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Green finance covers a wide range of financial products and services, which can be broadly divided into banking, investment and insurance products. Examples of these include green bonds, green-tagged loans, green investment funds and climate risk insurance. However, a friend of mine mentioned moving into a focus on spatial finance the other day. Spatial finance? What’s that?
‘Spatial finance’ is the integration of geospatial data and analysis into financial theory and practice.
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We have taken nature as the basis of all human economic activity for granted. The economy and the finance sector depend as well as impact nature. Financial decisions need to take these risks and opportunities into account. To date such assessments have been difficult. However, with the advance in geo-spatial and earth observation data combined with artificial intelligence and machine learning, new opportunities are rapidly developing to manage risk, opportunity and impact. This new and emerging field is called Spatial Finance.
Oh, so spatial is taking geographic data sensors from Earth and Space and linking them with AI and ML (Artificial Intelligence and Machine Learning) to monitor human and financial impacts on our world? Sounds about right. It’s a sustainable investing thing.
Spatial finance offers socio-economic and environmental insights that have the potential to enhance data transparency in the financial system. How could this help create a smoother transition to sustainable development? Spatial finance, the integration of geospatial data into financial practice, can help increase transparency within the financial system for practitioners and data providers alike. Sustainability related risks can be better managed through the use of geospatial data. It can also assist in the analysis and management of other factors affecting risk and return in different asset classes. A primary objective of The Future of Sustainable Data Alliance is employing new data and technology to support a just transition to sustainable development.
But how does it work in practice?
At its most basic level, spatial finance begins with the accurate location and definition of ownership of a commercial asset (i.e. factory, mine, field, ship, retail estate) known as ‘asset data’. Using different data approaches in combination, such as Geographic Information Systems (GIS) and remote sensing it is possible to assess the asset against ‘observational data’, such as environmental, climate, governance and social variables. Sub-asset monitoring (e.g., power smart meters) or voluntary reporting (e.g. ESG company reports) can be integrated for even greater insights. Merging results of multiple assets at the subsidiary, parent company, portfolio or national, or sector level, provides insights at scales relevant to different financial applications, ranging from project finance to sovereign debt. For a company whose environmental impact is primarily created through its supply chains, its footprint can be defined by running a spatial finance assessment that includes all the suppliers’ assets as well as its own direct assets. For example, to understand the footprint of a major car manufacturer, run a spatial finance assessment of the car manufacturer’s physical assets, their factories, headquarters etc., and a second assessment on their supply chain assets.
Funnily enough the insurance industry has been on top of this for a few years with technologies like FarmTech. What is FarmTech? It’s the use of digital sensors to monitor fields, crops, stock, herd, flock and more to report, in real-time, the state and the health of the farm. This can be deployed not just to farms but to any area of wildlife, forest, oceans and sea.
In summary, spatial finance combines digital with finance. All aspects of environment, our world, biodiversity and climate are sensed by technologies and that data is fed back to corporations and financial institutions to create a pulse of our world’s health. The challenge is then to have financial institutions act upon that pulse. Some do, particularly insurance companies, but it is not a given. It is an ask. And, if the customer asks, then it could become a given. Are you asking?