Decarbonisation sits high on the agenda of many boards. With almost every nation now endorsing the Paris Agreement, growing numbers of businesses are pledging to be carbon neutral by 2050. The finance industry is no exception, with institutions like UBS, HSBC and Aviva all announcing net-zero ambitions.
Measuring and reporting against these ambitions can be difficult. According to the Greenhouse Gas Protocol Corporate Standard, carbon accounting must address not only the emissions generated through a businesses' own operations, but those that arise along their value chain as well. For financial institutions, this includes any lending and investments.
Digital transformation may help solve this challenge. New technologies are streamlining financial infrastructure and improving visibility over emissions data. But financial institutions must account for computing power if they want to avoid taking one step back for every two steps they take forward.
Blockchain dilemma
Blockchain technology is not new to the finance industry. Lots of firms and technology providers routinely call on it to simplify resource-intensive infrastructure and exchange information in real time.
Today, blockchain may help financial institutions improve visibility across their complex value chains. With Greenpeace reporting that the UK finance industry is responsible for 805 million tonnes of carbon dioxide-equivalent emissions each year, more than the domestic emissions of Germany, the secure and instant sharing of data across network participants could deliver much needed transparency over carbon emissions in the supply chain.
Financial institutions must account for computing power if they want to avoid taking one step back for every two steps they take forward
To support carbon reduction along these value chains, financial institutions are joining forces to create new financial marketplaces for high-integrity carbon credits. Blockchain solutions like Climate Impact X and Project Carbon provide users with a trusted environment to exchange carbon credits, together with an immutable record of ownership that can be used for carbon accounting.
And by underpinning digital assets like cryptocurrencies, blockchain may help financial institutions eliminate carbon emissions associated with payment cards. The carbon footprint of each card may not sound like much at 150 grams of carbon dioxide-equivalent emissions, but with approximately 97 million cards in circulation in the UK it may be possible to save around 15 tonnes of carbon dioxide-equivalent emissions and 500 tonnes of plastic by moving to digital assets.
But financial institutions must do their due diligence if they want to receive the full environmental benefit of blockchain technology. It has long been acknowledged that it takes significant computing power to run networks that use 'proof-of-work' consensus mechanisms, with the resulting energy consumption giving rise to vast carbon emissions. Take bitcoin, for example, which produces an estimated 97 tonnes of carbon dioxide-equivalent emissions (and growing) — more than the domestic emissions of Finland.
Fortunately, blockchain technology has advanced over recent years and modern platforms now typically use alternative consensus mechanisms such as 'proof-of-stake'. This change can reduce the energy needed to run these networks by up to one million times compared to the amount bitcoin uses, putting this valuable technology back in the arsenal for financial institutions.
Artificial intelligence analysis
Artificial intelligence (AI) is widely used in the finance industry. It has the ability to analyse and learn from vast sources of data. This means financial institutions can get deeper insights into their business and their value chain, in turn helping to drive more informed decision making.
AI is a useful tool for monitoring carbon emissions. Solutions like OneView from BBVA — and another that is being developed by NatWest and Microsoft — are able to analyse vast stores of information and provide insights to customers to help them quantify, report on and reduce the carbon footprint generated by their daily activities.
To further advance this analysis, AI can be used to forecast future carbon emissions based on historic performance and trends identified from the data that is fed into the model. This may help financial institutions better understand and proactively manage the carbon emissions of their value chain, while also supporting their own carbon accounting.
But AI is a power-hungry technology. According to researchers at the University of Massachusetts, training large AI models can emit more than 284 tonnes of carbon dioxide-equivalent emissions.
Researchers are, of course, looking to address these problems but until solutions are found, financial institutions must do their due diligence and decide whether the benefits of using these technologies to support decarbonisation outweigh the detriments.
Alex Cravero is the UK head of the digital law group at law firm Herbert Smith Freehills.
