Home Data Data platform ‘blueprint’ published to help financial authorities with climate risks

Data platform ‘blueprint’ published to help financial authorities with climate risks

Carbon emissions: the blueprint involves the incorporation of data on ‘financed emissions’, among other information sources | Credit: Radovan Zierik (Pixabay)

A ‘blueprint’ for a platform that integrates regulatory and climate data to help financial authorities ‘identify, monitor and manage’ climate-related risks in the financial system has been published this week by the Bank for International Settlements (BIS) and Monetary Authority of Singapore (MAS).

Integrating climate-risk analysis into financial stability surveillance presents challenges due to the ‘complex nature of climate change, notable data gaps and limited understanding of how to measure the associated risks,’ the authorities state as they set out the rationale for the ‘exploratory’ ‘Project Viridis’ initiative.

The BIS Innovation Hub’s Singapore centre and MAS report that they have ‘prototyped the development of several features’ of the platform – which is built on the premise that insights on climate risks could be drawn initially from existing available data sources – with the technology architecture ‘enhanced in collaboration with other financial authorities from around the world.’

‘These insights could provide supervisors with an early understanding of which entities could be more exposed to climate-related financial risks and any potential systemic exposure to sectors and geographies,’ the authorities explain.

The platform is modular, meaning that ‘further advancements and international alignment’ on climate data and metrics could then be integrated into it, providing ‘richer’ insights, the authorities state.

NLP techniques incorporated

The blueprint involves the incorporation of data and information on ‘financed emissions’ (greenhouse-gas emissions linked to financial institutions’ investment and lending activities), physical risk exposure and forward-looking assessments under different climate scenarios.

It specifically demonstrates how regulatory data can be integrated with climate data extracted from corporate disclosure documents using natural-language processing (NLP) techniques. 

Features prototyped include banking- and financial system-wide and financial institution-level views of financed emissions with breakdowns by countries and industry sectors, ‘and their trajectories under various scenarios’; consolidation of reported and modelled emissions of entities that are key counterparties to financial institutions; and mapping the geographical distribution of entities’ assets to assess the entities’ transition risk exposure arising from changes in carbon-pricing policies and exposure to different physical hazards.

The ‘Project Viridis: a climate risk platform for financial authorities’ report includes elements of a solution design for potential future functionalities, ‘as and when more data become available, and methodologies established’.

‘It also shows how, over time, the conversations, standards, technologies and methodologies will most certainly evolve and how the platform too must evolve,’ the 44-page report states. ‘During this process, the blueprint could form the basis for supervisors to understand their data gaps and explore with the supervised banks how to collect such data.’

Ideal solution ‘may not be quite within reach’

The prototype’s main objective was gathering what is referred to as ‘roughly right’ data and providing authorities with a tool that can help their own efforts.

‘While an ideal solution with perfect information and perfect execution may not be quite within reach, the benefits of consolidating what is already available and making it even more broadly accessible cannot be understated,’ the report asserts. ‘As an exploratory project, the Viridis platform nevertheless presents an opportunity for the global regulatory community to further consider ways to identify, monitor and manage climate-related financial risks.’

The blueprint, the authorities state, ‘represents just the starting point and can serve as a foundation for ongoing intensive and extensive development’. It could, they continue, also form the basis for supervisors to ‘understand their data gaps and explore with the supervised banks how to collect such data’.

The project was first announced as part of the BIS Innovation Hub’s work programme for 2022 as spinning out of a similar initiative called ‘Project Ellipse’.

As its foundational architecture, the Viridis platform uses, the ‘Ellipse Data and Knowledge Platform’ (EDKP), also developed by the BIS Innovation Hub’s Singapore centre and MAS. The EDKP enables the integration of structured and unstructured data from various sources, and is being ‘collaboratively enhanced’ by more than 15 central banks and financial regulators around the world.

Project Viridis will be a module added on to the EDKP and made available to EDKP ‘community members’.

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Climate-change’s impact ‘intensifying’

“As the impact of climate change on the global financial landscape intensifies, the need for adaptive and forward-thinking strategies has never been more urgent,” said BIS Innovation Hub Singapore centre head Maha El Dimachki.

El Dimachki, who joined the BIS in Singapore in October last year from the UK’s Financial Conduct Authority (FCA), said that the blueprint “helps equip financial authorities with the insights needed to integrate emerging climate risks into their analysis – and thereby help promote global financial stability.”

MAS assistant managing director (economics and knowledge management) Celine Sia described the project as producing a blueprint that “leverages technology solutions to systematically track climate-related data and metrices, thereby augmenting regulators’ efforts in assessing physical and transition climate risk exposures of individual banks and the financial system.”

“This project addresses a common need of global financial authorities, and we look forward to further collaboration to expand such toolkits,” Sia added.

An ‘Ellipse’ webpage on the BIS website lists contributors including: Bank Indonesia; Bank of Japan; Central Bank of Malaysia; De Nederlandsche Bank; Deutsche Bundesbank; European Central Bank; Canada’s Office of the Superintendent of Financial Institutions (OSFI); and the Swiss Financial Market Supervisory Authority (FINMA).