Byline by: Arun Biswas, VP and Senior Partner, Asia-Pacific at IBM Consulting | 3 February 2022
On the path to global net-zero carbon emissions, the finance industry is a key driver while technology is an enabler of sustainability.
On the path to global net-zero carbon emissions, the finance industry is a key driver while technology is an enabler of sustainability. To make meaningful progress to mitigate climate change, the global finance industry needs technology to track emissions from financed portfolios, quantify climate risk and mobilize investments. Financiers also must adopt collaborative, secure, and trusted data platforms, and upskill. Together, the finance industry and public and private sectors can accelerate climate resilience and sustainable infrastructure through technology-enabled platforms.
Climate action is today’s business imperative – it is an innovation opportunity to create long-term financial, customer, human, and societal value for all stakeholders. According to the United Nations, shifting to a green economy could yield a direct economic gain of US$26 trillion through 2030 compared with business as usual. In ASEAN, green growth opportunities will require more than US$172 billion worth of capital expenditure and Asia could create 14 million new jobs by 2030 according to ILO – this is quite impressive.
Climate change and other green issues are a top priority for many governments, and financial regulators are also changing rules to force companies to better disclose their environmental impact. Many central banks and regulatory institutions have also prompted financial institutions to enhance their ESG risk management and screening processes while increasing sustainable finance opportunities. Monetary Authority of Singapore (MAS) for example, has allocated $1.8 billion with five asset managers as part of moves to protect its portfolio from climate change risks and aid the city-state’s efforts to promote environmentally sustainable projects.
According to the International Energy Agency, global investment in energy projects needs to more than double its current level by 2030 to meet net-zero emission goals by 2050. However, only a small number of businesses are well-positioned today to reap the benefits of the climate transition that is already underway.
The Role Of Sustainable Finance
Progress in delivering UN Sustainable Development Goals (SDGs) has been very slow to date and requires urgent action. A significant collaborative effort across Global Finance is required during the UN’s Decade of action to 2030, to address environmental, and social impacts aligned to The Paris Agreement. Increased scrutiny from investors, regulators, consumers, and employees to demonstrate accountability on sustainability performance means there is a clear role for the financial community to assess and communicate on companies’ climate risk.
But finance is a critical factor to drive climate change actions, through redirection of significant investment capital to build back better, greener, and resilient economies. Increased investments in smarter and cleaner technologies – such as renewable energy, electric vehicles, energy-efficient buildings, and sustainable infrastructure – and exit from carbon-intensive investments – such as fossil fuels – can significantly reduce carbon emissions.
Unfortunately, assessing climate risk is not so simple. Finance and businesses encounter issues with climate data availability and quality, methodologies, and capabilities to capture relevant climate data and enable financial impact analysis. Other challenges include ongoing ESG performance monitoring, inconsistent application of sustainability reporting standards, metrics, and benchmarks. There is increasing pressure from investors and regulators for greater consistency and standardization of climate-related financial disclosures, to improve comparability and data insight from organizations’ operations, customer base, and supply chain.
Innovative and secure technology systems and intelligent processes can help address these issues by enhancing data management, connectivity, and collaboration between all value chain participants. Thereby simplifying financial systems, streamlining and automating processes to improve ESG data capture, analysis, monitoring, and reporting. In turn, organizations can rapidly scale innovative solutions and create new opportunities that address climate change in accelerated timelines.
Climate Risk Analytics, Due Diligence, And Climate Resilience
The role of technology platforms in making climate impact is intrinsic to global investment decisions driving positive change for communities, investors, and businesses. Financiers are responsible for safeguarding business interests and minimizing climate-related financial risk, improving decision-making, defining and delivering financial strategies to reduce carbon emissions. Assessing climate risk and financial impacts is complex and requires the right data, tools, and skills to derive actionable insights. Finance practitioners encounter challenges with translating data into meaningful insights and are unable to provide the analysis needed to support near real-time decision-making. In most cases, existing finance and business decision processes are slow, manual, and laborious, relying on disparate systems or incomplete datasets.
