The unlikely link between financial data and tackling climate change

The Global Open Finance Centre of Excellence in Edinburgh is at the forefront of exploring how financial technology can help fund the transition to a low-carbon economy.

SCROLL through the app store for any mobile phone or tablet computer and there are a range of programs to enable you to take control of your cash. From apps to help you budget to apps to help you save, there are more and more choices for consumers who want to manage their money.

That wide variety of apps has been driven by the UK’s “open banking” landscape. After customers have chosen to share their bank account data safely and securely, they can then access a range of apps developed by banks and financial technology (fintech) companies to help them get on top of their personal finances.

The next step is “open finance”, which will extend the benefits of open banking into other parts of the financial services market, including insurance and behind-the-scenes regulation. In the years ahead, customers will be able to buy insurance policies tailored to their specific needs, while regulators will be able to make sure rules and regulations are protecting consumers by studying financial data.

Those same benefits of sharing data could also help to tackle climate change. As the United Nations’ COP26 climate change super-summit in Glasgow approaches in November, more and more attention is turning to how countries will fund the measures needed to cut their carbon emissions to limit the increase in global temperatures.

That need for climate finance affects both consumers and their governments. Individuals want to know that their pension funds are supporting companies in the low-carbon economy and to understand the carbon footprint of their spending habits – using tools such as the carbon footprint tracker developed by CoGo for NatWest’s mobile banking app. Governments, on the other hand, want to raise the finance that they need to fund infrastructure projects and work with the private sector to cut emissions.

Identifying opportunities in climate finance

Climate finance is one of the emerging sectors that’s being explored by the Global Open Finance Centre of Excellence (GOFCoE), which was launched last year [2020] by the Financial Data & Technology Association (FDATA), industry body FinTech Scotland, and the University of Edinburgh. GOFCoE forms part of the Edinburgh & South-East Scotland City-Region Deal’s Data-Driven Innovation (DDI) initiative, which aims to establish the area as the data capital of Europe and as a leading global data hub.

GOFCoE and FinTech Scotland commissioned a report to investigate the links between finance and climate change. That report, entitled Innovations in climate finance, was compiled by FreshSight, a student-led consultancy firm based at the University of Edinburgh, which focuses on social impact.

The report highlighted the need for common frameworks and standards, so companies and organisations can compare measurements of climate risks and classifications of sustainable activities. With many fintech companies already developing digital tools in these areas, the report identified opportunities for GOFCoE to work with regulators by using the data-sharing principles that underpin open finance to help develop the necessary frameworks and standards.

The need for greater collaboration between the private sector, the public sector, and academia was also identified as a key theme within the report. It also underlined the need to raise the profile of facilitators, such as the Green Finance Institute.

The report suggested GOFCoE could also help fintech companies working on climate finance products and services by creating open finance data assets and compiling a library of application programming interfaces (APIs), the chunks of code that allow one piece of software to exchange data with another. APIs are already underpinning the open banking movement and will go on to fuel the open finance revolution.

Taking the next steps

Rachel Dunn, one of the students who compiled the report, says: “It was exciting to see so many fintech companies already operating in the climate finance field. Those companies are channelling their expertise into something that will help the planet and help other people.

“It was also good to see the collaborations that are already taking place between academia and the public and private sectors. Those collaborations are really important for tackling global problems such as climate change and mobilising finance, not just within countries but also between countries.”

Damien McGarrigle, the interim chief operating officer at GOFCoE, adds: “The intersection of open finance and climate change is a very new area because open finance is still a relatively new concept. It’s all about data-driven insights and that’s why it’s of interest to GOFCoE.

“The way that open banking was developed in the UK involved a set of specific standards, which helped third parties – like fintech companies – to come in and engage with the banks securely and with customer consent to access their data. The next step is to have a global framework for standards, so that countries’ standards are interoperable with each other, and there are lessons there that could be shared when it comes to a framework of standards for climate finance too.

“We’re starting to build a global library of APIs for open finance, which researchers will be able to access. Eventually, that API library could help fintech companies to develop apps for individuals, such as measuring their carbon footprints or examining their investment portfolios to assess their sustainability – and all of that will need standardisation to bring in data about energy usage or mobile phone data.”

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