The

FUTURE SERIES
2024

THE FUTURE OF
ESGTECH 2024
 2

THE FUTURE OF

| THE FUTURE OF ESGTECH 2024

ESGTECH 2024

Finextra Research All rights reserved.

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CONTENTS

01 Introduction ............................ 4 05  How is AI being used

to address climate
02 How can environmental change and nature-
frameworks shape a related risk in
decade of change for sustainable finance? ....... 21
sustainable finance? ......... 5
06 How behavioural
03 How should banks science can benefit the
manage the transition ‘just transition’ for cities? . 26
to net zero and a nature
positive future? .................. 11 07 Conclusion ........................... 28

04  How can we make 08 About Finextra .................. 29

data centres more
sustainable?........................... 16
01
INTRODUCTION

With every passing year, we are seeing our chances to tackle climate change 4
diminish, but we are not without the opportunity to make a change. The

| THE FUTURE OF ESGTECH 2024

summer of 2023 was the world’s hottest on record according to NASA, with
Europe being stuck by the largest wildfires ever recorded, Storm Daniel
decimating Libya, and record-breaking downfalls in Hong Kong.

The financial sector has a big role to play in changing the trajectory of the
world. The opportunities presented by ESGtech play a large part in that.
This report aims to analyse a variety of the ESGtech options and present
a future the impacts they could have on our future.

There are important goals which have been set out for us. Net Zero emissions
by 2050 was set out by the UN, which means having a balanced amount of
greenhouse gas produced to the amount that’s in the atmosphere. A nature
positive approach, which involved mitigating biodiversity loss and biodiversity
recovery through conservation.

Focusing on sustainability will be pivotal for the financial sector moving

into 2024. This report featuring expert views from Dimitra, HeavyFinance,
McKinsey & Company, MVGX, Rimm Sustainability, and Zumo, will explore
how financial organisations use ESGtech to make substantial change.
02
ENVIRONMENTAL
FRAMEWORKS SHAPING
A DECADE OF CHANGE FOR
SUSTAINABLE FINANCE
Over the last decade, there has been a growing awareness of the financial 5
risks posed by environmental factors. This led to the creation of the Task

| THE FUTURE OF ESGTECH 2024

Force on Climate-related Financial Disclosures (TCFD) in 2015 and the
Task Force on Nature-related Financial Disclosures (TNFD) in 2021.

These initiatives aim to enhance transparency in capital markets regarding

how climate change and nature loss can affect organisations' financial
stability. The frameworks outline disclosure recommendations to encourage
organisations to incorporate climate and nature considerations into their
risk management and strategic planning.

Additionally, investors can use these disclosures to allocate capital toward

more eco-friendly endeavours. TCFD has become a global climate reporting
standard with over 4,000 supporters worldwide and is now part of mandatory
disclosure rules in various regions, including the US, UK, and EU among others.

While the two frameworks share similarities, they also share a few
fundamental differences, for instance, the frameworks have distinct origins
and organisational structures.

The TCFD was established by the Financial Stability Board (FSB) at the
request of the G20, with Michael Bloomberg as its chair, making it industry-
led but closely tied to financial regulators. In contrast, the TNFD was
founded by a diverse group of financial institutions, corporates, and market
service providers and is not formally linked to the FSB or G20. However, it
receives funding from public agencies and international entities like the UN
Development Programme.

Both task forces have similar member compositions, including representatives

from financial institutions and corporates. Each operates with a dedicated
secretariat, with the TNFD's secretariat managed by the UK's Green Finance
Institute and the TCFD's by Bloomberg L.P.
Laimonas Noreika, CEO and co-founder of HeavyFinance explained that the
alignment and delivery of the TNFD and other frameworks are instrumental
in addressing the interconnected challenges of climate and nature. “The
TNFD and TCFD frameworks both recognise the vital role that nature and
climate play in financial risk management and disclosure. By considering the
guidelines on nature-related risks, global finance gains a more comprehensive
understanding of environmental impact.”

