How blockchain can revolutionise social impact investing

Reed Smith's Nathan Menon looks at how blockchain has much to offer the two billion adults worldwide without a bank account

Innovation and creating purposeful change for communities is at the very heart of social impact finance. Such impact investments have never shied away from embracing latest technological innovations or challenging the status quo. In this vein, finfech initiatives such as blockchain have the potential to prove that they can be the catalyst for democratising data and opening new worlds of possibility to users and stakeholders around the globe. A recent Harvard Business Review research project set out strong evidence that blockchain can not only transform businesses and governments, but also have a profound impact on society as a whole.

Socially responsible and ethical investing is not a new endeavour. One of the most famous social investment programmes, the Grameen Bank in Bangladesh, was founded in 1976. However, what underpins the fintech trend is the use of an innovative, digital and often app-based skill set to address these social and economic challenges. Digital take-up of fintech has been phenomenal. The EY FinTech Adoption Survey 2019 states that, on average, 75% of the world’s population are using fintech products. In the global markets of China and India, that figure is as high as 87%.

Financial inclusion 

One area where fintech is already having a tremendous impact is access to banking, especially in countries like India and other emerging markets where access to banking facilities is still limited, but uptake of mobile technology is high. 

Blockchain – a chain of data held by its user community – has the potential to revolutionise operational systems and record keeping. It acts as a record or ledger of events (or transactions) that occur digitally, which is shared between its users. Applications of the blockchain algorithm have much to offer the more than two billion adults worldwide who currently lack a bank account. For example, BitPesa (part of AZA Group) focuses on converting bitcoins into Kenyan or Tanzanian shillings, depositing that local currency to a mobile money number.

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Tracking the need

Blockchain also has huge potential to provide accessible and even real-time data tracking social or environmental need, or data on the impact of products such as development impact bonds. 

The benefits are clear – the distributable nature of the blockchain community enables the reconciliation of information entered by multiple parties. Using a shared infrastructure means that the data is timestamped and therefore is significantly less susceptible to manipulation and fraud.

Predicting the impact?

What if blockchain could be harnessed to help predict trends and the impact of new initiatives? Predictive markets (albeit those that don’t rely on blockchain) already exist, so this could be achievable in the near future. In principle, people would be able to select an outcome or set of outcomes on an app or other platform and then invest based on the likelihood that a particular approach will achieve the set outcome. Those whose predictions are accurate would receive a financial reward. Over time, this model could be used to predict the likelihood of certain social needs and how best they can be improved by social impact initiatives.

The future is ripe for innovation and progress

Fintech in general, and blockchain in particular, have seemingly endless possibilities to revolutionise the way we do business, particularly within the sphere of social impact investing. This could liberate markets, opening up millions to better and more consistent access to finance in marginalised communities. 

By tracking and recording social need and the effect of social investments, products and strategies can be more easily streamlined and developed, all within an environment less susceptible to fraud. In short, when matched with a positive social impact, blockchain seems to have found the perfect partner to re-energise impact financial markets and drive the next generation of such programmes.

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Natalie Kenway

Natalie is global head of ESG insight for ESG Clarity and has been an investment journalist for 16 years. She won Editor of the Year at the Aviva Investors Sustainability Media Awards 2021, and was Winner...