Sustainable Finance | January 03, 2022
Imagine a world where farmers use satellite data and AI modeling to determine how climate resilient their lands are, how much carbon their soil and crops are sequestering, or how susceptible the farm might be to extreme weather events like drought, flooding, frost or forest fires, over the short-, medium- and long term. Or where a company uses this technology to monitor, in real time, fugitive emissions from its facilities, or management of water resources?
What if a shipping or logistics company could plan transport routes and manage supply chains based on geospatial mapping against the likelihood of disastrous climate events like storms or high seas that could endanger the lives of its employees and their cargo? Or if fishing companies could ensure that their vessels are not fishing illegally?
Now imagine this technology integrated into finance, so that performance can be measured and monitored and, if meeting an agreed upon standard, can result in a financial benefit that is supported by the company’s bank or investors. Clearly this would create a virtuous circle, incentivizing sustainability.
In fact, technology today is making this happen, allowing us to analyze more data about our planet than ever before, globally and down to the resolution of a square meter, presenting us with new tools to protect our businesses from the impact of climate change and reach a net zero world.
We call this spatial finance, and it has the potential to revolutionize the integration of sustainability into finance and banking.
As the world embarks on the transition to net zero, it is clearer than ever that understanding decarbonization pathways will be critical to reaching the destination, and that technologies like these will be key enablers of solutions.
Finance will also be at the core of climate solutions – a theme underscored repeatedly in COP26 meetings in Glasgow. Technology provides the means for linking sustainability performance to capital allocation, and to incentivize strong performance aligned with global goals. Known as spatial finance because it combines geospatial climate data and financial theory, it is technologies like these that will become critical AI tools to synthesize data and help businesses assess the short and long-term risks that climate change could have on their operations.
Integrating climate into business strategy and risk management is a key focus of the BMO Climate Institute, just as using technology to predict future climate trends and identify risks and opportunities for the bank and its clients is core to BMO’s sustainability strategy.
The Institute launched In March 2021 as part of our Net-Zero Ambition, and is a centre of excellence within our company with a mandate to harness the combined scientific and analytics expertise of the bank and its partners to better understand and manage the financial risks and opportunities of the transition, for ourselves and for our clients.
As part of that process, we partnered with innovative technology partners, like Climate Engine, which leverages big data through Earth observation platforms, such as satellite imagery, in combination with rigorous scientific models to understand and even model what climate impacts might look like in the next few weeks, months, or even years and decades from now, across regions, countries, cities, and agricultural lands. The technology can help us understand the impacts of a changing climate on business today and into the future.
All that data – which is synthesized using advanced analytical capabilities including artificial intelligence – can help businesses assess the short and long-term risks that climate change will have on their operations.
“I think we’ve been living in a world that (believes that) somehow the economy lives outside of the environment, and that’s a myth. And the impacts of living within that myth are starting to be seen across different variables: water usage, climate change, greenhouse gas emissions. I think the time is now to really act in a way where we’re connecting the economy to the environment,” Jamie Herring, CEO of Climate Engine, told me in a recent interview with BMO Sustainability Leaders.
That was abundantly clear at the COP26 gathering in Glasgow, where the delegate from Fiji described how a cyclone in 2016 erased 1/3 of the country’s GDP over the space of 36 hours. Closer to home, just this past summer, we saw a province-wide heatwave in British Columbia help spark a tragic fire that burned much of the town of Lytton to the ground. And then, more recently, we saw Vancouver, home to one of Canada’s largest ports, lose transport links to the rest of the country after intense rains and heavy winds led to devastating flooding and landslides.
Technologies used by Climate Engine are helping companies and governments to understand and operationalize data to help make decisions about what they are doing to either reduce risk in the face of extreme climate events that will inevitably continue to happen, or reduce the negative impacts of economic activities and behaviors.
Committed to be our clients lead strategic partner in the transition, we started talking to Climate Engine over a year ago to look at potential applications of its technology for banking and finance. We turned to our own Data and Analytics AI Labs at BMO and asked them to help build a platform that would take the analytical capabilities provided by Climate Engine and allow us to combine it with our own data on physical locations for all of our clients, from home mortgages to businesses large and small, local and international.
Using Climate Engine’s technology, the Climate Institute can use this scientific modelling to help make sense of all the data, and spot risks and opportunities to advance climate action.
While still in the early stages, spatial finance holds enormous promise across a wide range of applications. With petabytes of satellite data, we can now start to see information about the planet and the impact of economic activities, with the ability to map this information to financial instruments.
It is also a critical tool in helping to get the bank, and our clients, to navigate the transition to net-zero emissions by 2050 and building resilience to physical climate change risks. Through the BMO Climate Institute, looking at how climate science can help in both risk management and in motivating activities to address climate change through finance.
Managing climate change and a sustainable transition will be as much about opportunity as it is about risk. For instance, cities will need to rethink infrastructure needs in order to mitigate vulnerability to a changing environment. With climate analytics, a municipality can adapt to likely climate events by incorporating different scenarios into its planning to ensure that it evolves along with the planet.
Having a clearer understanding of the financial industry’s role in addressing climate change opens the path to change, allowing the sector to provide solutions ranging from new kinds of insurance products, to novel fixed income offerings, investments in game-changing startups and risk assessments that are more nuanced and company-specific.
While we may not be able to stop climate change in the near-term, we must be able to evaluate, map, and mitigate the impacts. It’s hard work, but with the right tools and willing partners, we can be prepared for what lies ahead.
About Michael Torrance:
Michael is Chief Sustainability Officer at BMO Financial Group. Michael spearheaded the founding of the BMO Climate Institute in March 2021. Passionate about sustainability, Michael leads strategy and implementation of sustainability governance, disclosure, engagement and innovation at the bank. Michael was recently a lead BMO delegate to the Sustainable Innovation Forum, which occurred alongside the Global UN Climate Conference (COP26). View the Climate Institute’s Call for Action video aired in Glasgow.