When it comes to reducing the impact of climate change, cutting emissions among the energy, manufacturing and transportation industries would likely come to mind for most Canadians. Few would think about the key role financial institutions can play in addressing climate and sustainability challenges.
But the country’s financial companies, which include banks, insurance companies and pension funds, are now playing an active role in protecting the environment.
“Financial institutions have moved well beyond just supporting sustainable investing,” says Zlata Huddleston, a partner with IBM Consulting.
While her unit works across many industries, Ms. Huddleston’s expertise and focus is on the financial services sector, which plays an increasingly pivotal role in reducing the effects of climate change.
“Managing climate risk remains a key priority for our financial services clients; however, they are more ambitious and are intent on making all touchpoints of financial services sustainable,” she says.
As the leader of IBM’s Canadian sustainability practice, the Toronto-based executive directs a diverse team of experts including environmental, social and governance (ESG) specialists, data, clean energy, biodiversity and environmental scientists.
“We help clients with the ‘what’ and the ‘how’ of achieving climate sustainability objectives,” she explains. “So whether the client knows what the objectives are and it is really a matter of reaching them, or they need help in setting sustainability and climate change objectives, that is where we assist with very targeted consulting.”
IBM is distinctly positioned to provide unique digital solutions that allow financial institutions to control the physical and transition aspects of climate risk. These include future-proofing banks from the impact of climate change, speeding up the analysis of climate risk, compiling better quality data, and integrating it with lending and other business functions.
IBM typically assists financial services clients with the creation or fine-tuning of their ESG data reporting models, climate data strategy and Scope 3 emission reporting on assets that are not directly owned or controlled.
“For financial institutions, this comes down to the climate risk embedded in their investment and lending portfolios,” Ms. Huddleston explains.
“So financed or invested emissions are a particularly thorny subject for financial firms that require a lot of analytics and a lot of data collection and cleaning that needs to be mapped and planned for. So that’s an area we play a large role in with clients.”
She recommends that banks, for example, focus on creating a data strategy for their technology platform that can drive climate risk decisions. IBM typically helps such clients manage climate and sustainability initiatives across enterprise-wide credit, operational, regulatory compliance, liquidity, market and insurance disciplines. The firm can also create a structured approach to monitoring, measuring and managing risk exposures and the potential impact of climate threats.
IBM also works with financial institution clients to identify and act on opportunities to decarbonize their operations by identifying and reporting on the reduction of carbon footprint of a major business transformation, or by focusing on green IT strategies, green software development, and green technology procurement, or by optimizing data centre resources.
The climate challenge is large and growing. About US$125-trillion will need to be invested by 2050 to reach net zero, according to data from the United Nations Framework Convention on Climate Change (UNFCCC), with the financial services sector playing a central role in this global effort. The Organisation for Economic Co-operation and Development (OECD) estimated a US$6.9-trillion dollar gap annually to meet UN’s Sustainable Development Goals by 2030. In reality, just US$1.6-trillion was estimated to have been funded for sustainable projects last year worldwide.
“As a country, we have made the commitment, and most companies have set some ambitious targets,” Ms. Huddleston says. “There will need to be a large number of projects funded by government and private sector to meet these objectives.”
It’s fair to say that most companies in North America have a long way to go to achieve net zero. A recent study by the IBM Institute for Business Value found that, while 86 per cent of companies have created a sustainability strategy, just 35 per cent have acted on it and only 13 per cent can be categorized as leaders in the area of sustainability.
The world’s leading financial institutions have committed to accelerating the decarbonization of the economy through the Glasgow Financial Alliance for Net Zero (GFANZ), which is inspired by the goals of the Paris Agreement.
To help meet the world’s climate goals, IBM has developed sustainable finance approaches, such as sustainable bond analytics, aimed at closing the sustainability funding gap. IBM is also leading the design and implementation of the Finance to Accelerate the Sustainable Transition-Infrastructure (FAST-Infra). A partnership with HSBC, the International Finance Corporation, the OECD and other organizations, FAST-Infra aims to utilize emerging technologies, including blockchain and artificial intelligence, to make sustainable infrastructure a mainstream, liquid-asset class.
“FAST-Infra will allow project managers and financial institutions to identify opportunities and scale up private investment in sustainable infrastructure, particularly in emerging and developing economies,” Ms. Huddleston says.
At the forefront of corporate efforts to tame climate change and create sustainable practices, she’s optimistic about the future.
“First of all, because I am extremely busy,” she explains. “Canadian, American and global public and private sector entities are embedding sustainability, climate risk and sustainable finance into their business strategies, and executives’ compensation is now tied to achieving climate risk objectives.”
IBM’s clients are motivated to act and the organization has the expertise to assist in the transition.
“There are many emerging technologies coming into the market that we are building at IBM, not just through our research, but we have created very specific, targeted solutions for our current customers that we can use with other customers to help not just manage climate risk but to fund the transition to a green economy,” she says.
“Whether we assist with measuring carbon footprint of hybrid cloud, or enable climate risk management or sustainable finance with AI and blockchain, our practitioners are, essentially, ‘sustainability technologists’ who are leveraging IBM’s exponential technologies to help the financial services community reach its sustainability goals.”
Advertising feature produced by Globe Content Studio with IBM. The Globe’s editorial department was not involved.