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Home » From Credit to Credibility: Sustainable Finance in the world of Web3

From Credit to Credibility: Sustainable Finance in the world of Web3

by Mohammad Ghazal

The world of Web3 is upon us and the benefits are clear. At least for me.

As one of thirteen children of farming immigrants from Bangladesh, living in East London, I saw how traditional finance ignored the needs of families who live paycheck to paycheck, unable to access traditional banking and therefore the opportunity to build creditworthiness or generate any real financial history or data. Therefore, we remained forgotten and ignored within the system in what is termed ‘the Credit Paradox.’

After building a career trying to tackle these challenges within Morgan Stanley, I saw an opportunity to address the Credit Paradox through the promise of blockchain-enabled decentralised finance (DeFi) that cut out the middlemen. But because of the incessant scams, crypto (and by association, Web3) has become tarnished and increasingly ignored, neglecting the transformational power of the technology.  Its original purpose was to help the unbanked, cut out middlemen and offer a more democratic system for all. However, like its traditional counterpart, DeFi has only made the rich richer.

Now, as the financial world shifts from rewarding company shareholders towards rewarding humanity as stakeholders, Web3 is well-positioned to shine. Its ability to track, secure and automate transactions on a transparent ledger, and create new opportunities for sustainable finance models to predict and measure return on impact, in addition, to return on investment, can all happen while directly involving communities in the process.

As we move into this new world with an eye towards financial transparency and trust, Web3 and the technologies that underpin it, provide new opportunities for both sustainable finance and for those who lack data and credibility in the eyes of financial institutions.

Credit opened up opportunities for some…

When the concept of credit began to take hold, it was a revolutionary idea. The practice of extending capital to people who might not have had access to it before was a way for millions to build their lives and move up the economic ladder. Credit can be used to buy a house or car, start a sustainable business, invest in education, and even buy groceries when times are tough.

But the system today isn’t much different from when it was created 5,000 years ago in ancient Mesopotamia, using stone slabs to record creditworthiness. The first credit bureaus in the early 1900s not only collect credit information but political and social preferences as well as rumours about people’s personal lives. Today, the World Bank estimates that nearly 4 billion people have inaccurate or no credit history at all. In the US, the FTC has reported that 79% of all credit reports contain errors. Instead, financial institutions rely on poor, inaccurate data and a lot of guesswork, which leads to inherent bias, resulting in the Credit Paradox that keeps the unbanked from accessing capital in order to better their lives.

This is where Web3 can help. By using blockchain technology, AI models and smart contracts, we can create more accurate, unbiased data that is also transparent and ownable by the user. What’s more, for the growing sustainable finance and circular economies, this same model can help institutions understand and measure the impact of their investments while empowering and rewarding communities for positive behavioural change.

As we shift to sustainable finance models, How do investors make the right decisions?

Today, as we shift to sustainable finance models, investors are faced with many of the same challenges: lack of trustworthy data to make sound investments and lack of transparency for how investments are deployed and impact communities. With greenwashing, half-baked science and a culture of celebrity, many distractions divert attention from investments with real value and impact.

According to a recent study by The Rockefeller Foundation, 70% of surveyed investors felt misled by sustainability claims made by companies they invested in. And there are many examples of this kind of greenwashing happening every day—from large corporations like Tesla and Levi Strauss & Co., who have been accused of greenwashing; to smaller companies like Appalachian Sustainable Development LLC (ASD), who recently settled with the SEC after creating fraudulent documents claiming that their products were certified organic when they weren’t.

By improving the quality and transparency of data and connecting directly with the communities themselves, we can build trust in the sustainable financial system and encourage ongoing positive behaviours, making it truly sustainable.

How can we build trust?

An example of this can be found in a new pilot project designed to unlock affordable credit for farmers in Brazil. A partnership between CreDA, Ager and Impact Market, the program is designed to tackle food insecurity by building more robust credit data for farmers who then can unlock preferred borrowing rates in order to invest in their farms.

In this case, Impact Market works with farmers on the ground to build credit profiles by earning, holding and using cryptocurrencies; Ager provides aerial land surveys that can assess the viability and health of the farmer’s land; while CreDA provides the solution for collecting and modelling all the data on the blockchain through its AI-powered Credit Oracle. Together, this provides an unbiased, transparent and real-time view of the farmer’s creditworthiness.

Now imagine if we introduce another partner, who can assess and track the carbon emissions and credits stemming from a farmer’s decision to, say, cut down rainforest in order to expand the farm. This data can be assessed through Ager and modelled within the credit score. Now lenders can make informed decisions based on a holistic dataset, and predict and reward those who invest in the sustainable growth of their farms, reinforcing sustainable behaviour.

Furthermore, imagine this model was applied to young female entrepreneurs or climate refugees and the billions of unbanked people who can now become customers while championing sustainable practices.

It’s a shift from credit to the credibility that benefits the communities, the investors and most importantly, the world.

The future of transparent, sustainable and impactful investment

The financial world has come a long way since I was growing up in London. I’ve watched and worked to build more equitable opportunities for those who have lacked visibility because they’ve lacked data within the financial system. And while there is still a lot of trust that need to be built in Web3, I’m certain that through a movement towards sustainable finance, the technology will find its footing and its true purpose.

The technologies that enable Web3 can help ensure that capital flows directly to those that are making material changes while informing investors on where to place the right bets. This is not just a technological phenomenon, it’s a material shift in how financial institutions can directly influence positive change. It’s a new credit model that is unbiased and can be accessible to everyone, can help reinforce sustainable behaviours, and unlock capital for those who add value to a circular economy.

Web3 supports a promise to sustainable investors that they can make a return on investment while making a return on impact and giving credit where credit is due to those making real changes in the world.

By  Fakhul Miah, CEO of CreDA (Credit Data Alliance

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