BIOFIN Knowledge Briefs: Conversations in Biodiversity and FinTech

Abbie Trinidad[1], Pauline Wanjahi[2], Onno van den Heuvel[3], Marianne Haahr[4], Robert Pasicko[5], Mabel Niala[6], Amir Gerges[7], David Meyers[8], Ngawang Gyeltsen[9], Alonso Martinez Caballero[10], and Bruno Mweemba[11]

Background

The term Fin Tech (Financial Technology) refers to software and other modern technologies used by businesses that provide automated and improved financial services. Various players in the FinTech ecosystem are: a) large, well established financial institutions such as banks, or the “incumbents”;  b) big tech companies that are active in the finance services space but not exclusively so, such as Apple, Google, Facebook, and Twitter ; c) companies that provide infrastructure or technology that facilitates financial services transactions, including market utilities, and exchanges and d) disruptors: fast-moving companies, often startups, focused on a particular innovative technology or process. The financial sector covers five broad functions: (i) payments, including across borders; (ii) saving and investing; (iii) borrowing; (iv) managing risks to income, savings, and transactions; and (v) receiving financial advice. Technology that underpins FinTech include those that collect data, structure or integrate data, and use data to improve on current systems or develop new products and services (mobile phones, satellites, Blockchain, Artificial Intelligence (AI), and Internet of Things (IOT, such as electronic tags). Robust interaction amongst the four types of players accelerates innovation, competition, and cost efficiencies. Fintech firms acquired $135.7 billion globally in investments during the last year and the total transaction value of digital payments is expected to reach $4.8 trillion in 2020.

Some common metrics defining the potential for FinTech opportunities include access to banking services, ownership of a mobile device, internet capability, and an enabling policy environment. Globally, around 2 billion people remain unserved by banks -- a primary gap FinTech seeks to address. Meanwhile, ownership of mobile phones and improving internet capacities lay the groundwork for technology adoption. Worldwide, Asia (including China + India) cornered more than 60% of the FinTech market’s funding by late 2018^[12], while Latin-America contributed 2% and Africa, less than 1%.

BIOFIN organized a webinar on FinTech (Financial Technology) last 15 September 2020 to assess opportunities for financing biodiversity, either through mobilising resources through CSR, donations, or crowdfunding, or through behavioural change enabled by technology platforms (Figs. 1 and 2).  Conversations in Biodiversity and FinTech is the first knowledge product to emerge from the webinar which seeks to summarize salient points in the discussions between the panellists, moderators and participants.

Theme 1 : The next big thing is a lot of small things^[13]

Q. Abbie Trinidad. Can you elaborate on the democratization of finance and the role of individuals in influencing financial decisions and types of technology support?

A. Marianne Haahr. One of the real big opportunities is citizen’s savings and investments locked up in pension funds for many years showing a shift from carbonized to decarbonized assets. Actively participating in assemblies and articulating how we want our investment portfolios structured is one way of doing it pre-covid. We can still pursue this digitally through social media platforms to ensure that our opinion is aggregated and communicated.

In some instances, the desire to engage with citizens is reflected in policy. For example, in the Markets in Financial Instruments Directive (MIFID)[14] in the European Union, which says that in any investment situation, your advisor has to ask you about your non-financial preferences. A lot still can be done to maximize this feature through FinTech platforms such as automated green investment profiles or personas of people as savers in banks or pension funds. And what we're seeing currently, with all our mapping and landscaping is that because the incumbents are to a lesser extent offering us as citizens, those options, we see in a number of markets FinTechs filling that gap. So, we see green robo- advisors proliferate in Germany and examples like GCash and Antforest enabling behavioural change, essentially. One of my main messages is --- it doesn't have to be very high tech. At least not the first version of a green digital finance product in order to deliver scaled impact. For instance, GCash and Antforest are adding on increasingly advanced technologies as they start to understand user demands and what creates engagement. They are, for instance, leveraging satellite data to bring green impacts onto the platform images of the trees, but they're not leveraging distributed ledger technology (DLT) etc. And you don't need to. And so, I think one of the comparative advantages of FinTech is that it allows us to continuously add on new and upgraded functionalities to keep users engaged in new ways and to improve the green financing instrument. And that is where we can move it.

