22/01/20

FINTECH: AI to Reduce Risk for Sustainable Investments.

As published on finextra.com, Tuesday January 22, 2020.

The quest toward improving corporate sustainability is mired by uncertainty: uncertainty of emissions volume, extreme weather events, timing of such events, and inevitably, the toll they may take on investment. This uncertainty is regarded by investors as risk.

As such data sets are fundamental to determining the size and potential impact of a corporation’s carbon footprint, a new approach to demystifying the data must be found to provide investors with the certainty they need to align their investment strategy with sustainability objectives.

A 2019 survey by State Street Global Advisors found nearly half (44%) of respondents say the state of ESG data is a top pull factor hindering their ESG adoption. The most problematic aspects cited were the consistency of data across providers and the lack of availability of ESG data in some areas of the market.

Bloomberg recently explored how two startups, Cervest and Normative, are leveraging artificial intelligence to create tools which tackle uncertainty in modelling climate risk and emissions reporting.

UK startup Cervest was born out of the desire to accelerate ‘holistic adaptation decisions for all,’ that is, to translate complex data already in existence and generate proprietary data through machine learning.

Using AI to understand climate data from satellite imagery and projections, Cervest is creating a dynamic map of the earth into which further environmental data will be incorporated (such as water, atmosphere, biodiversity and population elements). The platform will equip investors and decision makers to make informed decisions about projected climate risks in a particular area over a specific period of time.

Speaking at Finextra Research and ResponsibleRisk’s SustainableFinance.Live Workshop in December 2019, Mark Hodgson, chief business officer at Cervest, commented that climate uncertainty is now seen as a very real issue and business priorities have shifted accordingly.

“It isn’t now about reporting back every quarter on performance and seeing how your share-price compares to the competition, it’s about being able to tell your investors, your employees, your customers, exactly how you intend to sustain your business into the future.

“Cervest’s magic is not so much our ability to bring extraordinary amounts of data into one repository, it’s being able to get a lingua franca output from the data sets which is of particular value for each decision that a bank or financial institution might want to make.”

Swedish startup Normative, addresses the challenge of automating reporting for emissions by calculating the footprint of players and products across a business’ value chain. Rather than paying thousands to external consultants to compile and analyse complex webs of emissions data, Normative automates the collation process and generates an estimate of a company’s footprint before recommending tools for impact reduction for a fraction of the price.

This AI backed technology is attractive not only to businesses with complex supply chains looking to streamline their ESG data, but to private equity investors who see the advantage in standardising ESG reporting across their portfolios.

Climate risk is high on the global agenda, with President of the European Commission Ursula von der Leyen strongly pushing for climate action at the 2020 World Economic Forum in Davos this week, stating: “I believe we can reconcile our economy with our planet, human development with the protection of our home…There are two kinds of capitalism: shareholder capitalism and stakeholder capitalism, stressing the responsibility of business to the whole of society.”

Earlier this month Larry Fink announced that BlackRock, the world’s largest asset manager, would be “increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.”

Despite these increasing calls for re-alignment toward sustainability to position the environment at the forefront of investment, it remains to be seen how the objectives will fair in practice. Employing AI tools developed by agile startups such as Cervest and Normative may provide the certainty required by investors to confidently allocate their resources in line with sustainability goals.