Climate is a data problem. Technology is the answer.

A unique opportunity for collaboration between the Financial Services Sector and Technology

By and Zlata Huddleston | 7 minute read | May 3, 2022

I was recently reminded of the famous first line of Leo Tolstoy’s novel: “Happy families are all alike; every unhappy family is unhappy in its own way.” During the unprecedented heat waive, record-breaking rainfall and landslides that destroyed highways and railroads in British Columbia last year, every impacted family suffered differently, had its own story. The climate disaster will play out very differently for all of us. It won’t feel like we are in it together.

The IPCC Sixth Assessment Report, which supports this grim picture with technical and scientific data, was introduced to the world with an equally dramatic overture by the UN Secretary General António Guterres, who bluntly called the report’s findings “damning,” a “litany of broken promises,” a “catalogue of empty pledges,” and a “file of shame” (I had to rewind that one).

We are fast-tracking toward an “unlivable world.” It is time to stop scorching our planet and start making climate data-informed, risk-based decisions – and start aggressively directing funding to sustainable outcomes.

 

 

How the sustainability imperative is driving the financial industry evolution.

A massive economic transformation is urgently required to lessen our dependence on fossil fuels so that the future global economy can operate without damaging the climate any further. Economists estimate that a $125 trillion investment will be needed to reach net zero by 2050. The financial services sector (FSS) will play a pivotal role in reaching that goal.

At IBM, we believe the key action items resulting from COP26 can be viewed by FSS across four key market objectives:

 

COP26 Goal 1: Securing global net zero emissions by 2050

 

FSS Action: Journey to Net Zero

A recent IBM Institute for Business Value study showed that while 86% of companies have created a sustainability strategy, only 35% have acted on that strategy, and only 13% can be categorized as leaders in this area. Clearly, more must be done.

One of the examples of IBM offerings in this theme is Sustainable Business Transformation. As our financial institution (FI) clients undertake major business transformations, we believe that every large transformation is an opportunity to consider decarbonization from a sustainability perspective – a chance to ask: What is the carbon footprint before, during and after the transformation? How can I measure the success of a digital transformation by demonstrating a clear greenhouse gas (GHG) reduction related to business operations after the transformation is completed?

IBM works with FIs and partners to improve data identification and collection, data quality and integrity, ESG analytics, internal & external reporting, decision-making and much more. We assess our clients’ sustainability maturity, and specifically, GHG management and ESG Reporting maturity, and find solutions to embed sustainability, including emissions reduction strategies, into the fabric of their business to deliver bottom line value through increasing operational efficiencies, exposing innovation opportunities, and developing competitive differentiation.

With banks, we work closely on helping them solve for the “full scope” GHG emissions measurement and reporting, with the focus of avoidance of double- and triple-count of emissions across the full enterprise.

One of our clients recently engaged with IBM to co-create a new tool, using IBM Garage for Sustainability, to empower employees to understand their business-related travel emissions to encourage emission reductions.

 

COP26 Goal 2: Adaptation, building defences and establishing warning systems (Risk Management)

 

FSS Action: ESG & Climate Risk

Achieving a net-zero carbon footprint and managing financial impact of climate change have become stated goals of many financial institutions. Yet, achieving these goals are an enormous challenge for any firm, representing a transition risk pathway in and by itself.  How to embed climate risk management in business-as-usual for a bank is difficult to answer and requires foresight and innovative thinking. Banks that recognize that climate is a data problem demonstrate such thinking.

As regulatory requirements roll out, banks are searching for more effective data sources, tools and platforms to address client and climate-related data challenges.

We recommend that banks  focus on building a data strategy for the technology platform that serves as an engine that can enable all climate risk management use cases. IBM helps FSS clients manage climate and sustainability risks proactively across operational, market, insurance, liquidity, and credit disciplines. We offer a structured approach to monitoring, measuring, and managing risk exposures to reduce the potential impact of uncertain climate and ESG occurrences.

Recently, a large North-American bank asked IBM to deliver a climate data strategy, target state architecture and IT roadmap to help the bank achieve its climate priorities such as reduction in GHG emissions, achieving net zero, and supporting the low carbon economy through low-carbon financing.

