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FINANCIAL SECTOR DEVELOPMENT: A CATALYST FOR CLIMATE CHANGE MITIGATION

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Eric Boachie Yiadom, Climate Finance Expert/Lecturer, University of Professional Studies, Accra Ghana

 

Scientists have long established that human activities are the primary cause of climate change. Human activities in the form of economic activities at different stages of economic development emit greenhouse gasses leading to climate change. There is also a strong relationship between economic development and capital availability; thus, countries with more capital resources grow faster. So, it appears that the richer a country, the greater the economic activities and the higher the level of greenhouse gas emissions (GHG). This perception is supported by the fact that developed nations emit more GHGs than developing countries. Capital resources are almost becoming bad for the climate, especially in the post-industrial era. But there is hope depending on how capital resources are directed.

The financial system is a key player in sourcing and disbursing funds for economic activities. The financial sector is the mediator between capital resources and the investment sectors of an economy. So, whether capital will be invested in environmentally destructive sectors or not depends on the eco-friendliness of the financial sector. The Financial sector development as represented by financial markets and institutions are the channels that distribute capital resources to the various sectors of the economy. As a distribution channel, financial markets and institutions indirectly determine the economic activities that eventually repair or retards environmental quality. If the financial sector is engineered to be pro-climate mitigation, funds will be allocated at the least cost into projects and sectors that ultimately reduce climate change. A novel work by Schumpeter reveals that a well-developed financial sector facilitates capital accumulation and advanced technology to spur economic activities. Thus, the financial sector plays an intermediary (mediator) role between capital and the environment. In the natural sense, a weak mediator is easily influenced. Therefore, a weak financial sector will mimic the type of capital received, hence, if the capital is toxic intended, it will adversely affect the environment. On the contrary, if the level of financial sector development is robust, it corrects market failure and capital impact on the environment may no longer be damaging.

Financial sector development can be a catalyst to climate change mitigation through its three components: financial deepening, efficiency, and access.  Financial deepening measures the depth of credit availability and investment options. As a result, the financial sector can be restructured to offer more credit to environmentally friendly sectors. This will encourage investment into the development of low carbon technologies and subsequently offer environmentally friendly goods at competitive prices. The level of financial efficiency, on the other hand, influences the cost of funds and the return on investment. To promote investment in low carbon technologies or encourage the uptake of clean energy, the cost of funding those investments should be relatively cheaper. This can be done through a deliberate central government policy to influence the determinants of borrowing and lending rates. Largely, macroeconomic indicators such as inflation, policy rate, exchange rate, among others which are at the heart of political decisions influence the financial sector efficiency. It behooves governments to believe in climate actions and take strong decisions to improve financial sector efficiency. Another aspect of financial sector development is access. Access measures the expansion in the financial sector. As the financial sector expands, households that hitherto were neglected get access to finance and this may exacerbate or recede climate change depending on the goods and services they purchase. Financial access increases purchasing power, hence demand goods and services. Low carbon products such as clean energies for cooking, lighting, and refrigeration can be modeled along with financial access by offering special credit/funds to purchase such items. In this case, the financial sector is not just expanding but climate adaptation has been incorporated into the expansion.

Financial sector development cannot mitigate climate change without the direct involvement of central governments. If the private sector is left to dictate financial sector development, it will surely be influenced by profit. Currently, low carbon technologies and products are relatively expensive than carbon-intensive ones and this can be attributed to the under-investment in the sector. It will take some time for early investors in the low carbon products to recoup or make gains on their investment. Due to this, central governments are in the best position to commit financial resources to develop the low carbon sectors and also regulate the financial sector to make cheap funds available to attract investors. Apart from the government taking the lead to make available prolonged and sustained funds to the low carbon sectors; specific regulations that outlaw investment in environmentally destructive sectors can be fashioned to redirect investment into low carbon sectors.

To a large extent, financial sector development requires a political will to enable it to mitigate climate change. The United Nation’s Secretary-General summarizes this beautifully:

“We are currently way off track to meeting either the 1.5° C or 2° C targets that the Paris Agreement calls for. We need to reduce greenhouse gas emissions by 45% from 2010 levels by 2030 and reach net zero emissions by 2050. And for that, we need political will and urgent action to set a different path.” (Guterres, 2020)

 

ACU Commonwealth Futures Climate Research Cohort Program

Being part of the ACU Commonwealth Futures Climate Research Cohort has been helpful to me in several ways. The workshops organized by the ACU in research leadership, knowledge exchange, stakeholder engagements, research to action, etc. have sharpened my research skills and improved my understanding of how to translate academic research into implementable projects.

One unique thing about the cohort is its diversity. The cohort comprises 26 members with diverse backgrounds from different countries across the commonwealth. This has offered me international collaborations and friendships. Recently, I teamed up with four other colleagues to deliver a virtual international climate change conference.

As part of the program, the cohort was grouped into sub-teams to undertake implementable projects. My team researched “Technology and Policy Mapping for Sustainable Energy Access in the Global South”. We were five in a team from different countries and different time zones. It was fun participating in virtual international collaboration. The project also gave a practical experience of the modules learned at the workshops.

