shall meet
by 2050 (more than half of the green bonds that originated in 2021 came
from Europe). The average size of an individual green bond reached USD
250m. Half of the 2021 green bond volumes originated in Europe, which
contributed USD 265bn (50%) to the total. The most aggressive growth in
the region came from financial corporate (136%) and sovereign (103%)
issuer types. Six European countries added sovereign volumes in 2021. In
2015, sustainable bonds were issued mainly on the EU market which is
visible in the currency used. With time, when instruments became more
popular globally, a major role will be played by USD and EUR.</p>
<p>
<strong>Table 1. Size of sustainable bonds markets</strong>
</p>
<table class="table table-bordered">
<colgroup>
<col></col>
<col></col>
<col></col>
<col></col>
<col></col>
<col></col>
</colgroup>
<thead>
<tr><th>
</th><th>Green</th>
<th>Sustainablity*</th>
<th>Social*</th>
<th>SLB</th>
<th>Transition</th>
</tr>
</thead>
<tr><td>Total size of the market</td>
<td>USD 1.6tn</td>
<td>USD 520.5bn</td>
<td>USD 538.8bn</td>
<td>USD 135.0bn</td>
<td>USD 9.6bn</td>
</tr>
<tr><td>Number of issuers</td>
<td>2045</td>
<td>425</td>
<td>861</td>
<td>225</td>
<td>15</td>
</tr>
<tr><td>Number of instruments</td>
<td>9886</td>
<td>2323</td>
<td>3471</td>
<td>317</td>
<td>32</td>
</tr>
<tr><td>Number of countries</td>
<td>80</td>
<td>51</td>
<td>44</td>
<td>37</td>
<td>12</td>
</tr>
<tr><td>Number of currencies</td>
<td>47</td>
<td>38</td>
<td>33</td>
<td>16</td>
<td>7</td>
</tr>
</table>
<p>(*) Numbers are approximate as are derived from two incoherent
databases 1. Social and Sustainability Bond Database 2. Green Bond
Database. Source: Climate Bond Initiative, Sustainable Debt, Global
State of the Market 2021, p. 2. Available on <a href="https://www.climatebonds.net/resources/reports/sustainable-debt-global-state-market-2021">https://www.climatebonds.net/resources/reports/sustainable-debt-global-state-market-2021</a></p>
<p>Note: GSS+ group of bonds shall be understood as: green, social,
sustainability, sustainability – linked (SLB) and transition bonds
market. It captures three databases: 1. Green Bond Database 2. Social
and Sustainability Database 3. SLB and Transition Bond Database</p>
<p>Figure 1. Cumulative Issuance of Green Bonds by Region in billions of
USD</p>
<p>
<img src="/articles/2022/pawlowska-2022-2/media/image1.png" />
</p>
<p>Source: own elaboration based on (Climate Bond Initiative…, 2021, p.
8).</p>
<p>Figure 2. Cumulative Issue of Sustainable Bonds by Region in billions
of USD</p>
<p>
<img src="/articles/2022/pawlowska-2022-2/media/image3.png" />
</p>
<p>Source: own elaboration based on (Climate Bond Initiative…, 2021, p.
11).</p>
<p>It should be noted that green bonds are issued mainly in EUR, mostly
due to the green targets set by the European Commission that shoud be
met by 2050. From the GSS+ bond group the most predominant is the green
bond sector which rose by 75% in comparison to 2020. The average size of
an individual green bond reached USD 250m. More than half of the green
bonds issued in 2021 came from Europe (USD 0.76tn). Half of the 2021
green bond volumes originated in Europe, which contributed USD 265bn
(50%) to the total. The most aggressive growth in the region came from
financial corporate (136%) and sovereign (103%) issuer types. In 2015
sustainable bonds were issued mainly on the EU market which is reflected
in the currency used. Over time, when the instruments became more
popular globally major role was played by USD and EUR.</p>
<p>FinTech also supports such green bond initiatives as Green Asset
Wallet (GAW) and CICERO. GAW was introduced by Stockholm Green Digital
Finance and supported by Norway’s Center for International Climate
Research (CICERO), and monitors green bond proceeds and effectiveness in
many countries. The aim of CICERO is to equip green investors with the
technology to better deliver the goals of the Paris Climate Agreement.
