In December 2020, Finextra and ResponsibleRisk convened a group of experts in sustainable finance to explore the evolving role of risk modeling. This conference aimed to reimagine how stakeholders can leverage risk management in the context of environmental, social, and governance (ESG) factors.
Following the event, Finextra produced a visual record that highlighted key discussions, including the challenges and opportunities associated with utilizing alternative data to refine credit decisions, as well as quantifying these decisions against physical and transition risks.
The conference utilized a top-down methodology focused on significant sustainability elements, challenging the notion that effective ESG implementation cannot yield financial benefits. Participants engaged in discussions around the advantages of assessing transitional and physical risks through real-time, forward-looking analyses related to climate change and biodiversity loss.
Experts illustrated how alternative data sources, such as satellites and sensors, can enhance traditional risk frameworks and provide actionable insights necessary for the sustained growth of sustainable financing.
Delving into operational challenges in risk management, attendees assessed the potential of alternative data to inform credit decisions, receiving guidance on how to adopt more sustainable finance practices effectively.
In an interactive forum led by Richard Peers, founder of ResponsibleRisk, cross-disciplinary professionals from technology, business, and finance examined the necessity of specifying practical use cases across ESG finance sectors.
Overview of Workshop Topics
Workshop 1: Leveraging Alternative Data for Physical and Transitional Risk
This session highlighted the challenges investors face due to short-term planning and a lack of forward-looking climate risk assessments. The workshop explored the use of Green Bonds as a case study:
- Physical Risk: Determined through geographic data of assets collected during the business case phase.
- Predictive Models: Satellite and earth systems can reveal detailed physical risks across historical and future timelines.
- Transition Risk: Links financial elements of a bond, such as interest rates, to environmental mitigation targets, including high-quality forestry offsets.
- Commitment Adherence: Real-time satellite data evaluates compliance with the commitments specified in the bond.
Nicole Anderson from Redsand Ventures emphasized that aggregating this data may be more suited for tech-focused entities than the financial services sector.
Workshop 2: Insights from Satellite Data for Investment Professionals
This session identified that current risk assessments predominantly rely on retrospective data analysis. Experts proposed a dual strategy:
- Create forward-looking risk systems with adaptable inputs to flag carbon-intensive and biodiversity-threatening activities.
- Utilize satellites, sensors, or disclosure data to monitor and trace carbon-heavy activities.
Workshop 3: Mainstreaming Data Utilization
During the final workshop, participants acknowledged that while universal asset-level data is crucial for assessing physical and transitional risks, accessing this data is a significant barrier. Environmental risk plays a critical role in evaluating companies, yet a comprehensive method to assess and price these risks remains elusive. The long-term nature of climate risks often inhibits immediate action, suggesting a need for an open banking solution to facilitate data exchange in sustainable finance.
Looking ahead, the next Sustainable Finance.Live event is scheduled for May 11-12, 2021, focusing on how innovative financial services firms and technology companies can work towards achieving the UN’s Sustainable Development Goals by 2030. To participate in the upcoming discussions, register here.