Sustainable Finance

Unlocking low carbon economy using sustainable digital finance

Published on: 9 December 2021 10:00 AM
by KnowESG
The renewable energy investment opportunity alone is estimated to reach $1 trillion per annum
The renewable energy investment opportunity alone is estimated to reach $1 trillion per annum

A Brief Summary

More than 1,200 so-called "climate tech" start-ups will be crucial in unlocking major investment opportunities for corporations and investors. Sustainable finance has become an integral part of how many financial services firms operate. Data is the backbone of investment decision-making: investors need to understand how companies may fare as the environment changes, regulation evolves and new technologies emerge. Increasingly, investors are looking for ways to measure the impact of their portfolios and set benchmarks. Switzerland, the Global Innovation Index leader since 2011, is one country providing fertile ground for ventures tackling climate change.

For climate-aware investors, modeling the potential financial impact of climate change on specific assets or portfolios can help them understand their climate risk exposure. By 2025, estimates indicate that there could be more than 160 zettabytes of data in the world and that 80% of this data will be unstructured. The availability of high-quality, data-driven insights will assist financial institutions in improving the sustainability profile of investor portfolios and in advising clients on how to align investments to their individual preferences. Technology is not a panacea, but an effective way of strengthening human judgement and amplifying the effectiveness of ESG analysis. Financial institutions can also create innovative financing models that steer client money to promising new projects and cutting-edge start-ups that are sustainable.

The consumer FinTech industry is in the midst of staggering growth in global adoption, from 16% in 2015 to 64% in 2019. Big data and AI can be used to translate financial transaction data into individual carbon footprints. More aware consumers who increasingly buy environmentally friendly products and services will in turn incentivize investments into greener production. Private investment as well as consumer choices will be critical to tackling climate change and will play an important role in closing the climate finance gap. The increased awareness of climate-related economic benefits and risks in the wake of COVID-19 has further focused investors on environment-related opportunities. Transitioning into a sustainable, low-carbon economy.

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Many countries and corporations have made bold commitments to combat climate change, dubbed the "decade to deliver" for the next ten years. Those attempting to mitigate or even reverse global warming rely heavily on technology. To boost energy efficiency, reduce overall energy consumption, and expand the use of renewable energies, intelligent goods, innovative applications of existing technologies, and even entirely new business models are emerging.

More than 1,200 "climate tech" start-ups have been recognized so far. Switzerland, which has led the Global Innovation Index since 2011, is one country that is fertile ground for climate-change-related companies. These start-ups will be critical in unlocking large investment prospects for corporations and investors, working alongside more established firms.

The global financial sector faces a fundamental problem in channeling these investments. Investors with over $45 trillion in assets under control have already decided to make climate change action a priority across their portfolios. As a result, sustainable finance has become ingrained in the operations of many financial services firms. We are certain that sustainable finance, in combination with technical innovation and banking digitalization, will be critical to long-term innovation and growth, as well as the transition to a less carbon-intensive economy.

What is the definition of long-term digital finance?

The integration of big data, artificial intelligence (AI), mobile platforms, blockchain, and the Internet of things (IoT) in the provision of financial services is referred to as digital finance.

Sustainable finance, on the other hand, is defined as financial services that incorporate environmental, social, and governance (ESG) principles into company or investment choices for the long-term benefit of both clients and society.

When taken together, sustainable digital finance is exhibiting its ability to overcome barriers and foster long-term economic growth.

Providing options for long-term investing

It will be critical to have access to high-quality, comparable data in order to expand prospects for more long-term investments. Investors need help understanding how companies will perform when the environment changes, regulation advances, new technologies emerge, and customer behaviour shifts. Data is the backbone of investment decision-making. They need to be able to better understand and quantify both risk and return. Investors are increasingly looking for ways to assess the impact of their portfolios and establish benchmarks.

As a result, the market for ESG data is expanding. Data suppliers have expanded their data sources and provided a comprehensive range of ESG products ranging from raw data to aggregated scores. The whole market might reach $1 billion by 2021, with a projected annual growth rate of 20% for ESG data and 35% for ESG indexes.

