Inclusive Green Finance—towards implementation of the United Nation’s 2030 Agenda for Sustainable Development

Adopting green policies with exclusive effects is fairly easy. If we require everyone to use renewable energies only, most human beings on the planet will be shut-off from any productivity gain modern industrial technologies have provided to mankind, will be forced to walk, and will most likely starve.

Even if we accept some negative environmental impact, it is not so easy to be inclusive: exclusion is often due to risks most incumbent institutions try to avoid in the absence of law and regulation.

The true art of policy making is how to balance the two policy objectives: saving the environment while ensuring inclusive growth and equal opportunities. We will discuss in this contribution what financial law and regulation can do about it. Neither claiming full knowledge, nor limitless wisdom, we present insights that provide better law making, and further research at the intersection of law, finance, technology, and sustainable development.

1. Exposure of the Vulnerable to Risk Factors

Inequalities as well as environmental, social, health and political crises hit the vulnerable first, for three reasons.

1. Their income tends to be under-diversified; their livelihood rests on what they create and earn with their hands.
2. Vulnerable persons have usually lower education; changing regions and professions is difficult for them.
3. Vulnerable and marginalized groups of society have usually less influence on the overall economic, social and governance conditions. They are risk-takers rather than risk-makers.

In light of these three factors, any economic and social order must balance the challenges of inequality, underdevelopment and changing environmental, social and political conditions. As the former concerns externalities, regulation is of outmost importance.

Yet, regulatory capital and resources are limited. The question is: what regulation works best?

2. Impact of Covid 19

Putting the above in the context of the pandemic yields three insights.

First, Covid 19 highlighted the exposure of the vulnerable, in some places with very harsh consequences. Hunger, the enemy of mankind which we had hoped to extinguish, returned to hundreds of millions of people. Second, Covid 19 undermined years of efforts furthering sustainable development. Third, Covid 19 forced all of us to digitize.

In all the darkness that COVID 19 brought, the last effect may become the spark of hope, as we will show below.

3. Financial Inclusion as Precondition of Sustainable Development

Sustainable development relies, first and foremost, on sound social institutions, such as labour markets that ensure sharing of growth and opportunities. Labour market regulation plays a crucial role in this regard. In some countries adequate labour market regulation is lacking. But in many countries, protections exist, although for large parts of society only on paper. That lack of enforcement is the result of a large informal sector of the economy.

This informal sector showed with all force during the pandemic. Due to the informality of employment and underlying financial relations, government-to-people-payments could often neither be calculated, nor paid out. Employee-related measures and public benefits could not soften the impact of the pandemic.

The core of the problem was financial exclusion.

The United Nations have recognized that financial inclusion is a facilitator for many of the UN Sustainable Development Goals. In the Report of the Secretary-General of the United Nation’s Social Commission, financial inclusion is mentioned twice, one time as ‘access to credit’ and one time as ‘access to digital payments’.

We find financial inclusion deserves more attention. From our experience in development cooperation, financial inclusion is a precondition for any crisis-resilient policy approach seeking to combat inequalities, be they gender, race, social or economically based.

Financial inclusion is understood, usually, as access of all parts, including the vulnerable, to financial services. At a minimum, everyone should have a payments account—which more than 1 billion adults on the planet lack to date. But beyond this formal access, the meaningful use of credit, investment and insurance by the vulnerable has also become of utmost importance.

Social development, including labour relations, protection of the vulnerable, development of societal institutions, and stable growth, rests largely on financial inclusion: Financial Inclusion means economic and social empowerment of the disadvantaged.

Once there is a trail of payments from employer to employee we have an accounting fit for determining public and private benefits in and out of crisis; not to speak of ways to calculate fees and taxes to finance any benefits. At the same time, financial inclusion policies further the development of service models adequate for retail clients, microenterprises and the vulnerable, thereby fostering employment and growth.

We have very convincing case studies from across the world that long-term oriented financial inclusion policies drive fundamental and inclusive economic change. One example is Kenya, with its payment services based on basic telecommunication services. Another is India, with its Aadhaar system and multiple applications based on e-identity: technology allows today for digital micropayments that come with zero costs and allow the payments of fruits on the street corner. High financial inclusion rates lead, eventually, to the formalization of the economy and technical innovations that allow for decently paid long-distant, home office and/or platform work models.

While not without challenges, if properly regulated and supervised, these examples show that financial inclusion creates opportunities and employment—for everyone in society.