According to MAS, the lack of access to trusted high-quality data on a project’s carbon emissions is probably the biggest impediment to green finance. Acquiring and verifying such data is currently manual, slow, and prone to greenwashing. But technology has the potential to solve this problem. Technology enhances climate risk analytics through dynamic data capture and automated, intelligent, faster processes. Thereby improving climate and ESG impact assessments aligned to standardized KPIs, benchmarks, and performance monitoring allowing consistent climate-related financial risk disclosures.
For example, IBM and The Climate Service alliance supports financial institutions and corporations to better measure and quantify climate-related risks. As part of the alliance, the companies have developed the TCS Climanomics® platform. By analyzing climate risk exposure on assets, the platform allows organizations to quantify and disclose the financial impact of climate change in terms that can form the foundation for investment decisions.
Financing Renewable Energy And Sustainable Infrastructure With Digital Marketplaces
Investment in the infrastructure of USD 6.9 trillion per year is needed to meet global development needs through to 2030 (OECD) with developing countries accounting for the majority of these investments. This infrastructure needs to be designed, built, and operated in sustainable ways to secure a net-zero future for the world and resilience to climate change. To achieve this goal, there must be an open and collaborative approach to data sharing and innovation from trusted sources enabled by secure, yet open technology platforms.
For projects as small as community rooftop solar panels and as big as large-scale international infrastructure projects, sustainable finance is a challenge that secure and scalable end-to-end digital technology platforms can help address. Exponential and innovative technologies are essential to accelerate climate finance investment. Digital platforms will enhance process efficiencies and data insights, reducing risks and complexities in the value chain, whilst creating equitable benefits and value add for all participants.
Technology specifically is an enabler of measuring and analyzing the impact of climate and values of assets. Key benefits of digital finance platform solutions include intelligent processes, standardization, increased trust and transparency, reduced duplication, advanced analytics, security and audibility, and enhanced reporting. The pathways to enabling technology to mobilize investment and achieve net-zero also involve improving the quantification, qualitative analysis, and comparability of climate-related financial risk and the transparent disclosures of those risks and the opportunities.
Technology can also create new digital marketplaces to mobilize sustainable investment. Digital platforms that serve as online marketplaces can connect climate entrepreneurs and funding, institutional investment with well-structured projects, and facilitate public and private financing for sustainable infrastructure. These types of end-to-end digital platforms can speed up highly manual and inefficient documentation processes, deal flows, and collaboration across ecosystems partners with added transparency.
A recent example of this type of digital platform is Raise Green’s collaboration with IBM Consulting. Together, Raise Green and IBM developed a solution designed to empower entrepreneurs, regardless of experience or income, to start their solar energy businesses. The Originator Engine is a digital platform that connects customers, investors, and ecosystem partners to help navigate the process of securing financial investment for new businesses in the solar energy sector. The new digital platform was deployed using Red Hat OpenShift on IBM Cloud and enables Raise Green with the flexibility to evolve the platform as they continue to grow and expand into areas beyond solar.
Shaping Sustainable Finance Policy And Skills Development
The lack of global consistency and differences in sustainability standards due to numerous existing frameworks is challenging for finance practitioners as preparers of climate-related financial disclosures and reviewers (i.e., investors, regulators). The latest global financial regulatory updates on climate reporting and the role of technology call for the need for financiers to constantly grow skills and training programs to deliver long-term industry change to build cleaner and resilient green economies.
Technology can help provide transparency in sharing real-time changes in the latest global policy and regulatory developments in sustainable finance, as well as relevant climate technology and analytics. By upskilling finance professionals to better understand technology tools, information analysis, ESG impacts, and sustainability standards, the finance industry builds capacity at large to improve consistency in decision-making and disclosures that could align with the Green Finance Education Charter, backed by BEIS.
Overall, technology can be a catalyst in the toolbox of global financiers to accelerate action and progress on sustainability goals by mobilizing investments, quantifying climate change risk, digitizing the marketplace for financing sustainable infrastructure, and equipping finance professionals with the skills and digital tools for a sustainable future.