The project offers the marketplace – a digital platform – for validation
and impact reporting of green investment (Repinsky, 2017). In the case
of GAW, half of the EU bonds come from the Nordic countries, issued for
the banking, energy and real-estate sectors (GAW, 2022).</p>
<p>The use of FinTech in the area GSS+ bonds concentrates on the
delivery of a digital, global marketplace that connects geographically
diversified private and public investors with the bond issuers. Such a
market will support supra-national projects that require global green
financing.</p>
<h3>3.2. FinTech
and sustainable development: other new application</h3>
<p>Since its emergence, FinTech has been widely applied in different
sectors. It is argued that FinTech has already improved the efficiency
of banking and the entire financial system (Lee, Li, Yu, & Zhao,
2021). FinTech companies have also attracted increasing attention in the
recent years for their potential in accelerating more sustainable
economic growth. It has been suggested in the literature that such
entities may play a key role in tackling environmental and climate
problems and countries’ transition into a more green financial system.
FinTech entities may have the ability to help counteract climate change
via, for example, promoting clean energy trade, improving carbon
emission trade or enhancing climate finance flows (Tao et al., 2022).
However, the concept of the relation between green finance and FinTech
is not widely recognised and the research in this field remains in the
early stages, and the empirical evidence remains scarce. For example,
Puschmann, Hoffmann, and Khmarskyi, (2020) examined the existing
literature to determine the degree of papers addressing the issue of the
relation between FinTech development and the goal of reaching a
low-carbon economy. They searched for two words – “FinTech” and
“climate” and found no publications dealing with this subject. Only in
the 2020s, has there been a noticeable rise in the number of studies
dealing with this issue and providing empirical evidence.</p>
<p>There are different approaches by FinTech companies to promoting
sustainable development. For instance, China’s Ant Group (owner of the
world’s largest mobile/digital payment platform Alipay) launched the Ant
Forest initiative in order to encourage its customers to actively
participate in green finance projects and lower their carbon footprint
(Muganyi et al., 2021; Yang et al., 2021). The main feature of the
application is converting simulated energy generated while engaging in
activities that help reduce carbon emissions into real trees planted in
China.</p>
<p>Another example of a FinTech solution for sustainable growth is Kiva,
which supports the delivery of capital from individuals, donors,
trusties, corporations and social enterprises to unbanked or
undercapitalized individuals globally. The flagship market for Kiva
capital transfers is the online platform where anyone can financially
support borrowers presented in the Kiva portfolio devided by sectors.
Money transfer is supported by PayPal, which transfers funds at no cost
between the two sides of the contract. However, peer to peer online
lending enables connecting investors who want to take part in something
more than just liquidity delivery (Kiva, 2022).</p>
<p>Figure 3. KFTX index and value of loans originated by Kiva in
millions of USD</p>
<p>
<img src="/articles/2022/pawlowska-2022-2/media/image5.png" />
</p>
<p>Source: own elaboration based on Kiva financial statement 2011-2021
(https://www.kiva.org/about/finances) and Nasdaq data (Kiva financial
report for 2014 and 2022 are unavailable at the moment of writing this
paper).</p>
<p>Figure 3 presents values of loans raised by Kiva and the value of the
FinTech index on the Nasdaq stock exchange (KFTX). KFTX embraces US
financial technology companies such as PayPal. The development of
sustainable growth financing instruments is greatly dependent on
technology, which is very visible in the case of Kiva.</p>
<p>Without FinTech solutions, this connection between borrowers and
lenders would be impossible. The positive role of FinTech in such a case
is undisputable. However, linking sustainable growth with financial
technologies is not that obvious which is addressed in the next section
of this paper.</p>
<p>Some FinTech companies are actively incorporating ‘green’ measures in
order to, for example, reduce carbon emissions and facilitate the more
efficient use of resources (Muganyi et al., 2021). FinTech such as
crowdfunding platforms, robo-advisors and entities based on blockchain
technology increasingly offer green finance opportunities for the
general public (Dorfleitner & Braun, 2019).</p>
<p>Robo-advisors are FinTechs that provide automated investment advice
and portfolio management applying computer algorithms to find optimal
investment strategies (Kaya, 2017). Due to their lower operating costs
they enable individuals with scarcer financial means to obtain
investment advice. One can distinguish green robo-advisors, i.e. such
entities that either are solely dedicated to green investment or offer
the option to invest sustainably (Dorfleitner & Braun, 2019). There
are already several green robo-advisors operating in Europe. VisualVest
and LIQUID from Germany, include in their offer sustainable investment
portfolios besides the standard strategies. Nutmeg and Wealthify from
the United Kingdom, on the other hand, offer socially responsible
investing options. Vividam (in Germany) is solely dedicated to ethical
and ecological investment strategies, however, this is associated with
higher fund or product costs compared with more conventional strategies.