4. Digitization as Key to Financial Inclusion

Digitization is a key enabler to financial inclusion:

• it bridges the last mile issue in remote locations,
• it trains and protects the vulnerable,
• it traces and furthers financial flows in both directions.

We have laid out the necessary steps in a policy framework called FinTech For Financial Inclusion together with the Alliance for Financial Inclusion.

By focusing on digital financial inclusion, the institutions usually best equipped in many countries—central banks, finance ministries and financial regulators—become part of the solution. Financial supervision becomes instrumental in furthering equality in the labour and social sector as well as the economy at large. 

5. Digital ID as Substitute of Formal ID

Digitization also allows for the provision of individual and business identities (ie the buildup of a labour and payments history) where a legal, economic or social formal identity is otherwise lacking. For individuals, this can be based on biometric features difficult to forge, such as fingerprint and iris scans. For Micro-SMEs, there is in fact in many cases limited differentiation with their owners: a digital business ID combined with digital individual ID can thus be particularly powerful.

Many of the more than 1 billion people that lack a formal ID often belong to the disadvantaged, suffering social and economic exclusion: when people need to travel several days to the public office that issues formal ID, those that have to take care of their children and families at home face the greatest challenges to apply for a formal ID in a distant place. In most parts of the planet women take care of their children. A digital system can bridge this gender divide, and financial inclusion may become the enabler: small value, net positive digital banking can and does often rely on biometric identification; a formal ID may be issued much later, when amounts surpass critical thresholds.

6. Inclusive Green Finance Roadmap

Often social difficulties stem from environmental stress. For instance, where water is scarce or storms are plenty, the discriminated and vulnerable will feel this first, for reasons of economic unbalance and lack of diversification.

The exposure turns into real world hardships in times of environmental crises: It is much harder for women that have to take care of children and families to change places when environmental conditions change. And where men hold control over financial flows and critical infrastructure, we can be sure this control is exercised most beneficially for the control holder.

For these reasons the term Sustainable Development encompasses environmental, social and governance dimensions. It is our view that any effort aiming at employment growth and equal opportunities long-term needs to focus on financial inclusion first, as part of a comprehensive strategy that involves social, environmental and governance matters.

Again with the Alliance of Financial Inclusion, we have laid out the necessary steps in a policy framework called Roadmap for Inclusive Green Finance Implementation.

We find that an official IGF policy is necessary for two reasons. First, markets are poor at assessing uncertain, long-term risks due to the lack of reliable data regarding the future. Second, inclusion and the environment are ‘public goods’: individual entities do not directly reap the full benefits from investments in financial inclusion and environmental protection. In the absence of regulation, private actors will under-invest in inclusion and environmental protection; this is true regardless of whether we speak of social, labour or financial inclusion.

7. Conclusion

We seek today to understand what is necessary to facilitate and support inclusive growth, inclusive labour markets and inclusive development that leaves no one behind. Our answer is: any social or economic inclusion, be it economic participation, well-paid labour or representation in state institutions, rests on financial empowerment and financial inclusion. For the former we need digital access for the disadvantaged, acceptance of some form of digital ID where formal IDs are lacking, and facilitation of payment and additional basic services, such as disaster insurance and credit for microenterprises.

Economic empowerment through financial inclusion will allow for choice: instead of being forced to accept informal labour and discrimination without social protection, the financially included can search for formal and insured jobs and start economic activities where labour conditions are dissatisfying. At the same time, the state can support formal activities and individuals in need, especially during crises.

Financial inclusion provides a choice for those short of opportunities. It has often created in its aftermath decent jobs in new, sustainable, and growing sectors, notably the green economy, platform economy, care economy, and social and solidarity economy.

Any effort aiming at furthering employment growth and equal opportunities should seek to further financial inclusion, as part of a comprehensive strategy, such as we laid out in the Inclusive Green Finance Roadmap. Financial inclusion is a, if not the, most important cornerstone for steps that seek to fill the 2030 Agenda for Sustainable Development with life.

Dirk Zetzsche  is Full professor in Financial Law, ADA Chair in Financial Law and Inclusive Finance, University of Luxembourg

Douglas Arner is the Kerry Holdings Professor in Law at the Faculty of Law at the University of Hong Kong.

Ross Buckley  is the Scientia Professor in Law at the UNSW School of Law.

This post summarizes the statement of Professor Dr Dirk Zetzsche, ADA Chair in Financial Law (inclusive finance), University of Luxembourg, at the High-level Panel of the 61st session of the United Nation’s Social Commission, New York City (US) on 6 February 2023. The full broadcast of the presentation at the United Nations is available here (starting at 33:45).