The current economic climate, together with global geopolitical changes, has led to a paradigm shift in the financial sector. In 2020, the regulated carbon market in the European Union (EU ETS) reached a value of over €229 billion, representing 40% of total EU emissions. Furthermore, 70% of farmers report difficulties in accessing credit, which limits their productive capacity and their participation in sustainable transformation.
Despite the strong traditional component of financial institutions, they have integrated ESG (environmental, social and corporate governance) vectors into their operations. Such is the proliferation of this trend that the term Green Finance has been coined to designate finance that integrates a sustainable approach. Want to discover how finance has changed?
What does the term Green Finance mean?
Originally, the term Green Finance referred to the financing of sustainable and green projects, i.e. supporting those projects directly involved in mitigating the effects of climate change. However, ESG vectors encompass the entire sustainability value chain, so the term has evolved to include finance that is responsible and committed to its operating environment. The aim of this movement is to drive a greener and more resilient economy by raising awareness among financial institutions of the importance of finance in ensuring the livability of cities.
CO2 sinks and agriculture: examples of how GeoAI impacts Green Finance
The paradigm shift in the financial sector is directly related to a clear challenge: to have valuable data for decision making to ensure the profitability of investments in Green Finance projects. Geospatial data, together with artificial intelligence(GeoAI), have become key allies of financial institutions. The availability of unpublished data has boosted differential decision making, transforming the usual way financial institutions operate.
The greatest exponents of this trend are the possibility of analyzing the risks derived from investment in the agricultural sector and the exponential growth of the regulated carbon credit market, which to date has been voluntary, although market dynamics are beginning to call for it to become at least partially mandatory. These two cases highlight the impact of GeoAI in the financial sector.
In the case of vulnerability analysis derived from the granting of credit to agriculture, geospatial data together with artificial intelligence (AI) allow lenders to have a retroactive and detailed analysis of the productivity of a given crop. The possibility of obtaining historical data on the evolution of plots of land is not only useful to know how production has evolved, but also makes it possible to predict or simulate what will happen in the near future. In this way, financial institutions can have sufficient information to make decisions about lending to farmers, based on their capacity in the market rather than their size.
GeoAI’s contribution to the carbon market is an interesting example of how geospatial data and AI are key to the future of sustainability. The accuracy of the information provided by satellites, together with the analytical capacity of AI, can help to calculate the carbon sequestration capacity of elements that, to date, had not been considered by the regulatory framework: permeable soils, capable of absorbing up to 25% of pollution, or the biodiversity present in the oceans, the largest carbon sequestrators on Earth.
Green Finance to achieve the objectives of the Green Pact
In the Green Pact, the European Commission lays the foundations for the sustainable transformation of the European Union’s economy. Achieving climate neutrality by 2050, promoting the circular economy and facilitating a new production model are some of the main objectives of this document. All this must also be linked to a strong social and governance component that allows citizens to adapt to these changes.
Green Finance will therefore be a growing trend in the near future. Financial institutions will play a key role in the sustainable transformation of the European Union. ESG (environmental, social and governance) vectors entail financial support that will require modernized mechanisms adapted to the new needs to accompany citizens towards a new sustainable economic model.