Noreika furthered that taking this holistic approach helps institutions

better assess and manage their exposure to climate and nature-related
risks, ensuring the long-term sustainability of their investments in projects 6
related to sustainable cities.

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“The standardisation of reporting sustainable risk management
and disclosure frameworks is gaining traction globally,” Noreika
added. “These efforts enhance transparency and comparability
across financial institutions, enabling investors and stakeholders
to make informed decisions. The frameworks help streamline
reporting processes, reducing the reporting burden on institutions
while improving the quality of information available to
stakeholders.

Crucially, these frameworks address the pressing sustainability

challenges faced by financial institutions. They enable institutions
to assess and disclose their impacts on the environment, foster
green investments, and navigate the transition to a more
sustainable and resilient financial system. By integrating climate
and nature considerations into their strategies, financial
institutions can play a pivotal role in supporting the development
of sustainable cities and the broader transition to a low-carbon,
nature-positive economy.”

Noreika

Daniel Stephens, senior partner, McKinsey & Company, explained that in the
US, while these voluntary frameworks have been helpful in catalysing and
structuring voluntary reporting, the industry is waiting for clarity on required
reporting, especially from the SEC, which, because of the scale of US markets,
will be a critical component of eventual standardisation or reporting. “Our
perspective is that the most critical part of reporting will be investor-
actionable data – in other words, information that can give an investor a
better understanding of the forward-looking growth prospects and risks
of a given company based on its climate and nature footprint.”
 TNFD vs TCFD recommendations1
TCFD TNFD

Governance Disclose the organization’s governance Disclose the organization’s governance

around climate-related risks and around nature-related dependencies,
opportunities impacts, risks and opportunities

Strategy Disclose the actual and potential impacts Disclose the actual and potential impacts
of climate-related risks and opportunities of nature-related risks and opportunities
on the organization’s businesses, strategy on the organization’s businesses, strategy
and financial planning where such and financial planning where such
information is material information is material
7
Risk Management* Disclose how the organization identifies, Disclose how the organization identifies,

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assesses and manages climate-related risks assesses and manages nature-related
dependencies, impacts, risks and opportunities

Metrics and Targets Disclose the metrics and targets used to Disclose the metrics and targets used to
assess and manage relevant climate-related assess and manage relevant nature-related
risks and opportunities where such dependencies, impacts, risks and opportunities
information is material where such information is material

*”Risk & Impact Management” in the TNFD

What is the differences and challenges between frameworks?

Speaking to the difference between the two frameworks, Sasja Beslik, senior
advisor for data analytics at Rimm Sustainability explained that TCFD is
focused solely on disclosure of climate-related risks and opportunities, while
the TNFD recommendations encourage companies to produce integrated
climate-nature disclosures, rather than just nature disclosures, and also to
develop appropriate risk management processes. Some of these differences
can be seen in the visual below.

Generally, frameworks provide good guidelines for companies, however

lately there has been an overload of frameworks in this space. TNFD goes
beyond climate into nature and in order to disclose on this nature assets
need to be priced, which is not the case today. I think it makes sense to have
it as an indication of what companies will be expected to do but the level of
complexity is so deep,” observed Beslik.

Michael Sheren, president of MVGX, noted that despite having some

positive attributes, these frameworks are not binding and do little to
actualise concrete progress.

1 Source: Manifest Climate

This issue is not limited to the TCFD and TNFD, and is faced by other
disclosure or standard-setting groups — such as climate accounting, the
Integrity Council for the Voluntary Carbon Market (IC-VCM), and the
Voluntary Carbon Markets Integrity Initiative (VCMI) among others.

“Given that voluntary standards and disclosure requirements have failed to

catalyse the climate transition at pace and scale required to meet Net Zero by
2050, policymakers should deliver binding policies to be integrated into the
global and sovereign regulatory regimes in order to accelerate climate action,”
argued Sheren.
8

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How will guidelines on nature-related risk impact global finance?

