Technology is playing a critical role in scaling up climate action and transforming capital markets. It is helping to overcome challenges in data gaps and risk modelling and ensure market and investor confidence in sustainable products and projects. Nevertheless, more investment is needed to support technological advancement, and with new technologies comes uncertainty.
This edition of the Sustainable Policy Institute journal examines the key role data and technology will play in driving green finance and the economy-wide transition. It explores the latest policies for innovation and technological advancement, and the increasingly prevalent role of artificial intelligence and machine learning for investors and asset managers.
To better understand, and thereby mitigate, potential financial risk, more disclosure and reporting of financial activities is integral. This importance has been reflected in the proliferation of regulation and taxonomy frameworks introduced in recent years.
But collecting reliable and actionable data remains a challenge. As Emmanuel Levy, product management, climate data science at Citi, argues, data disclosures suffer from staleness. The data sourced are often published on an annual basis and can be as much as 18 months old. Collecting data on a much timelier basis would help to solve this challenge.
Stuart Coleman, director, consultancy and learning at the Open Data Institute, and Elena Simperl, professor of informatics at Kings College of London, argue that data must be treated as public infrastructure. Dominant platforms should share anonymised datasets and fund greater data access to support socioeconomic development.
The financial risks triggered by climate change are still misunderstood by the financial sector, but technology can play a big part in changing this. As Andrés Alonso-Robisco, senior economist, financial innovation, and José Manuel Marqués, director of financial innovation and market infrastructures from Banco de España, write, the main areas where technology might underpin further developments in green finance are the use of satellite data for nature finance and physical risks evaluation.
An initiative developed by the Bank for International Settlements Innovation Hub Singapore Centre, in collaboration with the Monetary Authority of Singapore, integrates climate-relevant geospatial data to provide qualitative assessments of climate risks. This can support financial authorities in identifying, monitoring and managing these risks within the financial system.
AI-powered solutions can play a key role in increasing the speed and efficiency of the environmental, social and governance disclosure process, thereby improving data and information quality. Atiyah Curmally, principal environmental scientist at the International Finance Corporation, cites a number of solutions developed to support emerging markets’ integration of increased disclosure requirements, helping to provide more investment opportunities.
However, there is a risk of developing countries becoming excluded from many of the economic benefits of AI, with significant capital costs, risks of labour automation and potential environmental consequences, write Francesco Tasin, research assistant at the University of Oxford’s Future Impact Group, and Julian Jacobs, senior economist, OMFIF’s Digital Monetary Institute. Institutions will need to collaborate with the global South as AI advances.
Demand for solutions to reduce the risks and impact of climate change is creating opportunities for investors. Bing Leng, board member, International Sustainability Standards Board, provides insight into the ISSB’s recently developed disclosure taxonomy. The taxonomy is designed to support investors and other capital providers to digitally compare and analyse sustainability-related financial disclosures.
Tracking and reporting environmental impact can improve investors’ accessibility to information and combat greenwashing. Public and private sector partnership is crucial to this. Georgina Lok, head of market development, Hong Kong Monetary Authority, explains how tokenised green bonds are paving the way for digital sustainability and examines the potential they have to transform capital markets.
As Trevor Allen, head of sustainability research at BNP Paribas, argues, ‘data-driven analysis is the best tool to find the most promising sustainable investment opportunities’. Combining both thematic screening and quantitative analysis, we can begin to crowd investor allocations into emerging technology and sustainable markets.
Other examples of innovation include a model for identifying companies in the business of adaptation and resilience across regions, sectors, growth stages and asset classes. This has been developed by the MSCI Sustainability Institute, in partnership with the Global Adaptation and Resilience Working Group, to support the identification of opportunities in climate-orientated finance, writes Umar Ashfaq, research director at MSCI.
While advancements in AI and other innovative technologies can cause uncertainty, the financial sector must capitalise on and integrate these tools to support better investment practices, data and information as well as risk management. Technology developments provide huge opportunities for scaling up a sustainable economy.
This article featured in OMFIF’s Sustainable Policy Institute Journal, Q3 edition.