Q. Ngawang Gyeltshen. Many of your examples on crowdfunding raised limited amounts of funds, but you explained that crowdfunding is much more than raising funds. In this context, can you please explain how crowdfunding can contribute to biodiversity mainstreaming advocacy and communication?

A. Robert Pasicko. From our experience in crowdfunding, some of the campaigns can have low financial targets and the donation amounts may be small but if the platform delivers a lot of traffic, then the total amount is big. For example, Kiva[15] a crowd lending platform, already delivered more than $1.4 billion in loans with a minimum of USD 25 while on average, they're delivering $5000 to $6000 per person. And in a similar way, this is how crowdfunding and blockchain work. In the same manner, every Bitcoin owner or any block chain owner has, its usually very small amount, maybe $700 to $800, on average, but being able to reach out so strong and so wide, is what makes us say “the next big thing is a lot of small things”. And, being able also to use this for advocacy, if you are able to succeed on this, then you are also able to do a system change. It's not only raising the amount of money, but it's actually getting huge visibility. So, this is where we see the largest value. And so for example, in a similar way, this platform from Sweden www.trine.com which gets European citizens to invest in solar energy in Africa, they already invested over 44 million euros so far. Is it possible to have something like this for biodiversity? This is highly possible, but we have to make a really good case. And we have to work together with such companies and see how to make it right and emulate those who are already providing results, such as team trees (teamtrees.org), which collected $22 million in just like over a month, and similar.

Q. Bruno Mweemba. Many people are sceptical about making online donations, being unsure where the money ends up. I just wanted to get a sense of how did you manage all these facets not just the technology -managing change? How did you build the capacity of local partners?

A. Robert Pasicko. This is exactly what we are trying to do with the Tadamon platform (www.Tadamon.community) financed by Islamic Development Bank (IsDB) project which includes a suite of activities including NGO empowerment, our Crowdfunding Academy and building an ecosystem from our crowd funding among member countries. In Somalia  we work with a local NGO - they went into crowd funding and they were sceptical about how they would look like, but we easily managed to develop the http://www.sokaab.com/ platform. And in little over a year, they managed to fund development and infrastructure activities amounting to over $1.5 million for local community projects. Most of the funding they got was from ordinary people contributing $1 or $2, paying with mobile phones as this is widely used in Somalia. So they created a platform, which was accepting only mobile payments, no credit cards. We need to go into the ecosystem to see who is there. Instead of bringing completely new ideas, the best way is to see what is already working in the place. If mobile payments are well established, if people can trust it, then it makes sense to build up on this. If very few people use credit cards, you have to find a way around it. For example in Tajikistan we started working with banking machines through which you can buy, credit for your mobile phone, or you can pay for some of your bills. And so there is always a way if there is a will and what we can see is that crowdfunding has always existed in all the communities, it has always been there. It is just about how do we bring a new layer of digitalization to make it more transparent, to make people have more trust and more visibility, and to make it more robust.

Theme 2 : Biodiversity-linked finance decisions

Q. Bruno Mweemba. There is an oversupply of FinTech solutions but Africa is lagging behind. I'm wondering what you think are some of the low hanging fruits that you think Africa could capitalize on given the status quo? What do you think we should be looking at, to try and play catch up?

A. Marianne Haahr. There are certainly geographical diversities or differences in the supply of FinTech. The African continent has its particularities and also a lower supply of Fintech solutions. The most promising platforms appear to be that of mobile payment platforms, where most skills can be found. Farmers using these mobile money platforms actually have natural capital assets right on their farms or close to their farms. We can look into how to adapt the Rabobank biodiversity-linked loan product to the African context, so that African farmers or even SMEs can benefit through lower Interest rates via biodiversity-linked behavior. For instance, in Uganda 70 % of all the trees are on privately held land. So it's small scale farmers. Now, if  you could design a biodiversity-linked loan, because a lot of the farmers are already on mobile money platforms, that would give them a lower interest rate for keeping the trees in the ground, and you could monitor that with satellites. And then you could give them a lower cost of capital. They could maintain a tree asset but you would of course need to address chopping down the trees for probably firewood, right, so for energy, so you would need to give them a new another energy source through solar, for instance. But I think doing the biodiversity-linked lending and getting these mobile money platforms to start to develop products, to incentivize biodiversity positive behaviors or no net loss behaviors, is a win-win in many ways, because it gives the farmer lower cost of capital. And many times interest rates tend to be pretty high in those markets anyway.  I think that's one thing that is really interesting to look at for the African continent. And then I think that's the first step to trying to start to structure the market in Africa, for financial capital market instruments that are maybe more geared to the African market. So if you can then have biodiversity link lending to small scale farmers, then  you can start to aggregate them through our FinTech platforms, and issue a biodiversity-linked digital bond, or micro bonds, for instance, where Africans can be offered to invest directly into. This way we can unlock citizen savings in Africa, and allow Africans also to become green asset owners in their own country.