Nature-related risk frameworks like the TCFD and TNFD aim to transform
global finance by enhancing transparency regarding climate and nature-
related risks. They encourage organisations to disclose and manage these
risks, guiding investors toward eco-friendly investments. Their influence on
sustainability reporting, risk management, and strategic planning can lead to
more resilient financial systems and support the transition to a low-carbon,
nature-positive economy. However, pricing nature assets and achieving
binding policies are challenges they must address to make a substantial
impact on global finance.

Beslik suggested that only assets with a measurable price and those available
for trading are typically considered. For instance, the value of ecological
functions and population in the Congo Basin or the price of a well-diversified
fish stock isn't well-defined. Therefore, the absence of clear pricing for nature
makes it unlikely to significantly affect global finance at present. Beslik also
highlighted a major challenge for finance in the context of sustainability: many
sustainability issues are currently regarded as external factors with no direct
influence on financial performance. seen as externalities with no particular
impact on the financial performance. “Unless we change this, any frameworks
or reporting will not have any material impact on the changes we need.”

Kirsteen Harrison, environmental advisor at Zumo explained that the

global finance market has a strong part to play in the transition to a more
sustainable future. Mandates including the Corporate Sustainability
Reporting Directive (CSRD) and International Sustainability Standards
Board (ISSB), will require sustainability reporting alongside financial
reporting, in addition to the TCFD. “These vital frameworks call for
transparent and audited data, and ways for corporates to measure and
report on carbon footprints at scale.”
This is where technology and innovation can come to play a meaningful part
of the transition. Harrison stated that this is an area in which blockchain
and tokenisation have a very strong use case — both in the tracking and
showcasing of data, and in broadening the accessibility and tradability of
tokenised instruments such as energy attribute certificates or carbon credits.

“At Zumo, we continue to actively explore the tokenised use cases for ESG
assets, and some members of our team are part of the founding members
of the ETST, the Emerging Technologies Sustainability Taskforce, with the
goal of providing robust input into standard-setters’ organisations so that 9
emerging technologies companies have what they need to ensure they adhere

| THE FUTURE OF ESGTECH 2024

to sustainability practices.”

TCFD and TNFD looking forward

The past decade has witnessed a growing recognition of the financial risks
associated with environmental factors, leading to the establishment the
TCFD and TNFD. These frameworks aim to enhance transparency in capital
markets, highlighting the impact of climate change and nature loss on
financial stability.

The role of these frameworks in driving sustainability and their alignment

with evolving standards will play a critical part in the transition to a more
sustainable global finance market. Additionally, technology, particularly
blockchain and tokenisation, can facilitate this transition by providing
transparent and audited data and expanding the accessibility of ESG assets.
This demonstrates the potential for innovative solutions to contribute to
sustainability practices and standards.
03
HOW SHOULD BANKS
MANAGE THE TRANSITION
TO NET ZERO AND A
NATURE POSITIVE FUTURE?
10
What is sustainable finance?2

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Sustainable finance refers to the process of taking environmental,
social and governance (ESG) considerations into account when making
investment decisions in the financial sector, leading to more long-term
investments in sustainable economic activities and projects.

Environmental considerations might include climate change mitigation

and adaptation, as well as the environment more broadly, for instance
the preservation of biodiversity, pollution prevention and the circular
economy. Social considerations could refer to issues of inequality,
inclusiveness, labour relations, investment in people and their skills
and communities, as well as human rights issues. The governance of
public and private institutions – including management structures,
employee relations and executive renumeration – plays a fundamental
role in ensuring the inclusion of social and environmental
considerations in the decision-making process.

