Solving climate, nature and sustainability data transparency for better risk management
Environmental Finance: What challenges or issues do companies face regarding risk management?
Girish Narula: In recent years we have seen more companies trying to incorporate climate and nature into their risk management processes, but sometimes lack the data to do it.
One of the major challenges facing the industry is the lack of trustworthy, transparent, and credible data. This is a particular issue for private markets, but there are often gaps in public markets also about forward-looking targets and transition plans. One of the bigger challenges for clients is location-based or geospatial data. Many want to know how physical assets might be affected by climate change. And when trying to understand the nature-related impact, the data is even more scarce.
Another issue, from a risk management perspective, is the lack of data and transparency for companies lower down in their supply chains, an increasingly important area of focus for regulators and investors.
EF: What are the benefits of improved transparency?
GN: Transparency is critical for any progress. What cannot be measured, cannot be improved.
Hence one of the most obvious benefits of data transparency is that investors can have more confidence in their decision making and make better informed choices in their strategies. It is challenging when companies use different reporting standards, putting the onus of normalisation and standardisation of disjointed data points on investors that very often are unable to integrate the climate, nature and sustainability data with other financial data or put it into their proprietary risk models. More transparency also means investors can benchmark different companies and understand how they perform compared with the sectors or peer groups.
Transparency is also essential for understanding how companies execute and implement transition plans within their business models to match their ambitions against progress.
EF: How is ICE working with clients to improve transparency?
GN: Our mission is to provide a comprehensive view of climate and nature data, analytics and workflow solutions for the financial market participants to achieve their sustainability ambitions.
We work very closely with all our clients to help them with their risk management processes. For example, one of the challenges in the market is the lack of data in private markets. So, we have built inference models, that have been tried and tested over the past 10 years, that give clients a good sense of emissions where no reported data is available.
Another area we work very closely with clients on is disclosure and the quality of the publicly available data so it can be compared.
We also do a lot of work on forward-looking data, such as science-based climate models that are open and available publicly.
One of our solutions allows clients to upload their portfolios so they can examine companies’ decarbonisation and transition plans. We can show how a company expects to decarbonise, provide a benchmark to its peers and the sector, and evaluate whether those transition plans are realistic based on our assessment of the data.
We also provide a lot of support around supply chains and Scope 3. We have a very granular data set that enables the evaluation of supply chain risks, and we are going to launch that as a product very soon. It will not only provide climate data, but also show how it impacts a company’s profitability or the financial impacts of these risks.
Finally, we are working with clients in the climate, nature, sustainable and green bond space to bring more transparency and better data quality for showing the use of proceeds and how these bonds are used in the climate transition financing.
Our expertise in linking financial instruments across fixed income and other asset classes with climate and nature data is critical in helping the market participants see the holistic impact of their decisions across the investment lifecycle.
EF: What role will data and transparency play in shaping risk management in the future?
GN: Many clients started the risk management journey from a climate perspective with exclusions or inclusions but have moved on towards more closely integrated data sets for their risk models. We believe there will be more focus on short-term risk assessment and integrating climate into those models, as much risk modelling is based on the long-term impact.
As carbon markets further develop and become more regulated, we think we will see more focus on supply chain risk models and the integration of climate and carbon pricing. And as data becomes more reported and verifiable, you will see the integration of this data into risk models.
For more information, see: https://www.ice.com/fixed-income-data-services/sustainable-finance
