Demand for green finance is surging in Hong Kong but the lack of unified standards or definitions of green financial products is posing regulatory challenges, facilitating greenwashing, damaging investors’ confidence and harming the proper development of the sector.
Against this backdrop, technologies and regtech solutions can be put to work and help foster the healthy growth of green finance, enabling better environmental, social and governance (ESG) insight, and bringing investor confidence and transparency, according to a joint report by the Fintech Association of Hong Kong and the Law, Innovation, Technology and Entrepreneurship Lab at the University of Hong Kong.
The paper, titled “Our Changing Climate: Applying Regtech to Green Finance”, draws on interviews with industry professionals and experts to explore the potential of regtech in green finance.
Source: GSIA, Bloomberg Intelligence
According to the paper, green finance is gaining momentum around the world. In H1 2021, green and sustainability bond and issuance reached US$809.5 billion, up 182% from H1 2020’s figure of US$286.7 billion.
At the same time, the Hong Kong government is pushing for regtech innovation. The Hong Kong Monetary Authority (HKMA) released in November 2020 a whitepaper identifying 16 recommendations across five core areas to accelerate the further adoption of regtech in Hong Kong, and laying out a two-year roadmap to promote regtech.
Applications of regtech in green finance
These factors are setting the foundation for the growth of green finance-focused regtech.
In particular, the paper delves into four applications of regtech in green finance. These applications focus on improving land registration and land transfers, climate risk and environmental data collection and processing, risk management and governance framework, greenwashing challenges.
Greenwashing is a form of marketing spin focusing on persuading the public and deceiving consumers into believing that an organization’s products, aims and policies are environmentally friendly. It creates confusion and distrust, discouraging investors to invest in real green projects because they are unable to tell whether a particular project is genuinely green.
According to the report, eco-labelling, social media platforms and distributed ledger technology (DLT) can be used to tackle greenwashing.
Non-governmental organizations (NGOs) can leverage social media platforms to share their investigations online and bring public pressure on greenwashing companies, the paper says, while DLTs can bring greater transparency across supply chains by transforming how natural resources are recorded and traced.
For example, Provenance, a UK non-governmental organization, piloted in 2016 a blockchain project that tracked yellowfin and skipjack tuna fish from fisherman in Indonesia to export stage. Mobile, blockchain technology and smart tagging were used to track fish caught with verified social sustainability claims.
The goal was to aid robust proof of compliance to standards at origin and along the chain, prevent the “double-spend” of certificates, and enable consumer-facing transparency.
The second regtech application in green finance outlined in the report is the use of blockchain to improve land registration to decrease the risks for green investments.
With a land registration system supported by blockchains, landowners are less likely to be subject to fraud, or land and property titles being in dispute and the related administrative and bribery costs, the paper says. Also, a transparent land registration system allows investors and asset managers to conduct due diligence to verify the titles of the land in a more efficient way.
Next, data technologies including artificial intelligence (AI), machine learning (ML) and natural language processing (NPL) can be used to address the lack of information on climate risk and environmental data.
Currently, the space is plagued by inconsistencies in disclosure practices, non-comparable reporting, and a lack of consistent information. These challenges make it difficult to incorporate climate-related risks and opportunities into investment, lending and insurance underwriting decisions, and prevent investors from considering climate-related issues in their asset valuation and allocation processes.
Using data technologies, regulated entities can improve data collection, storage, preparation, processing and presentation. This would ultimately help improve disclosure, bringing greater transparency, better-informed decisions, and better evaluation of risk, the paper says.
For example, Hong Kong-based Miotech has developed an AI platform that incorporates ML and NLP to deliver ESG data. The platform integrates more than 230 uniquely identified ESG data points with supply chain, shareholding, investments, and many other relationships to analyze corporates social responsibility performances alongside key financial indicators.
Finally, the last regtech application outlined in the paper is the use of data technologies and statistical tools, including scenario analysis, simulation and stress testing, to enhance risk management and governance framework.
For example, computer algorithms can be used to conduct different statistical modelling, including sensitivity analysis scenario analysis and simulation. Scenario analysis is the process of analyzing future events by considering alternative possible outcomes.
Featured image credit: Photo by Robert Bye on Unsplash
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