On the 5th of March 2020, the Spatial Finance Initiative hosted its 3rd Spatial Finance Connect event in partnership with WWF-UK. Experts from the finance, data and conservation sectors came together to discuss how geospatial solutions could help financial institutions address the biodiversity crisis (Reference 1). Within this article, we summarise the key takeaways from the evening.
Setting the scene – David Patterson, WWF-UK
1. Selling the need for biodiversity data to investors
David’s talk made stark how the future of our global economy is now wrapped up in our combined response to the climate / biodiversity crisis, and how the negative impacts of these crises are already directly impacting GDP. For example, rice production in Bali has fallen 20% in recent years, and while we might not feel this ramification immediately in the west – stability – the bedrock of the global economy is now at risk. The key to selling biodiversity data to the financial community is accurate, trustable, and accessible biodiversity data to empower decision making.
2. The need for ESG data standards
The current adoption of geospatial data across the finance community varies. Commodity departments use it extensively to estimate resource extraction and processing efficiency, while sovereign bond investors use little to none. Disparate uptake can lead to confusion between peers, which in turn will slow the uptake of data. If geospatial is to be adopted and fully utilised by all types of investors, we all need to speak the same language and standardisation will be needed.
To align our terminology around data, David proposed the 4-tiered model shown below. Whilst Tier 1 and Tier 2 data are currently widely adopted within investment communities, they are typically not derived from (sub-)asset-level information. Mainstreaming the use and analysis of Tier 3 level data is still a challenge, especially given the investment decision timeframes required for some clients. Asset-level data is information about physical and non-physical assets tied to company ownership information. This information can include asset location, capacity, technology used, emissions, etc. Mike Hugman, portfolio manager at Ninety One, later proposed a 5th tier or tier 0 for countrywide data or scores that capture trends on a national level, particularly relevant for sovereign debt investing.
Source: David Patterson, WWF-UK
A banking perspective – Giulia Guidi, Independent ESG expert
3. Fast turnaround Tier 2 data makes up most of the work
Biodiversity risks for banks are mainly a reputational risk consideration, though it could become a credit risk in asset financing. In Giulia’s experience, an environment, social and governance (ESG) analyst at a bank will get asked to consider biodiversity risks either at a project level or at a company level. Project-level or asset-level finance can take several months to set up, giving the analyst several months for its analysis, including surveys and site visits. These requests will make up 10% of the analyst’s work. 90% of the analysts’ work is assessing ESG risks on a whole company level (tier 2), in a matter of hours rather than months to match the pace of investment decisions. However, as shown by David’s pyramid model, the quality of this tier 2 data is dependent on decent tier 3 data. Without reliable access to a company’s physical footprint, aggregated corporate level analysis becomes a ‘best guess’.
4. ESG analysts’ workflow can be improved
Giulia highlighted a typical workflow for an ESG analyst, looking at corporate level risks:
There are many opportunities within this workflow to create data insight products for analysts that help alleviate pain points, for example, ownership chain identification, footprint mapping, and cross-platform analysis.
A sovereign debt investment perspective – Mike Hugman, Ninety One
5. Current macro-economic models cannot incorporate climate/nature concerns
Economists try to represent the economy and its various impacts in a set of models though struggle to integrate the climate or nature related crises due to their complex nature. One example that Mike highlighted was a recent report from JP Morgan that reviewed multiple predictions and models on how climate change will impact GDP. One of the – Nobel prize winning – models that were assessed, predicted a GDP decline by only 20% in case of global temperatures rising by 12 degrees Celsius. As this would render the planet basically uninhabitable, how could there even be any GDP left? Current integrated assessment models are inadequate and there is a huge need for new and better macroeconomic models and frameworks incorporating climate and nature-based variables and observations.
6. Sovereign bond market lacks macro ESG analysis and tools
Financial and GDP impacts from nature and biodiversity losses could be significant on a country level. Climate change could turn whole regions uninhabitable or infertile. This needs to be calculated and understood by sovereign bond investors who lend money to governments. However, within the sovereign bond market, macro-economic ESG analysis is rarely performed. Actionable ESG data on a country level is required for investors to assess these risks and impacts. With the growth of sustainability linked bonds, solutions to monitoring impacts linked to the proceeds of the bonds will be required.
An ESG research provider perspective – Luba Protopopova, RepRisk
7. Avoid the ‘blackbox’ data product
Traditionally ESG research and data providers provide consolidated ESG scores based on proprietary, ‘black box’ methodologies. This means they generate different outcomes for the same company, leading to a lack of trust in this data by investors. Luba highlighted the importance of transparency in terms of methodology and data sources when creating products for the finance community. Understanding the context behind the metrics and drilling down in the underlying data allows users to better understand, compare and triage the results, while building trust in the solution.
Biodiversity footprinting – Edward Pollard, The Biodiversity Consultancy
8. Opportunities for better understanding of biodiversity impacts and supply chains
Large companies with complex supply chains, some purchasing over 3,000 commodities have footprints that are near-impossible to measure, which again results in ‘best guess scenarios’ for biodiversity impacts. Recent campaigns around some ingredients such as palm oil have been fantastic in highlighting biodiversity impact. However, palm oil is the exception and not the norm, many raw materials such as aluminium found in deodorant cans can’t be traced and proven to be good. However, without somebody asking for supply chain origins, this information won’t be sourced. Who, in the investment world, will start asking for biodiversity scores? Or will it be the consumer?
9. Ecosystem analytics solutions outside of forestry are missing
There is a lack of biodiversity analytics products that focus on ecosystems outside of forestry. While forestry is often in the news and often linked to troublesome and important issues, Edward made a call for more biodiversity focused solutions around ecosystems such as wetlands, rangelands, grasslands and the Artic.
We’ve seen various opportunities for existing geospatial solutions to be used more widely by financial institutions to understand biodiversity risks and impacts and for new solutions to be developed that help analysts incorporate this data in their daily workflows. We need to develop and scale these solutions quickly if we are to address the broader nature/climate crisis effectively. The spatial finance initiative is set up to promote both the adoption and supply of spatial finance solutions, so please do reach out at email@example.com if we can support your organisation on this topic.
About the author
Matthew Carter is a Design Thinker at the Satellite Applications Catapult, focused on keeping the end user at the heart of space technology interaction.
Reference 1: If you are unfamiliar with the biodiversity crisis, how it impacts our economy and how it differs to the climate crisis, PWC’s Nature is too big to fail report provides a good introduction to the topic.
If you have any further queries about the Spatial Finance Initiative, please email firstname.lastname@example.org