I cannot forget the unmatched publicity the ACU has given to me. It is offering several opportunities both locally and abroad. I can only be thankful to the ACU for creating this cohort and offering me the opportunity to be a part.

 

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Mitigating the insurance risks of climate change through geospatial data visualisation

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Richard Toomey, Senior Manager, Commercial Insurance at LexisNexis Risk Solutions UK and Ireland

 

In the lead up to the 26th United Nations Climate Change Conference of the Parties (COP26)[i] November 2021, A United in Science report[ii]  provided a stark warning of the impact and acceleration of climate change. The UK Environment Agency also warned of more extreme weather leading to increased flooding and drought[iii]. While some progress was made at the conference, understanding the changing risks created by extreme weather to price property insurance more effectively, and more importantly, to help mitigate the physical risks posed by climate change, has become imperative.

Mapped geospatial data intelligence including live data on flood warnings and river flows, viewed alongside data held by insurance providers on the properties in their portfolio, can be a key ally in helping to protect customers and reduce claims losses created by extreme weather events.

With the air temperature rising and heavy rain becoming more and more frequent due to climate change insurance providers are looking to identify properties that are more at risk than others. For example, properties with basements carry more of a substantial risk of surface water claims than others and especially in London where space is tight and water runoff is low. In the autumn of 2021, the industry saw a number of high value claims due to basement flooding. There are some really large high net worth (HNW) households with big basements which carry a significant insurance risk.  The problem is that in many cases insurance providers don’t know if they have a property ‘on cover’ that actually has a basement.

The huge and growing volume of data now available to the insurance market to assess property risk to the level the industry needs, could easily overwhelm and prove a barrier to the swift decisions needed in weather-related surge events. However, the evolution of desktop based geospatial data visualisation tools such as LexisNexis® Map View means insurance providers can make quick, informed decisions based on a picture or map of risk, looking at a specific geographical region, a postcode, an address or a single property outline.

They can look at environmental risks including flood, fire and subsidence and live flood data updated every 15 minutes direct from the Environment Agency, as well as highly predictive flood risk data from respected flood modelling organisations. Insurance providers can also bring in data on the characteristics of a property to understand more about its construction, including the type of roof it has, how many floors there are, the square footage, as well as further data on the location and the individuals behind a business to gain a more holistic understanding of risk for pricing.

Mapping of historical flood data brings a further dimension to the understanding of risk, revealing the maximum extent of all individually recorded flood outlines from rivers, the sea and groundwater springs in England and Wales. This takes into account the presence of defences, structures, and other infrastructure where they existed at the time of flooding and includes floods where overtopping, such as at seawalls, river breaches or blockages may have occurred.

But the real step-change for the market has been recent ability to view live flood and other environmental data in tandem with customer and policy data held within an insurance providers’ own databases.

Crucially, this means insurance providers can pinpoint down to individual properties, the policyholders most at risk as weather events unfold, should a river burst its banks, or a flood barrier fail and those properties that may actually be vacant at the time of the event.

Through data visualisation tools, insurance providers can gauge where flood water may go so that policyholders can be warned to take measures to protect themselves, their possessions and to move any vehicles to higher ground. They can even see where roads may have been closed due to fallen trees. All this intelligence helps with planning on the ground resources, working with local authorities and claims adjusters. Then, in the immediate aftermath, rather than wait for a deluge of claims, insurance providers are in a position to reach out to customers known to be in areas affected to support them through the claims process.

The inherent flexibility of today’s geospatial data visualisation tools for the insurance market means risk can be assessed as needed or as constant monitor for a whole commercial property portfolio. Fundamentally these tools are designed to streamline the assessment of property risk.

In the future, commercial and residential property claims data gathered from the whole of the market may allow insurance providers to look at a whole portfolio alongside past claims, but for now they can bring in their own claims data to build a more granular picture of risk, to price more accurately and understand how they could help mitigate future claims and potential losses caused by weather events.

A picture can say a thousand words and data visualisation tools can certainly make highly complex risk data easy to understand and act upon. Being able to instantly visualise an environmental risk to policyholders – day or night – using highly granular data on past and present flood events puts insurance providers in a more powerful position to reduce the misery and costs caused by extreme weather.

[i] https://ukcop26. org/wp-content/uploads/2021/07/COP26-Explained. pdf

[ii] https://public. wmo. int/en/media/press-release/climate-change-and-impacts-accelerate

[iii] https://www. gov. uk/government/news/adapt-or-die-says-environment-agency – The Environment Agency’s third adaptation report October 2021

 

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From compliance to the metaverse: Investment trends to look out for during the year ahead

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By Rami Cassis, Founder and CEO of Parabellum Investments

 

In the investment world, the old saying, knowledge is power, has never been more pertinent. As any investor will testify, it is essential to retain an in-depth, and up to date, understanding of news, predictions and trends that specifically relates to his or her specific area of interest.

This is particularly true for investors in the financial sector.

We all know just how quickly the sector can change beyond recognition. The demands of consumers are forever changing, new technology is always waiting in the wings to re-write the financial status quo and the next big digital company is constantly looking to increase its market share. There is always a new trend to look out for.

