Why does Climate data matter?
Climate data emerges as a cornerstone in the global response to climate change. In an era marked by intensifying climate impacts, the importance of accurate and comprehensive climate data becomes even more pronounced. It forms the bedrock for assessing risks, identifying opportunities, and steering investments toward more sustainable and resilient activities.
Moreover, this data forms the basis for navigating a landscape increasingly shaped by growing environmental reporting requirements such as the Corporate Sustainability Reporting Directive (CSRD), IFRS-S and others. These last years have also been marked by increasing supervisory expectations on climate and environmental risks management. These regulatory frameworks underscore the imperative for businesses and financial institutions to integrate climate data into their decision-making processes.
Climate data, therefore, becomes not just a tool for forecasting extreme weather events or understanding long-term environmental shifts but an essential asset for compliance, risk management, and strategic planning, aligning global efforts toward a resilient and sustainable future.
Understanding the climate data gap
Climate data plays a pivotal role in addressing the urgent challenges posed by climate change. Governments, businesses and organizations rely increasingly on this data to formulate climate policies, assess risks and guide sustainable investments.
Yet, a climate data gap persists. The climate data gap refers to the insufficient and fragmented data available for assessing the risks and opportunities related to climate change. This gap often results from challenges such as, incomplete historical data, poor data collection methods, lack of standardized indicators and methodologies for climate risks assessment, limited data coverage, inconsistent data quality, etc.
In this regard, the search for more accurate and granular data has become a notable challenge within organizations. While the need for detailed data on specific geographic locations and climate-sensitive factors is evident, achieving this granularity poses challenges in terms of data collection methodologies and standardization.
Financial institutions do not often have direct access to their counterparties’ information. In this regard, organizations often rely on and turn to proxies and third parties’ data providers. Financial institutions have also started addressing the latter by reaching out to customers to obtain more precise and granular information like GHG emissions, geographical location data, energy performance certificates, etc. However, this can lead to an immense amount of data with inconsistent quality and granularity, being channelled through different channels and departments. In addition, too many questions and requests can damage customer relationships.
Navigating the Climate data challenge: a nuanced approach
Bridging the climate data gap necessitates not only enhancing data collection infrastructure and coordination but also addressing the complexities associated with obtaining more granular and precise data to better understand and respond to the intricacies of our evolving climate.
Financial institutions are faced with a formidable challenge: How to effectively balance the increasing demands of escalating climate reporting requirements, the need for more granular and precise data, and the challenges posed by the scarcity of reliable data?
In this context, in his recent speeches, David Carlin, Head of UNEP FI’s Climate Risk programs, has often stressed the need for a nuanced approach to address the climate data gap, built on three key themes:
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- Embracing Imperfect Information:
Climate data, at its core, deals with uncertainty—an inherent aspect of finance and risk management. Recognizing that predictions about the future are inherently limited, the focus shifts from obtaining granular data on specific factors to adopting a holistic view. Climate data becomes a tool to uncover uncertainties, identify missed risks, and reveal information that may have been overlooked. It serves as a lens through which financial institutions can prepare for contingencies and gain a broader perspective on the evolving climate landscape.
- Embracing Imperfect Information:
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- Utilizing Purposeful Climate Data:
The usefulness of climate data lies not in its sheer volume but in its ability to shape decisions and transform perspectives. Rather than drowning in data for its own sake, financial institutions should seek data that challenges assumptions, confirms or disconfirms hypotheses, and guides decision-making. In the realm of climate, this means identifying where climate action is strengthening and pinpointing potential risks on the physical side. Purposeful climate data serves as a catalyst for informed decisions, revealing insights that might otherwise remain hidden.
- Utilizing Purposeful Climate Data:
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- Becoming Active Users of Information:
The true impact of climate data lies in how it influences decision-making and actions. It transcends mere reporting; it demands active engagement. Financial institutions must evaluate how climate-related shocks flow through their organizations, influencing risks, revenues, costs, and more. This involves identifying climate-sensitive assets that may not be accounted for, understanding the criteria for decision-making, and continuously improving processes. In addition, climate data is key in assessing impact materiality of financial institutions. Impact materiality refers to measuring how a company’s actions affect the world. In this context, data should be used not only to identify material risks but also ensuring organizations are headed in the right direction (e.g., in terms of portfolio decarbonization or reducing financed emissions). Collecting data is not an end in itself; it is a means to foster the transition by integrating information into decision-making processes and tracking progress towards defined targets
- Becoming Active Users of Information:
In conclusion, the journey to narrow the climate data gap is not just about gathering information but about actively using it to drive sustainable practices. Financial institutions must establish clear uses for the data, reshape client relationships, manage risks effectively, and gain insights into the unknown. Climate data, at the heart of sustainability, becomes a dynamic force when coupled with processes that encourage continuous improvement. By embracing these three themes, financial institutions can navigate the challenges posed by imperfect information and harness the power of climate data for a resilient and sustainable future.
Do you want to know more? Reach out to our expert Elise Sungurtekin
esu@climact.com
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