 

COP26 Goal 3: Funding the transition to the green economy or sustainable finance

 

FSS Action: Sustainable Finance and Sustainable Insurance

Funding the gap of US$6.9 trillion annually to meet the Paris Agreement goals is an ongoing challenge. In 2022, only US$1.6 trillion in sustainability funding was deployed globally. The GFANZ pledge presents a  colossal opportunity for North-American financial institutions, but deploying on these commitments is an enormous challenge.

Sustainable Finance helps put public and private funding and investment towards the transition to a climate-neutral economy and socio-environmental objectives through financial models, products and markets. In its wider definition, Sustainable Finance refers to any kind of financial product or service that takes sustainability into account. Intelligent and automated workflows, exponential technologies and platforms can enable sustainable financing initiatives to be deployed with the urgency associated with our climate emergency.

In partnership with HSBC and others, IBM is leading the design and development of the FAST-Infra (Finance to Accelerate the Sustainable Transition Infrastructure) technology partnership. This platform aims to close the trillion-dollar sustainable infrastructure investment gap by transforming sustainable infrastructure into a mainstream, liquid asset class.

 

COP26 Goal 4: Collaborating across sectors and consumers and integrating sustainability into everything we do. In FSS, it’s about integrating sustainability into client experiences.

 

FSS Action: Sustainable Client Experiences

FIs are looking to accelerate and deliver better consumer and employee experiences by embedding sustainability design thinking into the customer lifecycle and into the design and delivery of products, business solutions and experiences.

As part of their broader sustainability strategies, FIs are launching green financial products and experiences to attract new clients, retain existing clients and expand to new retail demographics and new commercial markets.

SMBC, The Climate Service and IBM Japan collaborated to launch TCFD-Aligned Climate Risk Analysis Services for SMBC’s corporate customers, to prepare them for compliance with new climate risk disclosure rules. This will allow them to analyze the risks, opportunities related to climate change, as well as the potential impact of regulations governing financial disclosure.

 

Fuelling climate risk management and sustainable finance with data and technology

Since the Paris Agreement, consensus across science and public and private institutions has been reached that the World should pursue efforts to limit the temperature increase to 1.5 degrees Celsius above pre-industrial level. IPCC AR-6 reminded us that keeping warming below 1.5 degrees Celsius threshold will require us to attain negative emissions and reduce emissions rapidly, which would not be possible without understanding and leveraging climate data or without investing in research and technology.

IBM has been a leader in sustainability research and technology for over 50 years.  Every day, we help financial industry address climate and other sustainability challenges with our AI, Hybrid Cloud, Intelligent Workflows, process engineering, digital and data solutions and our ecosystems of partnerships. Our focus on sustainability business imperative helps banks and other financial services clients better manage their journey to net-zero with full-scope emissions reporting, climate risk, sustainable finance frameworks, and sustainable client experiences:

  • Our data analytics and exponential technologies help banks solve for “full-scope” reporting challenges, incorporating Financed Emissions in Scope 3 reporting, while focusing on avoidance of double- and triple-counting of emissions.
  • IBM’s Sustainable Finance data ingestion, curating, modeling and visualization help banks align market-facing financial funding instruments to creating social and environmental impact for their clients in a streamlined way.
  • As an AI and cloud leader, IBM is an expert in delivering technical and strategic solutions that help FIs manage both physical and transition components of Climate Risk. Specifically, IBM looks to future-proof banks from the impact of climate change, to accelerate the analysis of climate risk, enrich banks with climate data, integrate it with lending and other business functions and internal and external data sources, and define a common vocabulary for climate data within a banking organization.

 

Only timely investment in data and technology can guarantee a “livable world”.

It is this kind of impact that brought me to IBM from the banking industry. The rise in appreciation of climate data fabric, coupled with exponential technologies and the urgency of climate action present a unique opportunity for collaboration of technology sector and the financial services sector. It is time to turn the “catalogue of empty pledges” into the catalogue of climate data governance, and the “file of shame” into climate data platforms that secures the world’s Net Zero emissions by 2050.

 

Zlata

 

About Zlata Huddleston:

Zlata, who is based in Toronto, is a Partner, Financial Services and Sustainability Lead, IBM Consulting, focusing on Sustainable Finance, Carbon and Financial Reporting, and Climate Risk. Prior to IBM, Zlata spent 30 years in Corporate & Investment Banking in Canada, US and Internationally, where she worked in several executive roles in Financial Institutions Coverage, Corporate Lending, and Risk Management.

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