The newly established UK Green Finance Taskforce has an appropriately ambitious six-month timeframe to make recommendations to help ensure the UK remains the world’s leader in providing the capital and financial services needed for the transition towards global environmental sustainability. We are entering the most capital intensive period in human history with clean technologies at the very centre. This will benefit owners and organisers of capital and the UK is uniquely placed to reap the benefits.
Fundamental to this is transparency. Financial centres agglomerate and attract financial institutions and related service providers to be close to one another for many reasons. One of these reasons is to reduce information asymmetries and the transaction costs associated with gathering, assuring, and using information.
For green finance to develop and expand in the UK, financial institutions must have unparalleled levels of access to information to enable its financial institutions to fully assess environmental risks, returns, and impacts. Data and information allows financial markets to access green opportunities and manage physical and transition risks related to environmental change.
There are several key elements to ensuring there is sufficient information to green finance. First, appropriate disclosure, particularly implementing and then building on the recommendations from the Task Force on Climate-related Financial Disclosures (TCFD). Second, utilising developments in data capture (e.g. satellites and sensors) and data processing (e.g. machine learning and natural language processing) to complement and enhance disclosed information. Third, developing analytical frameworks, processes, standards, and capabilities that can ensure the comparability and usability of data and related analysis (e.g. scenarios, data standards, tagging/back-tagging, and distributed ledger technologies).
There is significant potential for a public-private collaboration on these issues, particularly in terms of utilising new technologies that can provide unparalleled levels of transparency: green fintech.
The proliferation of satellites and sensors allow us to see what is going on around the world in more detail than ever before. We can now see what risks and impacts face companies and assets at incredibly high degrees of granularity without companies disclosing information. When combined with machine learning to rapidly process and interpret the huge amounts of data generated from new data capture methods, this can unlock significant analytical capabilities for investors and other stakeholders. Developments in distributed databases and block chain also open up novel applications that are relevant to the adoption of these capabilities.
The UK has demonstrated world leadership in these areas. These now need to be brought together in a comprehensive way to accelerate innovation in this field. The creation of a new UK Green Fintech Catapult (GFC) would build off sustained UK investments in remote sensing (e.g. European Space Agency, EU’s Copernicus Programme, and the UK Satellite Applications Catapult) and big data (e.g. the UK’s Alan Turing Institute), generating new applications from these endeavours. It would focus on making the most of existing data capture investments, rather than seeking to develop this infrastructure directly. This means that the costs will be significantly lower than other catapults.
The GFC would provide capabilities and testbeds to support green fintech development by public and private sector actors. It would do the following: i) provide access to satellite and remote sensing data that would support the development of new green fintech products and services; ii) provide computing power to support big data analysis and machine learning applications relevant to green fintech; iii) support the creation of algorithms and processes to match datasets, particularly in terms of linking asset-level data with ownership information (a key pre-requisite for many green fintech developments), iv) develop methodologies to measure environmental risks and impacts currently and in the future, v) develop a global MRV system for remotely measuring the point source of emissions of individual facilities and land use change globally, vi) develop distributed databases and blockchain technology that can support the creation and development of asset-level databases and information sharing between public and private sectors relevant to green fintech, vii) establish the rules, principles, and technologies required to create a global database of asset ownership based on observational data (providing unparalleled levels of transparency for global governance, including in terms of climate change), viii) pioneer applications of green fintech for policymakers and regulators in the UK and internationally, and ix) develop approaches using novel datasets and methodologies to tag all publicly traded securities with a shade of green.
In each of the proposed areas, innovation and research is at a relatively nascent stage. There is, therefore, a significant opportunity for UK actors to set standards across a wide range of areas. This would guide the development of key markets for many decades to come and give the UK a comparative advantage over other jurisdictions. The window of opportunity is brief and the UK is well-positioned to grasp it.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of The Economist Intelligence Unit Limited (EIU) or any other member of The Economist Group. The Economist Group (including the EIU) cannot accept any responsibility or liability for reliance by any person on this article or any of the information, opinions or conclusions set out in the article.
