For decades, technology has been a key driver of change in the financial services sector, but today, digital developments are accelerating such change. Innovations such as cloud computing, big data analytics, artificial intelligence and distributed ledger technology offer new opportunities that could foster radical change in the financial sector.
The mobilisation of private wealth is crucial if the UN’s sustainability goals are to be met
Digitalisation is set to revolutionise the finance world, breaking up value chains and altering business models. It holds tremendous potential for financial service providers to increase efficiency and improve customer relationships. In the meantime, regulators are struggling to keep up with the pace of developments. While often less regulation is sought in certain areas, market participants are pushing for clearer rules to provide legal and planning certainty.
The European Commission has responded to calls to fill the current regulatory gap with its fintech action plan, which was published in March. The document sets out a range of measures aiming to encourage and simplify the emergence of new solutions and enable innovative business models to scale up. It also sets out to increase cyber-resilience, thereby preserving the integrity of the financial system while helping the sector manage risks and cope with change.
With digitalisation allowing companies to hold and use more consumer data than ever, it is essential that such information is kept secure. In an attempt to ensure just this, the General Data Protection Regulation (GDPR) – which is designed to protect citizens’ data within the European Single Market, regardless of where the data is processed – came into force in May. Complying with GDPR while also meeting customers’ new, digitally focused expectations requires appropriate managerial structures, operational processes and data governance.
As well as digitalisation, another equally important issue is increasingly occupying the financial industry: sustainability. After the Paris Agreement and the United Nations’ adoption of the Sustainable Development Goals (SDGs) in 2015, the discussion on sustainability gained new focus. The SDGs include targets such as providing affordable clean energy, ending poverty and ensuring access to clean water and sanitation. The goals have, for the first time, combined social and environmental concerns into a single agenda.
This approach recognises that sustainability and economic development programmes can work in harmony. Nearly in parallel with the FinTech Action Plan, the European Commission presented its Action Plan on sustainable finance and financing sustainable growth for a more sustainable financial system. The plan states that roughly €180bn ($214bn) in additional investment will be needed in the EU alone to meet the agreed climate targets. PwC, meanwhile, has estimated the global annual investment required to meet the SDGs to be a hefty $7trn. However, even if the financial demands of the SDGs are met, the real test of success – implementation – is yet to come. The UN can only achieve the SDGs if states, businesses, local communities and individuals play their part. However, at present, governments are only spending one seventh of the amount required, most of which has come from the private sector.
To overcome the challenges of achieving sustainable development, be it in social or ecological matters, we not only need a strong political system, but also businesses that act sustainably and make their own contributions via structural change and technological innovation. The financial sector has significant responsibilities and an important role to play in the necessary transformation, particularly in terms of allocating capital.
A question of allocation
The mobilisation of private wealth is crucial if the UN’s sustainability goals are to be met. According to Deutsche Bank, in 2015 the global wealth of private households amounted to a total of $250trn. Worldwide, the assets managed by institutional investors – such as pension schemes and investment funds – amount to approximately $83trn, according to OECD estimates. Private and institutional investors both tend to be focused on long-term results, as do the sustainability goals themselves. Accordingly, their wealth could be employed worldwide to ensure access to education, promote health, bring affordable clean energy, support infrastructure projects and fund climate protection. Sufficient capital is available; it’s merely a question of how it’s allocated.
While sustainable investments become increasingly important to private investors, the majority of institutional investors already believe that sustainable investments increase risk-adjusted yield. There are still constraints preventing private investors and investment entities from integrating sustainability into their decision-making processes. To further encourage sustainable investments, we need to increase both awareness and acceptance of the fact that environmental and social responsibility doesn’t mean renouncing economic returns. This erroneous belief is still rooted in the minds of investors and product providers, despite numerous studies showing that sustainable investments bring better financial returns in the long term.
The next generation
Considering that 460 billionaires will be leaving some $2.1trn in wealth to younger generations in the next 20 years, it’s clear that the financial sector’s evolution towards sustainability requires commitment not only on the part of financial intermediaries – who are creators and brokers of sustainable investment products – but also among high-net-worth individuals, who will be making significant investments. Studies have found that younger generations are increasingly motivated by an interest in changing the environment and society for the better, rather than purely material wealth. This is the same generation for whom the use of digital technology is a matter of course in everyday life. Digitalisation and sustainability are thus more than just trends; they are complex issues that financial firms absolutely must come to grips with to survive in the marketplace in the long term. Neither is more pertinent than the other; both will determine the industry’s agenda over the coming years.
For change to happen, however, there is a pressing need for action, information and education. The financial industry plays an essential role in this regard. It is apparent that leadership at the top of every financial institution is needed to drive change and accept responsibility – both today and for future generations. Fortunately, ongoing digitalisation presents opportunities to tackle these issues through developments such as new educational tools and the ability to reach out to previously excluded individuals via innovative channels.
Liechtenstein can lead
The country of Liechtenstein – a financial centre in the heart of Europe with an international focus – is evidence that small national economies can make an important contribution to reaching the SDGs, as well as achieving stability and sustainability in general. With its 38,000 inhabitants, Liechtenstein offers the institutional framework for sustainable development: excellent economic growth, low CO2 emissions and fast, unbureaucratic channels to support capable and adaptable behaviour. These factors alone give Liechtenstein an advantage over larger economies in terms of initiating and achieving sustainability.
With its balanced, debt-free national budget and AAA country rating from S&P, Liechtenstein is one of the most stable global economies. Accordingly, the country has proven to be a reliable partner to the international community over the years. This can be seen in its participation in the exchange of information, its effective measures against money laundering and terrorist financing, and the implementation of international regulations. With more than 1,300 non-profit foundations and many years of experience in wealth management, the Liechtenstein financial centre is well suited to taking on a significant role in the responsible investment of assets. It serves as an important bridge between investors looking to invest their money in a meaningful way and the financing gap that sustainable investment is experiencing.