In the EU’s policy context, sustainable finance is understood as

finance to support economic growth while reducing pressures on the
environment to help reach the climate- and environmental objectives
of the European Green Deal, taking into account social and governance
aspects. Sustainable finance also encompasses transparency when it
comes to risks related to ESG factors that may have an impact on the
financial system, and the mitigation of such risks through the
appropriate governance of financial and corporate actors.

As the European Commission defines it, sustainable finance is the catalyst for
supporting a resilient economy, delivering on policy objectives, and driving
private investment into funding a net zero and a nature positive future.

2 Source: European Commission

 The road to transition finance3
Finance Finance Finance General finance without
sustainability objectives

Finance to transition to EU
Transition Transition objectives and become greener
Finance Finance in the future
Financing of investments
Green
Finance that are green
Green
Green Finance
Finance

Short Term Medium Term Long Term

11

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Alongside this, sustainable finance is about supporting both sides of the
spectrum – what is environmentally friendly today, and what will transition
to environmentally-friendly levels over time. The latter concerns increased
investments into green production methods, reducing the environmental
footprint, or funding a sustainable city.

As the European Commission defines it, sustainable finance is the catalyst for
supporting a resilient economy, delivering on policy objectives, and driving
private investment into funding a net zero and a nature positive future.
Alongside this, sustainable finance is about supporting both sides of the
spectrum – what is environmentally friendly today, and what will transition
to environmentally-friendly levels over time. The latter concerns increased
investments into green production methods, reducing the environmental
footprint, or funding a sustainable city.

Financing the net zero transition and a nature positive future –

where are we now?

According to Daniel Stephens, senior partner, at McKinsey & Company, the

focus has been on the supply side of the transition, or as he explained “with
fossil fuel providers and with providers of alternatives to fossil fuels.”

However, in Stephens’ view, “the biggest gap we see in the market today
is investment on the demand side: supporting financial institution clients
to reduce their fossil fuel demand or shift their demand to clean fuels by
transforming their operations and assets. This is a harder problem – but it
is also one that is fully aligned with the growth and revenue ambitions of
commercial finance providers, and so we see a massive opportunity.”

3 Source: European Commission

In June 2023, the European Commission released recommendations for how
non-financial and financial organisations can use technology and tools to
provide transition finance. These include leveraging the EU Taxonomy, EU
climate benchmarks, the European Green Bond standard, and science-based
targets. With these tools, companies must move from climate change mitigation
and climate change adaptation to a circular economy, prioritise water and
marine resources, pollution prevention and control, and biodiversity and
ecosystems.

What do financial institutions need before channelling investment? 12

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Regulators and policymakers have created frameworks to support these
organisations with their journey to net zero. These frameworks consider
current regulation, risk management, and stress-testing, among other
numerous other considerations, which has proven to be problematic. Due to
the multitude of standards and initiatives out there, banks, insurers, asset
managers and fintech firms are struggling to understand what they must
comply with.

As Jose Manuel Campa, chairperson of the European Banking Authority

explained at the WSBI World Congress in 2022: “At the start, like any other
issue, is all about management. If banks are confronted with a new risk they
need to start by making sure that they incorporate into their management
structures the right mechanisms to proactively measure, manage, monitor
and report on the impact of these risks in their activities.”

Using Europe as an example for the time being, like the European
Commission, the EBA has also published numerous reports on how banks
should manage, supervise, and evaluate ESG risk when it comes to business
strategies. Most importantly, the EBA – and similar organisations around
the world – have also provided methodologies for capital allocation.

Michael Sheren, president of MVGX, elucidated to Finextra that it must be

reiterated that “financial institutions provide the liquidity (funding) for the
operation and expansion (growth) of the real economy (provider of goods
and services). Real economy actors (car manufacturers to dry cleaners), on
the other hand, are the clients of banks and finance companies and form
the primary source of their revenues.”