Q. Alonso Martinez Caballero. In Latin America, it is a challenge to find available land for restoration. Was this a barrier for restoration in the G cash planting program in the Philippines? And if so, how did you overcome it? And also, if you can chat about what are the characteristics of this land in terms of size? Is this land, public or private? Is it in national parks?

A. Mabel Niala. There are challenges identifying partners to work with in planting trees and doing reforestation. We worked closely with Biofin to identify the partners that we could work with. One of our current partners is WWF Philippines since they have certified foresters on their team and they actually take care of the land that we adopted at Ipo dam, which supplies 98% of water in Metro Manila. And it's, it's really very crucial for us to be supporting the forest so we would have water and we adopted around 120 Hectares with them. Biodiversity attributes is also an important criteria in site selection. One of the downsides in selecting sites is the insurgency problems in some areas. In some cases we directly engage with the communities and involve them in reforestation.

Partnership with the corporate sector is also a key component of GCash Forest – especially those who have previously identified areas or forests where they want to plant the trees. So what happens is that they would be able to leverage the users that we have, who have already grown virtual trees on the app. And then we will make it happen and make them plant the trees on behalf of the users by also connecting to the app. And, of course, getting effectively the carbon sequestration, which they could also in turn report for their sustainability action. In the future, we want to see more partners and like-minded companies to work with us closely. So, it's like crowdsourcing and really campaigning, so we could support the forest and biodiversity.

Q. Ngawang Gyeltshen. Most of the attendees here are from a biodiversity background, and they have a common problem, especially in terms of biodiversity loss. For example, poaching and wildlife trade is a huge problem in biodiversity. And as much as tools like FinTech could drive the economy, they could also provide more opportunities for illegal financial transactions and which can accelerate biodiversity loss, for example, using cryptocurrencies for poaching or wildlife trade. Can you shed some light on it?  

Generally, for green insurance, there is a challenge of over-reporting leading to a classic case of moral hazards. Can you tell us what could be done about this?

A. Amir Gerges. FinTech and especially cryptocurrencies are bringing to the trans-border transactions and can facilitate some types of poaching but also other illegal practices like drugs. The thing is here, with every new technology, there is a pro and a con, if you cannot stop poaching on the ground, then you can elevate this to the second level  and go after the money. And the US government has had different tools in tracking cryptocurrencies and tracking transactions done on the dark web that can be leveraged also in poaching. But unfortunately, the easier you make the money movement, the harder for you to stop illegal activities, because that was one of the challenges before.

The moral hazard in having people reporting violations is not only to have their insurance premium decreased but it's contributing to feeling good and doing good. One of the things that is essential in doing that is by building a violations reporting system, the system can divide the reports that are coming in, there are serious reports and there are other types of reports that have less priority, and every report gets assigned a score. So for instance, if you report seeing some rubbish or glass or whatever on a beach – this is quite different from witnessing poaching inside the National Park. If this type of verification is done using natural language processing, then the system itself helps in mitigating such a moral hazard. The thing is, initially, there would be certain type of violations that we believe have a more negative impact on the environment and we would like to report those first. And by working down the violations list we can start moving to the less severe ones. So by that we hope the moral hazard issue is mitigated as part of the insurance premium pricing.

The moral hazard in having people reporting violations is not only to have their insurance premium decreased but it's contributing to feeling good and doing good. One of the things that is essential in doing that is by building a violations reporting system, the system can divide the reports that are coming in, there are serious reports and there are other types of reports that have less priority, and every report gets assigned a score. So for instance, if you report seeing some rubbish or glass or whatever on a beach is different than seeing about poaching  inside the National Park, if and this type of verification is done using natural language processing, then the system itself helps in mitigating such a moral hazard. The thing is, initially, there would be certain type of violations that we believe have a more negative impact on the environment that we would like to report those first. And by working down -you can work down the violations backwards and then going to less severe ones. So by that we hope the moral hazard issue is mitigated as part of the insurance premium pricing.