This is due to a more costly process of measuring and evaluating
sustainability criteria (Dorfleitner & Braun, 2019). High-quality
data are required and furthermore, a low number of entities meet such
criteria. The robo-advisors sector has recorded a significant increase
in its value in recent years and with its expansion, more companies are
able to offer sustainable strategies.</p>
<p>FinTech companies operate as moderators and indirectly affect the
relation between green finance and high-quality economic development
(Yang et al., 2021). Moro-Visconti et al. (2020) argued that FinTech
companies promote both sustainable development and green finance. Zhou
et al. (2022) corroborated this statement with empirical evidence from
China. According to their results, FinTech companies have a significant
positive impact on sustainable growth, mainly through promoting green
credit, green investment and other ‘green’ mechanisms. This leads to
improving the balance of green credit and green investment in the
economy. However, this impact depends, to a great extent, on economic
development and is substantially stronger in more developed regions.
Similar evidence was found by Muganyi et al. (2021). This is mainly due
to the fact that it is easier to establish FinTech in well-developed
economies because, for example, the necessary infrastructure, venture
capital and market regulations are already available (Yang et al.,
2021).</p>
<p>Activities in the field of green finance can lead to tangible
positive environmental outcomes. For instance, Muganyi et al. (2021)
demonstrated that incorporating ‘green’ measures results in the
reduction of industrial gas emissions. Similarly, Tao et al. (2022)
indicated that the higher the level of financial innovation in a
country, the lower the carbon emissions, which favours further FinTech
development. Yang et al. (2021) showed that green finance driven by the
FinTech sector positively influences sustainable economic development in
three dimensions – ecological environment, economic efficiency and
economic structure. Furthermore, Luo et al. (2022) suggested that
FinTech innovation supports green transformation and the sustainable
development of the real economy. Tian & Liu (2019) argued that
technological progress driven by the FinTech sector may help break the
‘resource curse’ and thereby increase both the effectiveness and
sustainability of an economy. Other studies that indicate positive
impact of green finance on sustainable development include: Flaherty et
al. (2017), Zhou & Cui (2019) and Wang et al. (2022).</p>
<p>Another question is whether FinTech companies can benefit from their
involvement in green finance. Merello et al. (2022) studied how this
affects such companies market value. Although they found that CSR
practices are positively correlated to company’s market value, such a
relation in the case of green practices was negative. This issue also
requires further investigation.</p>
<p>An important field of research is the use of artificial intelligence
in the energy sector (cf. Makala & Bakovic, 2020; S&P Global
Report, 2022). AI systems can be very useful in the automation of
routine and structured tasks, leaving humans to grapple with the power
challenges of tomorrow. AI can be used both to optimise the
construction, siting and the operations of a wind farm, but more
importantly, it can be used to optimise across different systems, both
in terms of consumption and production (e.g. French utility Engie is
using AI software from Google to optimise its wind power operations. The
pilot programme is an extension of Google’s in-house project to capture
higher revenues by scheduling hourly wind-power commitments).</p>
<p>
<strong>3. Advantages and disadvantages of FinTech in financing
sustainable development</strong>
</p>
<p>It should be stressed that technological advancements may become a
solution to various environmental problems but also it can be the source
of environmental degradation and societal dissection. Blockchain
technology remains one of the more controversial financial innovations
while considering its impact on the environment. On the one hand, it can
be applied in green finance, as mentioned above. On the other hand, due
to the complex mechanisms, blockchain involves enormous energy demand
and consumption, resulting in higher carbon emissions (Fuessler et al.,
2018; Tao et al., 2022). Societal groups with no access to innovation
(for example due to poor internet range or operator services) cannot
benefit from innovation-based growth compared to groups with developed
infrastructure. This means FinTech may bring an additional factor of
growth rate stratification.</p>
<p>FinTech has both advantages and disadvantages when compared to more
traditional financial entities such as banks. The possible benefits stem
from FinTech’s characteristics – technological expertise and lower
operating costs. Thanks to them FinTech companies can offer competitive
products on favourable terms in comparison to traditional financial
institutions. Consequently, FinTech’s product offer is, generally,
addressed to a broader customer base. For instance, less wealthy and
less sophisticated investors due to the emergence of robo-advice and
crowdfunding are now able to take advantage of products that they could
not afford before (Kaya, 2017). Higher accessibility and increased
financial inclusion is possible because of lower fees and charges,
user-friendly web or mobile applications and almost no geographical
limitations. Furthermore, FinTech has enabled people from less developed
regions of the world to access the financial system from which they were
previously excluded. On the other hand, financial innovations such as
peer-to-peer platforms and crowdfunding have facilitated the financing
of projects that would not be possible for traditional banking credits,
due to their more strict criteria (Dorfleitner & Braun, 2019).