To paraphrase Sheren’s comments, it could be argued that although bank

operations generate a substantial carbon footprint, what he referred to as
‘real economy actors’ in fact generate he greatest percentage of emissions.
Looking wider to the entire world, while governments have committed to the
Paris Agreement, reducing these emissions and achieving net zero by 2050
will require “all real economy participants [to] change or alter their business
models to meet the carbon reduction requirements.”

Why are financial institutions of paramount importance for

sustainability?

What is the role of the financial institution? Advising how data should
be analysed to understand the risks associated with pushing capital to
sustainable activity, Campa added: “I realise that currently data availability 13
and data quality is a significant challenge. But here is an area where I believe

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financial institutions can act as catalysts for the necessary transformation
of our productive capacity.

“Financial institutions provide finance to all sectors of the economy. They

have access to every entrepreneur, corporate and household in our society.
Credit institutions help them pursue their goals and materialise their dreams
by supporting them and providing them financing for their projects, their
mortgages and life needs. That is the fundamental role of banks in our society.”

However, as Sheren stated: “All of these decisions are fraught with risk for
the financial institutions. Deciding what clients to support by providing
funding for CAPEX and R&D for the Green transition is a key area of focus
for financial institutions. Banks cannot immediately drop all of their high
emission clients, however, if the clients do not change their business model,
they will default on their loans as the cost of running brown companies
increases through rising carbon taxes.”

Already, there are numerous considerations that financial institutions

must make. Discussing this influx of ESG frameworks and aligning of
sustainability initiatives, Richard Conway, CEO of ElastaCloud, stated that
“ESG frameworks provide some high-level content to allow corporate entities
to be compared across their industry spectrum. New regulation will penalise
institutions that do not have clear and adequate investments mitigating their
carbon footprint. The issue whether the true cost of carbon offset is bundled
into this methodology which is currently isn’t.

“This means that whilst accuracy in numbers in frameworks like TCFD may
show a true representation of emissions for a company, choice in offsets
may render this reporting a waste of time as the true offset cost of carbon
is being misrepresented. Corporate citizens are still expected to be good
environmental citizens which is not a given. Whilst frameworks like CSRD
help through reporting and auditing pressure there are still many gaps.”
Conway also highlighted that AI and data analytics will play a significant role
in providing guidelines for reporting. Further to this, Conway clarified that
all business involves risk, but with proper planning, banks can reach peak
sustainability. It is the financial institution’s responsibility to mark out a path
towards a net zero and a nature positive future, but how can they do that for
sustainable cities?

5 ways financial institutions are pivotal to

financing sustainable cities 14

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In conversation with Finextra, Laimonas Noreika, CEO and co-founder
of HeavyFinance, revealed that banks, insurers, asset managers, and
fintech firms are “pivotal in managing and measuring the climate
transition when financing sustainable cities”, and “each bring unique
capabilities to the table, collectively advancing global Net Zero and
Nature positive goals.”

• Banks play a central role by providing funding for sustainable urban

projects. They must assess the environmental impact of their
lending portfolios and align strategies with sustainability objectives.
However, they face the challenge of balancing sustainability with
profitability.
• Insurers manage climate risk by offering specialised insurance
products and encouraging sustainable practices through premium
differentiation. They aim to provide effective risk management tools
and promote sustainability within their client base – but accurately
pricing climate-related risks is challenging.
• Asset managers oversee investment portfolios and must integrate
sustainability criteria into their decisions. Their goal is to allocate
capital toward sustainable assets, aligning investment strategies
with long-term climate considerations.
• Fintech firms leverage technology to facilitate sustainable finance,
enhancing transparency, ESG reporting, and sustainable
investments. They aim to make sustainable finance more accessible
and data driven.
• Moreover, bond issuers and investors play vital roles by committing
to green bond standards and sustainability principles. Investors
seek positive environmental and social impacts while navigating
green investment challenges.
As Noreika expressed, in collaboration, these organisations can drive the
climate transition, balance sustainability with profitability, and accurately
price climate risk. Kirsteen Harrison, environmental adviser at Zumo agreed
with this point on collaboration and stated that “we all have a role to play
in the transition to net zero – in this race, we all win, or we all lose, and we
believe collaboration is the way forward.”