As we move into a brand-new year and prepare to face the opportunities – and challenges – that doubtless lie ahead, these are some of the trends that are likely to develop during the next 12 months.

 

Personal banking conversations

In its Tech Trends 2021: A financial services perspective Deloitte states that today’s pioneering companies are using advanced digital technologies, virtualized data, and cobots to transform supply chain cost centres into customer-focused, value-driving networks, based around a personal experience.

The concept of personal banking provides a perfect example of how the financial services sector has evolved to deliver digital personal banking.

Before the digital banking revolution, personal banking involved a visit to a high street branch to sit down with a personal banker in the flesh. This personal banker would be the customer-facing, end point of a complex supply-chain, involving training centres, degree courses, carbon-emitting journeys into work – the list goes on.

Compare this to the current version of personal banking. Digital financial services firms such as Monzo have revolutionised banking thanks to sophisticated analytics and a personalised interface. The big banks are now catching up, offering their own versions of ‘modern’ banking insights for the everyday user, and furnishing them with the latest online, smartphone-powered gadgets to enable them to manage their money 24/7, wherever they might be in the world.

However, even this is now becoming somewhat stale, with many financial services providers still seeing personalization simply in terms of personalized messages. Instead, the next chapter will involve smart banks understanding that good personalization requires personalized conversations, not just messages.

Enterprise software is one of the specific investment interests of Parabellum Investments. One of our portfolio companies is ieDigital, a specialist UK financial technology provider. The team from ieDigital and Parabellum Investments analyses the latest developments in business technology regularly.

We understand the importance of pushing digital boundaries. Indeed, one eye should constantly be scanning the horizon to identify the digital tools that the customers of tomorrow will expect. The interpretation of digital transformation is specific to each organisation and translating technology into practical business outcomes requires the focused specialism the combined IE Digital & Parabellum Investments team is qualified to deliver.

We understand – and see daily – the pressure that banks are coming under to deliver an ever more personal service, and see the ability to deliver these personal conversations is one of the trends to watch during the next 12 months.

 

The metaverse

The word ‘metaverse’, is defined in the Oxford English Dictionary as a “virtual-reality space in which users can interact with a computer-generated environment and other users”.

When Facebook changed its name to Meta in 2021 it may have come as a surprise to many of the platform’s users, but it was a major moment in the company’s history. It signalled Mark Zuckerberg’s ambitions for his business; to be the leader in the development of the metaverse.

Indeed, the future of the metaverse is looking sophisticated and bright. With giants like Facebook and Microsoft introducing metaverse elements into the fabric of their business models, it’s a concept that cannot be ignored, and one which is likely to expand rapidly throughout the next 12 months.

Returning to the financial services sector as an example, in a blog post titled Metaverse, the end of banking digital transformation?, CoinYuppie speculates that the metaverse will change banking in a number of ways including:

  • Identify verification. In the metaverse, identity verification will be performed via VR glasses and Metaverse sensor devices which contain a security chip.
  • Real-time creation of financial products. In the meta universe, virtual product managers use gestures to drag and drop the entire process of digital product manufacturing.
  • Games and attractions become a source of bank traffic. You can open branches on Mount Everest, in the Tarim Basin, on the Kunlun Mountains, or in Jiuzhaigou. The bank will combine these magnificent landmarks to fully personalize its branches and display its products.

This is just the financial services sector. Just imagine the opportunities for other industries – and the tools that will be needed to deliver them.

People are likely to need virtual-reality headsets, for example, together with related components such as sensors, as virtual-reality technology becomes intrinsically linked with the metaverse world.

 

Compliance

Another key trend to look out for as we move into 2022 and beyond is how companies deal with their compliance issues.

In the wake of the global Covid pandemic, we are seeing a much-increased hybrid working model, with a large proportion of the workforce now based at home. This creates a logistical headache for compliance teams, who must now ensure that sensitive data and company secrets remain just that, despite a workforce now using multiple digital platforms, messaging systems, mobile phones and landlines.

Cloud-based archive systems that can capture multi modal communications are likely to become essential for companies to remain compliant.

 

Alternative currencies

Cryptocurrencies are likely to retain their position as one of the most talked about developments in the world of alternative currencies.

As an example, Bitcoin has risen nearly 70% since the start of 2021, driving the entire crypto market to a combined $2 trillion in value. However, heightened regulatory scrutiny and intense price fluctuations have somewhat dampened bitcoin’s prospects in recent months.

Despite this, we are likely to see banks increasingly looking at offering mainstream crypto services. We have already seen the start of this, with the first major crypto company going public with the debut of Coinbase in April, increased participation from Wall Street banks like Goldman Sachs, and the approval of the first U.S. exchange-traded fund linked to bitcoin.

 

Conclusion

We all know how quickly the financial sector changes. If you happen to be reading this just a few months after it was written, several of my points might now be in the mainstream – or they might be completely obsolete.

The fact is that unless an investor possesses superhuman powers, it is impossible to identify, with 100 per cent accuracy, what the next big investment trend is. All we can do is use our experience, insights, and up-to-date sector knowledge to predict what the next big trends are likely to be.

 

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