After leaning back and leaning into sessions where leaders in sustainability, spatial finance, risk management, technology and consulting set the scene, attendees were invited to learn by doing, share best practices and align priorities to create a visual record of the solutions discussed.

$47 trillion of capital has been pledged to sustainable finance and supporting outcomes aligned to sustainability and impact goals, such as the UN SDGs.

However, this huge volume of capital is trickling from behind a dam created by uncertainty from lack of data, taxonomies, schemas, reporting and products that are robust enough to satisfy financial institutions’ risk registers. The result is a lack of confidence in viable options for investing in sustainable initiatives.

The investor lens

Across two days and three workshops, hundreds of players from the sustainable finance space came together to reimagine risk modelling, with the first co-creation panel tackling short term planning and a lack of forward-looking climate risk predictions. What this has resulted in is investors being presented with the challenge of building a business case and pricing risk.

Expert facilitators from Elastacloud, S&P Global Ratings, EBRD, Redsand Ventures, Verisk Maplecroft, PwC Space and Mantle Labs explored how to ‘green’ finance when while the industry has access to asset level databases, climate risk tools, risk management teams and bond issuers, the lack of aggregation rules persists.

By linking climate data to credit risk, spatial data could potentially be used here, as it would help to understand how the natural environment is destabilising and how changes to climate could be detrimental to credit quality.

Forward-looking models must be used, but is the market ready? Conversation turned to an age old debate around whether purchasing or investing in a green bond provides the same return as a traditional bond, and this lack of understanding is resulting in the ‘triple bottom line’ not being leveraged and many organisations losing out on the benefits of ‘going green.’

In addition to this, spatial data is scientific in nature and therefore alien to financial organisations. Therefore, the remit of analysing data must not fall to the investor: a platform must be created so that the myriad of different sources of data can be aggregated, but the high dimensionality of data science also creates another problem.

For this reason, collaboration is of paramount importance - whether it is between private and public markets or governments and academia. While all agreed that education is needed across the board, some posited that rather than being concerned about improving data, satellite data needs to be used in the first instance, especially before finessing processes. Ensuring data is available would make the most impact.

The risk lens

The second co-creation workshop was based on a scenario and one that explored how current risk practices are largely based on rearward-looking analysis of annual data that informs short term decision making yet disregards non-financial data. What happens in this situation is the emergence of a pricing gap, inhibiting the flow of capital to innovative industries that can support the decarbonisation of the economy and protect biodiversity.

Panel facilitators from ESG Treasury, Wonder14, Impact Investing, WWF, Verisk Maplecroft, Smart4Tech and Earth Knowledge proposed a forward-looking risk system with dynamic inputs that can identify carbon intensive and damaging biodiversity activities across supply chains and help price this climate or natural capital risk.

While banks must continue to ensure they hold enough capital for expected losses, turning their focus to the financial impacts of climate change, financial institutions will soon have to consider the implications on their portfolios, as well as additional capital requirements and complying with Basel III as it evolves.

The panellists explored how there is a lack of standardisation where measuring transition risk and physical risk is concerned, and for shared value to be extracted, there must be shared infrastructure. But how can one balance weighting or compare habitat risk with ecological risk?

Therefore, the method of calculating risk must be bespoke to individual assets, but frameworks such as those set out by the EU Taxonomy must be utilised, for some semblance of standardisation.

Weighting risk is a constant battle for investors as loss of capital is a continuous worry. Whether it is worrying about whether weather risk is going to materialise, how this will affect bond price or whether not taking action will result in a fine or loss of licence - there is no hard or fast rule - it is dependent on stage of growth and competition, in a similar way that this impacts financial valuation.

Alongside concerns around loss of capital, it is crucial for these characteristics to be connected to overall business strategy in an organisation, integrating sustainable elements to evaluate physical and transition risk and ensure financial and environmental success.

The alternative data lens

In the third and final co-creation workshop, facilitators from Agrimetrics, Bardsley, WWF, Verisk Maplecroft, Satellite Application Catapult, Ocean Mind, Earth Knowledge, Refinitiv and Oxford Earth Observation worked through the problem statement: the absence of a broad universe of asset data, aligned by location and by owner, prevents proper pricing of ESG risk.

Identifying issues with the inaccessibility of universal asset level data and the impact this has on the measurement of physical and transition risk, the session highlighted how environmental risk will play a key part in company evaluations. However, another issue emerges as there is no standardised way of pricing this form of risk. Again, satellite, sensor or in situ can help but the real test is transforming what is regarded as alternative data today, into what is perceived to be ‘mainstream’.

A viable solution to this problem could be a data marketplace, where issues and needs are captured and clear value propositions are deduced within the new entity that is created, ultimately addressing the problem of provision of data and between asset owners and funders.

But how do you convey data quality and how can the data marketplace characterise levels of credibility? A few panellists stated that certifications could be provided, but later in the session, the concept of monetisation was brought up.

While it is not profitable to maintain datasets in the commercial space, companies cannot be relied upon to provide data, regardless of how important it could potentially be for banks, insurers and the supply chain. Insisting organisation share their data or provide access to it is not feasible, but a middle ground must be found. This is perhaps where legal agreements need to surface, or encryption so that there are no barriers to entry for data access, but all organisations will be searching for an incentive.

In January 2021, Finextra and Responsible Risk will be publishing a Visual Record that includes solution-based discussion and best practices from our co-creation workshop facilitators. Click here to read the Visual Record from the Sustainable Finance Live event in June 2020.