Funding barriers are lower thanks to decentralised collection of funding
without the involvement of traditional intermediaries and the
possibility of obtaining funds from a large global investor base.
Potential beneficiaries include start-ups, small and medium enterprises,
innovative companies and green projects. According to FSB (2017), such
decentralisation may help mitigate the negative effects of financial
shocks. Finally, FinTech contributes to better capital allocation thanks
to its advanced data processing technologies and therefore to improving
overall efficiency in the financial system.</p>
<p>Yet, FinTech is not flawless and there exist some potential
disadvantages or even risk related to it. FinTech solutions, such as
robo-advisors, are based on standardised questionnaires and therefore
provide only limited information on customer’s preferences and cannot
offer more individualised products (Dorfleitner & Braun, 2018).
Owing to limited due diligence and verifiability of information there is
a greater possibility of fraud compared to traditional investments (Lam
& Law, 2016). Blockchain, in turn, due to its complexity remains
difficult for its widespread adoption, and also requires a certain level
of skill and experience from its users. Moreover, transaction speed in
this technology is rather low and involves enormous amounts of energy
(Dorfleitner & Braun, 2018). Furthermore, innovative financial
technologies require either adapting the existing or implementing a new
legal and regulatory framework, which should not lead to non-regulation
or overregulation (Neves and Prata, 2018). This is especially
challenging since innovative technologies are changing quickly. A
situation in which there is not enough governance and process control
may pose a significant risk to the financial system if these entities
become bigger. It is worth to mention Ezubao, one of the largest
peer-to-peer lending platforms, before it turned to being a lending
scheme.</p>
<p>Due to the above, digitalisation provides numerous advantages, but
may also bring new risk and give rise to new threats. The risk
associated with the operations of FinTech and BigTech may be classified
on a micro and macroeconomic level. Microeconomic risk involves,
directly or indirectly, possible losses brought on by a loss of funds
from financial institutions, and at the same time due to operational
risk, e.g. a result of a cyberattack, risk inherent in sharing
infrastructure such as cloud services, or due to infractions or failures
on account of new solutions that have not yet been tested. Macroeconomic
risk chiefly pertains to systemic risk being of high significance for
the macroprudential policy and affects the relations between the
financial sector and the real economy (FSB 2017). Systemic risk involves
the effects of contagion, pro-cyclicality and increasing volatility.
