Financial Institutions: The Green Wave Is Coming, And Only Data Intelligence Will Save You

Creado por Council Post |

It's difficult to imagine what Larry Fink's thinking. When the head of BlackRock revealed himself to be a newly minted champion of sustainability at January's World Economic Forum (WEF), neither he nor his contemporaries could have anticipated how the market-wrenching emergence of Covid-19 would disrupt their collective vision for a more sustainable world economy. But, as the adage goes, "hindsight is 20/20."

This partly explains why some of the world's most well-heeled institutional investors are reevaluating their business continuity plans, scrambling to both preserve their value and mitigate their exposure to future exogenous shocks.

Akin to his counterpart at BlackRock, the goal for sustainability advocate and Bank of America chief Brian Moynihan is simple enough. Corporate leadership, especially that of public companies, must commit to decarbonizing their portfolios. The challenge, however, lies in securing the buy-in of those same decision-makers.

Even under normal circumstances, this would be a painstaking process. And against the backdrop of weakened corporate earnings, banks' narrowing lending margins and the increasing scrutiny of sustainability-focused shareholders, investors, regulators and lawmakers, it's unsurprising to see just how well Fink's and Moynihan's messages have resonated.

More specifically, financiers are seeking improved means of determining and addressing the climate risks facing their respective businesses. Yet riding the "green wave" crashing through the world's financial sectors requires investors develop mechanisms for mitigating their contributions to global warming and verifying the climate alignment of their activities, as well as means for limiting their exposure to shifting regulatory landscapes and stakeholder expectations.

But without robust data intelligence, success would be as much a result of luck as it would be a product of skillful management. This explains why many notable decarbonization efforts undertaken by financial sector heavyweights since Davos are built around one common, hitherto underutilized asset: data.

Take the U.S. banking sector. In July, four major commercial banks joined the Rocky Mountain Institute in establishing the Center for Climate-Aligned Finance. This "engine room" for collaboration with clients will facilitate development of "decision-useful" decarbonization plans, complete with relevant metrics, tools and other means for tracking their emissions reduction progress against the Paris Agreement.

This massive effort to leverage money managers' might toward decarbonization is representative of a broader trend taking shape across financial markets. The debate over whether private financial institutions should play a role in decarbonizing the real economy is being eclipsed by the debate over how financial institutions can mitigate the harmful climate impact their loans and investments have.

Judging from the climate-alignment agendas recently put forth by similarly high-profile financial institutions, it appears consensus is building over the need to implement frameworks for classifying, monitoring and disclosing the sustainability of the industry's economic activities.

For instance, one of the partner organizations behind the Center for Climate-Aligned Finance, the Partnership for Carbon Accounting Financials, launched its preliminary Global Carbon Accounting Standard after adding U.S. banks Morgan Stanley and Bank of America to its roster of climate-conscious financial institutions. Among other laudable initiatives are the recent launches of the Net-Zero Investment Framework by the Institutional Investors Group on Climate Change and the Sustainable Development Investments Asset Owner Platform by a coalition of pension funds to gauge companies' adherence to the U.N. Sustainable Development Goals (SDGs).

Even still, the task at hand remains incomplete. As Refinitiv CEO David Craig pointed out, truly investable and diversified SDG-related financial products cannot be developed without measurable and comparable sustainability data from companies across industries and regions.

The sustainability nonprofit Ceres, along with 72 co-signatories, reiterated this point in a July letter to U.S. Federal Reserve chairman Jerome Powell, which urged him to supplement the financial sector's sustainability initiatives with appropriate regulatory frameworks.

For corporate executives and sustainability investors, responsive engagement by regulators is plainly necessary. Because no matter how comprehensive a given investor's methods of classifying, collecting, tracking and reporting the climate impacts of their investment activities are, they are inherently distinct from those methods developed by their peers and competitors. And with no legal authority to standardize and enforce tracking and reporting methodologies, private firms stand little chance of reconciling these disparities.

Unfortunately, developing an exhaustive, standardized and enforceable sustainability reporting framework is an area in which the U.S. lags its peers. Chief among them is the European Union, which in June adopted its Taxonomy Regulation, or "common language" for investors, companies, issuers and others to navigate the transition to a low-carbon, resilient and resource-efficient economy. In effect, this soon-to-be legally binding regulation will help to bring transparency to EU climate finance and aid lawmakers seeking ESG-aligned Covid-19 relief options. Nevertheless, no sustainability metric or disclosure methodology is complete without meticulous itemization and analysis of relevant sustainability data.

Whether it's robust quantitative performance indicators, such as metrics on energy intensity or water consumption, or physical risks related to climate change, dozens of institutional investors have demonstrated greater willingness and capacity to truly measure the sustainability of their investments. To be sure, improving transparency in climate-aligned finance represents an important first step into a world of climate change mitigation and adaptation opportunities. In a 2019 paper, artificial intelligence experts outlined scenarios in which machine learning and the data intelligence it generates can be leveraged to tackle climate change. In the financial sector, applications for AI can include portfolio selection, based on a sustainability analysis of the stocks in question, and investment timing through analysis of historical patterns to predict demand.

Yet, ultimately, the government is responsible for ensuring this swell in enthusiasm for sustainable finance lasts. Fortunately, the U.S. government has begun to exhibit greater appreciation for this need, due in large part to the crescendoing calls for concrete action from various domestic and international organizations.

And if anything, the close collaboration between civil society organizations and major financial institutions shows a clear interest in a better defined and more conducive regulatory framework. Should U.S. policymakers wish to preserve the might of the country's financial sector in the era of sustainable investing, then they would do well to reciprocate.


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