Faculty of law blogs / UNIVERSITY OF OXFORD

Sustainability, Financial Inclusion and Efficiency: A Trilemma or a Trifecta for the Regulation of Digital Finance?


Dirk A Zetzsche
Professor of Law and ADA Chair in Financial Law (Inclusive Finance) at the Faculty of Law, Economics and Finance, University of Luxembourg
Douglas Arner
Kerry Holdings Professor of Law, University of Hong Kong
Ross P Buckley
ARC Laureate Fellow & Scientia Professor, UNSW Sydney

Over the past decade, financial regulators have been tasked with responding to the digital transformation of finance, today encapsulated in the term ‘financial technology’ or ‘FinTech’. While technology-driven efficiency has been a great enabler of value generation by FinTechs,  our recent paper finds it is the trifecta of efficiency, financial inclusion and sustainability that are driving financial institutions to digitally transform their activities. These factors are in turn also central to regulatory approaches to digital finance.

Until now, most research has focused on these three fields as separate and unrelated objectives. However, we argue that, rather than being a trilemma in which objectives conflict or are simply unrelated, the three objectives are linked as together they drive the development of stable, efficient financial systems which are inclusive and support sustainable development. Further, we show that efficiency, financial inclusion, and sustainability are necessarily intertwined—each depends on the others.

Our paper first establishes the link between financial inclusion and sustainability. Along with efficiency, financial inclusion was one of the early drivers of the FinTech revolution in the Global South, especially in East Africa and parts of East Asia. Financial inclusion involves delivering financial services at an affordable cost to all parts of society. It enables people to manage their financial obligations efficiently and think longer term. As of 2021, just under 1.9 billion adults lacked access to a financial or mobile money account, some twenty-four percent of the world’s population.

Financially excluded individuals lack tools to prepare for and manage the burden of life’s challenges, including sickness, crime, poverty, etc. For instance, farmers without access to electronic payment systems worry about theft, and may consume more immediately rather than risk saving. Yet saving can fund children’s education and provide for old age. Financial exclusion takes from people the opportunity to think, plan and act long-term. Risks that can be avoided, hedged, or socialized through the financial system can materialize at any time, yet financial exclusion forces the excluded to think and act short-term, often unsustainably and inefficiently.

At the same time, financial inclusion is central to responding to sustainability crises, with clear links between access to accounts (particularly electronic payments and transfers) central to responses to not only health crises such as COVID but also the full range of other forms of sustainability crises.

Financial inclusion and sustainability thus are two sides of the same coin, with both aimed at the UN Sustainable Development Goals (SDGs) core objective of promoting prosperity while balancing risks.

Although often overlooked, our recent paper also finds an inherent link between efficiency, financial inclusion, and sustainability agendas given that in a world where for the most part pension funds and other intermediaries provide the funding, only profitable market-based sustainability strategies are truly sustainable. We find four reasons for this.

First, the sustainable transformation of the world’s economy is costly. It requires development of more sustainable products and services as substitutes for less sustainable ones. This, in turn, requires investments in research and development (R&D). Only profitable or potentially profitable firms will be able to finance these R&D expenses, regardless of whether they use retained earnings or projected future earnings (ie capital provided by investors) to finance R&D.

Second, unprofitable firms have a strong incentive to misreport their sustainability position to justify lesser financial performance. Unprofitability thus undermines the readiness to comply with stricter ESG requirements.

Third, the link between profitability and sustainability is to date uncertain. Despite high general interest in ESG-based investing, the sustainability agenda suffers from a lack of understanding and empirical data about sustainable investments needed to guide investor behaviour. Every truly profitable and truly sustainable firm enhances investors’ trust that the sustainable transformation of financial markets is possible.

Finally, the more money in the financial system, the faster it can finance any transformation. Higher firm profitability in the real economy generally attracts more capital to shift from financing the financial economy to financing the real economy. What is true in general, is particularly true for the sustainability transformation.

The cost savings and efficiency gains that datafication and technology may provide are very welcome. The profits generated this way may well be used to finance the sustainability transformation. A large-scale, long-term unprofitable sustainable investment is in itself unsustainable in a business sense.

Furthermore, our paper finds that efficiency is informed by sustainability and financial inclusion perspectives. Where datafied technology negatively impacts financial inclusion and sustainability, it will prompt policy reactions. For instance, as part of the European Commission’s Revised Sustainable Finance Agenda from July 2021, the energy use of Bitcoin’s blockchain is receiving great focus, making a restrictive regulatory response very likely. The same regulatory interference may well be seen in response to the exclusive effects of credit scoring and taxi allocation algorithms, with the EU’s draft artificial intelligence regulation providing a noteworthy example. Accordingly, a large, cost efficient yet financially exclusive or unsustainable investment is as doomed to fail as a large-scale, long-term unprofitable sustainable investment.

Efficiency, financial inclusion, and sustainability are thus inherently intertwined. It is only by taking a cross-disciplinary approach that we can understand how these factors driving FinTech represent a mutually reinforcing trifecta, rather than a trilemma, with important implications for regulators globally.

Dirk A Zetzsche is Professor of Law at the University of Luxembourg.

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

Ross Buckley is a Scientia Professor at UNSW Sydney.


With the support of