Q. Alonso Martinez Caballero. Regarding the sources of information you mentioned during your presentation, are FinTech ecommerce platforms gathering consumer behavior information that could be publicly available and inform other businesses about consumer behavior and attitudes towards biodiversity related products and services. Could this become a source of information to really build and accelerate the amount of FinTech companies working with biodiversity impact.

A. Marianne Haahr. That really depends on data regulation regimes. In the European Union with the General Data Protection Regulation (GDPR) it would be me / myself as an individual I would need to consent to my data being open. But in most other countries that data is currently owned by the platforms. So you would need to look at data regulation on how to change that while still incentivizing innovation. It could be anonymized data or you could use technology to make it open source just like we have the open banking regimes – this way, consumers are still protected. Currently, ecommerce platforms have a lot of consumption data that can be of course linked to your personalized biodiversity impacts, whether you're living within planetary boundaries or not. We could replicate Antforest, just for biodiversity, and it could have massive impacts. Data strategies for public sector data can also be made available using open source platforms to incentivize more FinTech entrepreneurs and software developers to train algorithms and design a software on this. For example- In the European Union, all fertilizer accounts of each farmer per geolocation has to be made available open source. So every year, you know exactly on which geolocation, how much phosphate is put in the ground, how many different types of fertilizers, and then you can get algorithms to convert that into biodiversity impact on micro fauna and flora, but also convert that into ocean impacts for eutrophication, for instance. So you can go back to the bank and say, if you're giving an agricultural credit to this exact geo location, you may cause ocean impacts.

Theme 3 : Reflections and moving onward

David Meyers. FinTech opportunities are emerging from a range of trends that are ongoing and some of these are important trends. Of course, the whole growth in technology, our ability to harness massive computing power in your palm, global connectivity, and the explosion of remote sensing satellite information. So, you have all these global technology trends as well as, of course, the trends with biodiversity - how we're losing forests, where we're threatening the oceans-so there's need, that the need right now is even greater than it's ever been for more activism, more opportunity, and more investment, more finance. Some of the elements to this that I find really fascinating and I see where this might lead us in the future is, for one, it is extremely personalized- you can get investments or donations from individuals and they can do it for individual projects, and to individual NGOs, things like that. So, there's this connectivity, a very personalized experience that can be harnessed. And something that people brought up earlier, too, it's not just about the money, but it's about communication. And I thought that was really interesting. It's really effective. You know, when you're doing a crowdfunding campaign or something like that, you're communicating very effectively, you've got this great issue, we need money, please help us out, you're talking about the issues, you’re educating the public, you're broadening your base of people that care about it and so that's really important. And it's not just efficient, but it's emotive. You know, when you talk about money, you really have to capture people’s interest there. And of course, overall, just, it's super-efficient compared to having to drive or walk to a bank if a bank exists. And so, there's all kinds of amazing efficiencies. But what I loved about what someone said earlier was, you got to make it easy for that person to do it -- the lazy environmentalist, coined by Mabel Niala.

Using Artificial Intelligence and satellite data -- there's huge opportunities coming from that. The Conservation Finance Alliance has an incubator as well and we have a few FinTech companies in there: one that tracks trees, one that does community banking, all using FinTech. So, very interesting. That's GreenFi, for community banking and GreenStand, or Digital Tree.

And one last point here is that, I mentioned these big (digital) trends, and there's some worrying issues about rights, I think this was just brought up, and privacy and things like that. This is an exploding industry right now, and very diverse and growing very rapidly. And I think it's important to put in place privacy safeguards for environmental impact and being able to track those positive, but also as well, the negative impacts. You don't want companies that are basically destroying parts of the planet, to then get “greenwashed” because they have a fin tech application that plants a few trees. So, safeguards, honesty, transparency, all that can be brought in from the beginning. Going forward, we probably need to do more on micro insurance and getting the incentives right-- this is really a chance to figure out how to work in the remote areas that need access to finance and need access to information, how can we improve how nature is managed by using these technology solutions?