Global fintech and funding innovation ecosystem

Creating Sustainable Wealth Through Digital Finance

E2 Management Corporation | Lynn Johannson | Sep 20, 2021

Creating sustainable wealth - Creating Sustainable Wealth Through Digital Finance

We live in interesting times. We have extreme weather events, social disruption in part driven by a global pandemic and by the dissolution of trust in institutions, and financial disruption. ‘Perfect storm’ may be an overused term, but combining ecological, social, and financial stress does provide the makings of a perfect storm.

While all three need to be addressed with better performance, patience and prudence, there are some critical differences. For example, while you may have the potential to refinance a loan or a mortgage, there is no option to refinance ecological debt, nor social debt.

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However, there is also an incredible opportunity that may be likened to a Phoenix rising. It is the convergence of sustainable finance, the democratization and naturalization of capital markets enabled by digital finance, and your opportunity to apply your wealth to a better, greener economy.

Sustainable finance generally refers to the process of taking environmental, social and governance (ESG) considerations into account when making investment decisions in the financial sector. This is leading to increased longer-term investments into what is supposed to be sustainable economic activities and projects. Some refer to this opportunity as green finance, which I will address below.

There are three layers of wealth. Think of a pyramid shape.

Creating sutainable wealth figure 1 - Creating Sustainable Wealth Through Digital Finance

The foundation of all wealth, without exception, comes from the planet. Everything we use, grow, build, or buy - energy, food, homes or cars - comes from the planet as provided by Mother Nature. Think of her as the president of the planet. Her terms and conditions, her rules, override all regulations.

Secondary wealth is derived from the things we make from primary wealth. Ore becomes steel, plants become your dinner, trees are used to make lumber, paper, etc. Because we do not follow the rules set by Mother Nature, the conversion is 96% inefficient. Some experts say that is low, and it’s really 98%. Simply stated, that means for every $100, you are getting $4 or $2 of value.

The final layer, tertiary wealth are all the paper abstractions that we layer on top. Tertiary wealth is entirely dependent on the primary level being healthy, and rests precariously on top of the pyramid, only kept in place by trust. When we put the primary layer of wealth at risk by our decisions or actions, you can see where this is going.

Planetary Boundaries from 1950 to Present

The Stockholm Resilience Centre has estimated how the different control variables for seven planetary boundaries have changed from 1950 to present.

Creating sutainable wealth figure 2 - Creating Sustainable Wealth Through Digital Finance

We are in the red on three critical variables, and this is causing instability in ecosystems, social systems and risk, including stranded assets. What may be surprising to many is that with all the concerns posted in the media, the push for disclosure on climate-related financial risk, climate change is still not the biggest crisis according to experts. It’s the loss of biodiversity. It’s the impact our way of doing things had burdened our ecosystems with nitrogen and phosphorus. So not as much a tragedy of the horizons as stated by the former Chair of the Financial Stability Board, Mark Carney, but a tragedy that’s in our face, but that we are not managing.

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I find it extraordinarily perverse that the decisions and actions we continue to make, which diminish the quality of our lives today, and certainly undermines the quality of life for our children and our children’s children, we seem to be okay with. Perverse, yes, but predictable. As early as 1738, Dutch polymath Daniel Bernoulli figured it out, and this was echoed in a Ted Talk by behavioural expert Dan Gilbert who said “the expected value of any of our actions -- that is, the goodness that we can count on getting -- is the product of two simple things: the odds that this action will allow us to gain something, and the value of that gain to us.” So, basically we overvalue what we have in our hands today, and undervalue what the future holds. Part of this challenge may be that we mistakenly trust other people to manage our money, and at a cost to us that is no longer necessary.

Digital Finance Opportunity

Digital finance offers a range of values that is only starting to be understood by the market. And in the time and space remaining I can only hint at some of the opportunity. Digital finance and the value it offers to greening finance deserves a much, much deeper discussion (and one that I hope NCFA will enable). The democratization of capital markets offers individuals the opportunity to direct their tertiary wealth to the things that matter to them. It means that every dollar, peso, euro, can be a vote and support an action to bring human endeavours back within the boundary conditions necessary for a quality of life that is sustainable.

A group of entities, including the World Gold Council, The Silver Institute, the European Central Bank and others, stated that the value of the global money supply was 600 hundred times higher than the value of new gold coins minted in 2019. In the first six months of 2020, digital currencies increased 1,600 times over minted coins. While any currency carries a carbon and a broader environmental footprint, digital currencies, assets and the communities that power them offer access to new pools of capital at a lower costs while reducing intermediaries and excessive fees found in traditional banking.  New consumer-centric financing models offer consumers choice and enable them to vote directly with their dollars that can lead to lower environmental impacts.

It is important to note that digital currencies are not risk-free; a power failure, cell tower outages, bad reception in rural areas not well served by the internet, extreme weather; these are some of the unintended consequences that come with a transition to digital.

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But if money talks, with digital finance you could make it walk in the direction you want it to go to match your values aligned with a better, greener economy. If money makes the world go round, digital currency could enable you to drive initiatives that are part of a circular economy, or products and services that fit into the ecosystem where you live and work.

So, whether you are buying a product, engaging services, investing in a project, asset or an activity, look at the investor or purchaser in the mirror.

The first question that you should ask is “have I taken into account the environmental impact or environmental performance of the product, the asset or activity?”  If not, think again?  The choice is yours and the power of change is within.


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This article appears as a featured article in NCFA's digital magazine, Fintech Confidential. Click to read the latest thought leadership, insights and trends about Fintech in Canada:

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