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The data advantage

Identifying climate transition opportunities for financial institutions

As the need to reduce greenhouse gas emissions continues to build, there are increasing and widespread commitments from all manners of governments, organisations and individuals to take or increase action to avert dangerous climate impacts. The recently released IPCC AR6 provides further evidence on the urgent need to reduce greenhouse gas emissions in order to avoid dangerous and unprecedented climate changes.

But the speed and composition of actions that these groups are developing in response to climate change is uncertain – giving rise to transition risk. It’s critical that organisations understand their position amongst rapidly evolving policies, technological developments, and consumer sentiment.

Financial institutions are uniquely positioned at the intersection of sectors and economies to be exposed to significant risks from the transition, but also capture outsized opportunities.

The risks and uncertainties of transition

Across all industries, organisations must navigate the uncertainty and potential impacts on their operations, value chains and broader stakeholder community. These uncertainties and impacts can be significant and from varied sources, including:

  • Policy, regulation and litigation: Are policies being implemented consistently across geographies and are they being implemented at the same pace? What is our current and future exposure to global carbon pricing or border adjustments mechanisms?
  • Technology: What technology options are available to reduce emissions, both now and in the future? How will decisions be made about which technologies and when to implement them? What additional capabilities or systems will be required to implement them?
  • Financial markets and investors: How will climate change affect the cost of capital? What will be the expectations of emissions disclosure and emissions reduction performance?
  • Supply chain and community pressure: How quickly will consumer sentiment shift towards sustainable options? Are we positioned to service significant demand for sustainable products and services? How traceable are the emissions in our supply chain?

For organisations that deal with a broad cross-section of sectors and geographies – such as financial institutions – these impacts can compound and be difficult to measure due to data constraints. If not properly considered, these may also present high levels of risk to the broader economy. This risk is recognised by the financial regulators in Australia and abroad and has catalysed processes such as the Climate Vulnerability Assessment (CVA) by the Australian Prudential Regulation Authority (APRA), which provides insights into the potential financial exposure from physical and transition risks of climate change.

Outsized opportunities for financial institutions

The same characteristics which place financial institutions at risk from the worst of physical and transition impacts also create outsized opportunities. All manner of products and services offered by financial institutions will be required to enable and capitalise upon the trillions of dollars of potential economic gain available from taking strong climate action.

The type and scale of the opportunities are unlikely to be exposed by exclusively following regulatory processes such as the CVA, as this process is more focused on marrying climate and financial data to characterise climate risks for the purposes of maintaining stability.

This is where we can rely on data. By leveraging data and insights, better decisions can be made when assessing clients for credit or in providing timely and suitable product offerings. Climate scenarios provide indications of the direction and scale of forward-looking metrics to compare progress – of emissions intensity, product deployment or sectoral exposure.

Solutions exist and are being developed to scope, identify, validate, and assess the environmental, social and governance (ESG) characteristics of portfolios and constituents. Digitally-enabled, embedded ESG information can be integrated with existing credit risk ecosystems to rapidly scale and adapt to regulatory and business demands. By not considering climate-related data as part of the portfolio investment decision-making processes, businesses and investors can be exposed to competitive disadvantage.

The evolution of action by governments, organisations and individuals to avert climate change creates both risks and opportunities. Financial institutions are uniquely positioned at the intersection of sectors and economies to be exposed to risks, but also capture outsized opportunities.

Exceeding the requirements imposed by regulators, by incorporating climate data and insights regarding risks and opportunities into decision-making processes, limits the exposure to competitive disadvantage and can provide business benefits. The insights gathered from data enables organisations to mobilise accurately and capture the enormous opportunities available throughout the climate transition. This will be crucial to enabling and accelerating the pathway to zero emissions and, ultimately, limiting global warming to well below 2 degrees Celsius.