The Digital Opportunity for sustainability

I’d like to provide some context on how the team at ANZ is thinking about digital finance, innovation and the ESG challenge and opportunity.

“We might not know just how the future will evolve but we do know some … ventures will become very significant, even transformative, and we want to understand, participate and contribute where we can.”

None of us can predict exactly what financial services will look like in even the reasonably near future. In fact, I’m sure many of us recall a line from a couple of decades ago, which Bill Gates picked up: “banking is essential to a modern economy. Banks are not.”

With this in mind, we need to be increasingly mindful innovation in financial services is occurring at a faster and faster pace and will continue to do so as DeFi, Web 3, AI and new competitors radically disrupt our industry.

It will happen whether banks participate or not.

ANZ is participating. We have launched a stablecoin, A$DC. We are a very willing partner in the DFCRC.

In my time at Optus I have seen the amazing potential of “disruption” in digital finance with the M-PESA project in Kenya which brought banking and financial inclusion to a huge proportion of an unbanked population - with just a cheap mobile phone.

Telcos and banks came together and, in the process, contributed to financial stability - in particular, the opportunity for women to manage family finances and start micro-businesses.

Kenya is not Australia and the opportunity here is different – but I have no doubt the evolution of digital finance can be just as disruptively positive.

Much of our recent transformation at ANZ has been around focusing on those things we do best. And doing them better.

It is not our intention to participate in everything taking place in the DeFi world but the team under Nigel Dobson will help us choose where we can add value and where we can create value for our customers, shareholders and staff.

Our experience with our stablecoin demonstrates this. We have been working across different areas including trade finance, carbon credits and even taxation.

All are key businesses for ANZ.

We see great opportunity in areas relevant to us, such as digital trade finance, smart contracts, the Lygon digital guarantee company and, significantly, the interaction of digital assets and ESG.

We were among the first to market in Australia with our stablecoin and have now done two major transactions. The first was focused in the digital asset realm with the Smorgon group and the second in that part of ESG where we see enormous scope: tokenised carbon credits.

We take ESG very seriously. But not only is climate change an existential challenge for society it is also an enormous business opportunity for the finance community and banks like ANZ.

Financial services, especially large institutions like ANZ, have a critical role to play in promoting understanding of the challenge, working with the public sector and across industries, and in engaging their own staff on this vital front.

Our ability to tokenise carbon credits and offer a digital means of settlement, with our A$DC, is a perfect example of how we can participate.

It’s a frontier opportunity that brings together our ESG ambitions, the carbon transition opportunity and our credibility as a licensed bank.

The carbon market is immature but it echoes the transition from manual, analogue banking to digital. We are seeing a shift from “analogue”, uncertain carbon credits to precise digital tokens.

At the moment this emerging market lacks liquidity, rules and clear market structures. Questions also remain around the best infrastructure.

But we believe a tokenised exchange offers the chance for a carbon market which is efficient and global.

One that is cheaper, faster, better.

Digital finance can address the “Market Infrastructure” question by leveraging the benefits of asset tokenisation and distributed networks.

Since the sustainability markets are immature, the adoption of the most efficient and secure infrastructure is likely to accelerate the scaling, resilience and credibility of market operations.

This applies particularly where existing market infrastructure is the least automated and interconnected.

While environmentally sustainable bonds can rely on existing capital markets, emerging asset classes such as voluntary carbon credits could, and we think should, be tokenised and exchanged on digital asset marketplaces.

The establishment of this “second-order” carbon credit unit (NFT), would build confidence and liquidity for both off-setters and investors and create the opportunity for further layers of value – on the social and governance fronts as well as environmental.

Moreover, the challenges of provenance can be mitigated by verifying and codifying project-specific credentials using non-fungible tokens, addressing concerns around “green washing”.

For example, in validating the provenance of Australian carbon credit units – ACCUs– and even information on how and where they were produced.

Moreover, with no legacy infrastructure, without the impediments of incumbency, by removing layers of manual processes there is the opportunity to foster innovation in this critical market - from a relatively blank sheet.

We at ANZ want to be instrumental in what goes on that blank sheet.

Indeed, being part of the DFCRC we see as the perfect way to participate in the discussion and development.

While these projects make sense for ANZ that won’t always be the case. When we survey the world, we see some amazing initiatives, in digital currencies, in DeFi more widely – but they are not a fit for ANZ. Nor indeed necessarily for Australia.

For example, Australia already has a mature, innovative, reliable and digital payments and broader financial system.

By and large, the system and its governance work. Obviously we should constantly review but we don’t have glaring gaps.

So when we look overseas, for example at some unbanked and underbanked sectors or mature markets which don’t have the robust payments system we have here, and we see some extraordinary innovation, we don’t necessarily have that need here in Australia – although the challenge and opportunity will be different in some of our markets such as the Pacific.

This is a point both the Australian Prudential Regulation Authority and the Reserve Bank of Australia have made.

When we look at Central Bank Digital Currencies the question is not whether they are exciting or possible or transformative but whether there is a need in Australia. And, if so, where?

The just announced project under the RBA and DFCRC, in which we are looking forward to being part of the discussion, will ask exactly those questions.

The private sector in Australia is performing almost all of the tasks the economy needs under the supervision and regulation in place and can also be instrumental as we move into digital finance as an enabler of ESG initiatives.

Our stablecoin carbon credits demonstrate this.

These ESG innovations do need to be regulated and supervised with credible industry bodies – like payments are today – but they don’t necessarily have to be centrally run.

So we welcome the establishment of the DFCRC and look forward to being an active participant in its projects alongside our regulators, academia and industry groups.

We might not know just how the future will evolve but we do know some of these ventures will become very significant, even transformative, and we want to understand, participate and contribute where we can.

I am confident the DFCRC will be a cornerstone in this transformation in Australia and I and my colleagues at ANZ are looking forward to its progress.

• The Digital Finance Cooperative Research Centre (DFCRC) is a 10-year, $180 million research program funded by industry partners, universities and the Australian Government, through the Cooperative Research Centres Program. The DFCRC’s mission is to bring together stakeholders in the finance industry, academia and regulatory sectors to develop and harness the opportunities arising from the next transformation of financial markets – the digitisation of assets that can be traded and exchanged directly and in real-time on digital platforms.

• This is an edited version of a speech given by Paul O’Sullivan at the Digital Finance CRC launch in Sydney on August 30, 2022

Paul O’Sullivan is Chairman of ANZ