The EU’s Fintech Action Plan (more recently, the Digital Finance Strategy) and the Sustainable Finance Action Plan represent important pillars of the current European policy agenda. While the two areas have been treated as separate for a long time, they present certain common features and great potential if combined. The COVID-19 pandemic provides an opportunity for countries in the EU to re-think traditional models of finance and rely more on technology and sustainability (see also the recent UNDP report).
We explore the potential of connecting Fintech and Sustainable finance, with particular reference to the environmentally sustainable segment (a less discussed area) in our recent EBI working paper, ‘Sustainable Finance and Fintech: Can Technology Contribute to Achieving Environmental Goals? A Preliminary Assessment of “Green FinTech”’.
First, we analyse the most recent developments in EU sustainable finance regulation (eg Taxonomy regulation, Sustainable Finance Disclosure Regulation, Regulation on EU Climate Transition and EU Paris-aligned Benchmarks, EU Ecolabel project) and identify key areas of concern (eg in terms of ‘greenwashing’ risk), such as the lack of reliability, standardization and comparability of certain disclosed information and relative ratings (also related to the limited scope of the duty to disclose non-financial information and voluntary nature of certain initiatives) as well as the ‘three pockets’ approach and ‘pass-or-fail’ nature of the proposed Ecolabel.
Second, we explore fintech areas that are available to respond to certain of such shortcomings. In fact, the use of technology in the sustainable finance area has the potential to channel financial resources towards environmentally sustainable firms more efficiently and incentivize the production of clean energy (eg green crowdfunding platforms; ‘energy’ tokens on DLT platforms and peer-to-peer exchange networks). Fintech (AI and DLT systems) could also help record and convey extensive, accurate, and relevant data at a low price and fast pace, thus reducing research costs and improving the pricing of environmental risks and investment opportunities. The combination of DLT systems and AI can improve ESG and green bonds disclosure, verification, pricing, and ratings, allowing the collection and processing of large amounts of data about companies’ social and environmental impacts and the comparison of company disclosures with almost real-time data and publicly available environmental data from, eg, non-governmental organizations, specialized website, satellites.
While these areas of Fintech have much to offer, they still face challenges such as certain technical obstacles, high energy consumption and operational risk in DLT networks, potential financial exclusion, and job losses from the increased digitalization in financial services, in addition to problematic issues from a legal point of view.
In particular, Fintech raises special consumer and investor protection issues. Despite the ‘technology-neutrality principle’ asserted at the EU level in relation to Fintech regulation, the EU has recently recognized the need to adapt certain financial rules or to issue special regulations in the areas of ICOs, crypto-assets and DLT, crowdfunding, and cloud outsourcing (see for instance the approaches of the European Banking Authority and European Securities and Markets Authority and, more recently, the proposals contained in the Digital Finance Package). In the working paper, we discuss certain aspects of special relevance for the sustainable finance sector in this area, with particular regard to the recently published European Crowdfunding Services Providers (ECSPs) for Businesses Regulation No 2020/1503 (about this regulation see Macchiavello 2020 and EBI Working paper 55/2019) and the European Commission’s consultation on crypto-assets (more recently, the Proposal for a Regulation on Markets in Crypto-assets) and the need to address certain interdisciplinary fintech-related issues (see also the ROFIEG Report and Macchiavello 2019), such as the legal validity and effects of smart contracts, principles for blockchain governance, DLT and digital data protection, criteria to identify the competent jurisdiction and the applicable law, liabilities in an AI context, fairness, transparency and intelligibility of algorithms without endangering copyrights and innovation incentives, data for financial services, and Big Tech regulation.
In our working paper, we provide examples of projects and firms operating in this area at the crossroad between fintech and sustainable finance and discuss more deeply the legal issues mentioned above and additional ones, also presenting some proposals. The aim is to start a debate about ‘Green Fintech’ in order to effectively connect the two worlds and spur additional research in a new and promising area.
A more detailled post about our working paper has also been published on the Duke Law’s FinReg Blog.
Eugenia Macchiavello is an Assistant Professor in Business and Banking Law at the University of Genoa (Law Department).
Michele Siri is a Full Professor in Business Law and holds the Jean Monnet Chair on European Union Financial and Insurance Markets Regulation at the University of Genoa (Law Department).