Investors will find it increasingly difficult to compare and interpret significant data due to:

  • Lack of specific data, such as indirect carbon emissions in a company's value chain;

  • Lack of standards and uniform legislation;

  • The sheer volume of data

According to predictions, there will be more than 160 zettabytes of data in the world by 2025, with 80 percent of that data being unstructured. It is commonly believed that in the future, technologies like artificial intelligence, machine learning, and natural language processing would be utilized to both generate and assess ESG data. These technologies can aid in the processing of large amounts of data, particularly in industries where data is frequently supplied in incompatible formats. They'll also be able to detect signals in unstructured data to acquire more in-depth or even predictive insights on long-term investment. These technologies will also help to lower the costs of information retrieval and improve the measurement and tracking of investment "greenness."

Technology, on the other hand, is not a panacea, but rather a useful tool for bolstering human judgment and enhancing the efficacy of ESG analysis. Financial institutions would benefit from the availability of high-quality, data-driven insights in improving the sustainability profile of investor portfolios and counseling customers on how to match investments to their specific preferences.

Financial institutions can also devise novel financing structures that direct customer funds to promising new initiatives and start-ups. Modeling the possible financial impact of climate change on certain assets or portfolios can assist climate-conscious investors to understand their climate risk exposure. Investors might then explore ways to mitigate, adjust, or shift their investments using this knowledge.

For climate-conscious investors, there are three lenses that are equally important:

  • Portfolio mitigation: reducing (step-by-step) investment exposure to carbon hazards;

  • Increased financial exposure to climate-related solutions, assets that are more resilient to the effects of climate change, or technology that resist it;

  • Portfolio transition: aligning investments with and ensuring that they are on track with the chosen climate path (whether that path is a 2°C world, a 1.5°C world, or something else entirely).

Consumer decisions that are more environmentally friendly are being rewarded. Technology can help enhance consumer knowledge about the environmental and social consequences of consumption and investment decisions, as well as incentivize people to make more resource-efficient and sustainable decisions.

The consumer FinTech business is experiencing rapid expansion, with global usage rising from 16% in 2015 to 64% in 2019. The increased use of mobile and e-banking applications provides financial institutions with a new opportunity to provide transparency to consumers about their daily consumption habits and to assist them in choosing products and services that correspond with their personal beliefs.

Take, for example, big data and artificial intelligence (AI), which may be used to convert financial transaction data into individual carbon footprints, which, when combined with digital banking services, allows for real-time analysis of the environmental impact of transactions. Consumers who are more environmentally conscious and buy environmentally friendly products and services will incentivize investments in greener manufacturing.

Responding to customer needs is good for both the environment and the company. As previously said, companies that focus on sustainability should expect to become more appealing to investors. Furthermore, studies show that more than half of consumers are prepared to pay more for environmentally friendly products that can be reused or recycled. Because of a company's beneficial influence on society or the environment, 42 percent of millennials in Switzerland initiated or deepened a business relationship.

Sustainable products are beginning to grow at a faster rate than their non-sustainable counterparts. Sustainability-marketed products account for only 16% of the consumer packaged goods market in the United States, but they account for 55% of the growth. The items also command a higher price and are growing at a quicker rate than their conventional counterparts.

Transitioning to a low-carbon, sustainable economy

Private investment, as well as consumer choices, will be vital in addressing climate change and will help close the climate finance gap. Following COVID-19, investors have been more aware of climate-related economic rewards and hazards, which has further focused them on environmental potential.

Carbon Tracker, an independent financial think tank, estimated that the renewable energy investment opportunity alone might be worth $1 trillion per year before the epidemic. Renewable energy jobs are expected to grow to 42 million globally by 2050, four times their current level. This opportunity is projected to grow much further if renewable energy, smart buildings, and cleaner public transportation are integrated into economic stimulus packages in the aftermath of the pandemic.

We believe that sustainable digital finance will be critical in channeling this capital efficiently to fuel innovation, growth, and job creation while also assisting the transition to a low-carbon economy.