Another risk source may emerge along with so-called systemically
important institutions. As was already mentioned, an important aspect
here is enhancing cyber security.</p>
<p>The development of the FinTech sector in the European Union has
attracted the interest of regulators in its influence on financial
stability (FSB, 2018). The Financial Stability Committee examines how
the FinTech activities fit into the regulatory framework and whether
they are in line with the arrangements resulting from the member
authorities’ approach to FinTech, and what challenge the FinTech sector
poses for regulators and supervisors. It seems that monitoring the
activities of FinTech companies creates major challenges as some
entities are subject to financial reporting regulations but have limited
or no obligations at all, e.g. due to their small size or because they
are registered under licences that impose less reporting requirements
than full banking licences. As a result, information on licensed FinTech
companies may not be directly available in traditional banking
statistics, e.g. in Europe where a regulatory reporting framework exists
(Zetzsche, Buckley, Arner, & Barberis, 2017). An important area of
using FinTech technologies are regulatory sandboxes, accelerators and
innovation nodes. There are also other activities that can be an
important source of information about new FinTech companies and their
business models. Regulators focus, however, on how FinTech affects the
domestic financial landscape; cross-border issues are generally not
discussed. In some cases, regional cooperation is an important factor,
especially in relation to counteracting money laundering and terrorist
financing or illegal transactions of an international nature. It is
important to increase cyber security, but efforts to do so are not
necessarily public, mainly for national security reasons, although cyber
risk does not only concern FinTech but also activity based on digital
solutions (cf. FSB, 2017, pp. 23-32).</p>
<p>FinTech is covered by the existing regulations on macrofinancial and
microfinance risk. In the context of macrofinancial risk, FinTech
companies should be subject to more intensive supervision, have greater
loss-absorbing capacity, as well as recovery and resolution plans, which
is expected to reduce the likelihood of bankruptcy or collapse and its
impact on the financial system. In the context of microfinance risks
associated with FinTech activities, such as credit risk, leverage,
liquidity and maturity mismatch, FinTech companies may fall under the
shadow of the banking policy framework.</p>
<p>Bandi and Pandimiglio (2022) drew attention to another issue – the
negative practice of greenwashing. Greenwashing is the process of
providing misleading information about the extent to which a company or
a project is environmentally friendly and socially committed. This may
refer to, for example, a situation when an entity deceptively announces
sustainable projects to be financed by green bonds but does not
implement them effectively. Their results show that such practice is not
rare, especially among manufacturing companies and in the financial
sector. This negative phenomenon is more pronounced among multinational
entities due to their greater distance from local communities.
Nevertheless, Bandi and Pandimiglio (2022) also demonstrated that
investors are aware of such practices and are inclined to accept lower
returns in exchange for confidence that they contribute to the funding
of projects with greater influence on the sustainable development.</p>
<p>It should be noted that half of the world’s population is still not
connected to the Internet. Income, gender, education and other
inequality factors are also under risk of digitalisation exclusion
(United Nations, 2022). Paradoxically, digitalisation increased the
inequalities during the pandemic between developed and underdeveloped
economies. According to the International Children’s Emergency Fund
(UNICEF), at least one-third of the world’s school children – 463
million children – were unable to access remote learning when COVID-19
shut down their schools, with large differences between and within
countries (UNICEF, 2020). Another troublesome issue is the overload of
information in the digital environment, as well as misinformation which
can be harmful to people’s physical and mental health. Google, Twitter
and Facebook addressed the problem by signing a voluntary Code of
Conduct. The importance of other applications is also rising, aimed at
rapid growth mostly based on misinformation. Therefore, FinTech tools
may be used to filter information and perform analysis in a positive,
sustainable way, but also for negative purposes.</p>
<h2>4. Conclusion</h2>
<p>This paper analyses the impact of new technology in the financial
system on sustainable growth. A new trend has emerged focused on
business model changes, particularly linked with digitalisation and
FinTech companies. Similarly, the authors also observed the impact of
using FinTech companies in support of sustainable growth. FinTech can
boost the development of green finance, which addresses environmental
protection and climate change, and has become an opportunity for
industrialised countries to achieve sustainable growth.</p>
<p>However, every coin has two sides. This study fond both positive and
negative impact of FinTech on sustainable growth perspective. On the one
hand, technological progress has been a source of environmental
degradation, while on the other, it is thought that technological
advancement may become a solution to various environmental problems.
This paper suggests that the positive aspects of using FinTech in
sustainable development prevail. Investors have also strongly embraced
several non-financial benefits in their decision-making, such as the
very rapid growth of green and social bonds and the ESG-style investment
(environmental, social responsibility, corporate governance) funds
suggests. Furthermore, a very important issue involves the sustainable
finance taxonomies which can play a role in scaling-up sustainable
finance. The estimation of the promised impact of the projects financed
by green bonds, as well as the ex-post tracking of their achievement, is
greatly facilitated by the mandatory uniform annual impact and the use
of proceeds reports. The standardisation of units and disclosure of
computation methodologies should be encouraged for reporting impact
metrics (Ehlers, Gao, & Packer, 2021). The next step in research
will be to calculate the econometric model. However, estimating the
quantitative impact of FinTech on sustainable growth, due to the
complexity of the problem, will require the development of a more
detailed methodology and using a sample of comparability of data, which
at this stage seems very difficult.</p>
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<ol><li><p>GSS+ bonds relate to debt instruments dedicated to
finance sustainable projects.<a href="#fnref1">↩︎</a></p></li>
</ol>