Providing a concluding comment, Sheren added that “banks, insurers, asset

managers and fintechs must decide which clients they think will be able to
transition to a net zero business model and which clients will not. Further,
they need to understand new technologies and take a view on what new 15
products will substitute old high carbon products. Finally, they will need to

| THE FUTURE OF ESGTECH 2024

determine if they would like to finance ‘brown’ sectors, such as gas or oil for a
limited time while they are still needed.”
04
HOW CAN WE MAKE
DATA CENTRES MORE
SUSTAINABLE?

Our global economy has been “driven and shaped by oil, gas, and coal” for 16
over 100 years. Fossil fuels powered the industrial revolution and formed

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the global financial ecosystem into what it is, but this has to change.

Over 80% of the world's energy consumption comes from fossil fuels, which
is having dire consequences for our planet. We have already seen this in 2023
where we have had the hottest.

Michael Sheren, president of MVGX said: “The global economy is driven

and shaped by oil, gas, and coal. We have seen how susceptible the world
is when conflicts disrupt its supply, causing domino socioeconomic effects
across nations.”

Sheren further argued that these effects are why “the delivery of clean and
affordable energy is not a one-man show, but a collective global effort across
borders. It is only possible when we shift our focus away from the oil and gas
industry and set policies that can engender effective change.” A point which
is becoming increasingly important as we look to what options exist for green
energy and how new innovations can improve those chances.

In the financial sector, data centres consume some of the highest levels of
energy. It is estimated that the global data centre electricity consumption in
2022 was 240-340 TWh1, or around 1-1.3% of global final electricity demand,
according to the International Energy Agency.

Many data centres are already aiming to use renewable energy sources.
Google Cloud, AWS, and Microsoft Azure have all pledged to move to 100%
renewable energy between 2025 and 2030. So what renewable options
are available to us? What do those options cost for financial services and
consumers? How can governments encourage renewable uptake? And what
other options do data centres have to lower their impact? The following
chapter will look into how data centres can make themselves more efficient
beyond renewable energy sources.
Green and renewable energy options

There are a range of green energy options or “greener” energy options which
many of us are familiar with, such as solar or wind, however, there are other
options out there being developed.

Rory Clune, partner, McKinsey & Company explained that “wind and
solar, of course, but also sources like nuclear and hydropower that have
been established at scale for decades. And then there’s a host of newer
innovations including low-carbon hydrogen as an energy carrier, carbon
capture paired with existing fossil fuel generation, or newer generations of 17
nuclear technology. Many of these forms of energy are cost-competitive with

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traditional energy sources in a given market.”

While many of these options are under development they can be very costly to
set up, and there are many more steps to be taken before they are working at
the same level as fossil fuels.

S&P Global currently forecasts that there needs to be a “$700 billion per year
of renewable energy investment through 2050, which means that the annual
funding gap to meet the net-zero modelled target could be as large as $700
billion. The global renewable energy funding gap is also highly concentrated
in emerging markets due to higher risk, and hence, lower appetite from
investors.”

However, Laimonas Noreika, CEO and co-founder of HeavyFinance stated:

“The cost of generating clean energy has decreased significantly in recent
years, thanks to advancements in technology and economies of scale.”

Clune also argued that there are costs beyond the upfront technology,
he said that “integrating them at scale to our energy systems is a highly
complex system problem involving unprecedented expansions of supply
chains and scale-up of permitting, supporting grid infrastructure, and
construction capacity.”

There is evidence of significant investment into green energy technologies,

as seen in the diagrams, but as pressures mount for this process speed up
we may see further investment.
 Estimated annual final investment decisions for
projects demonstrate dramatic activity in renewables
markets globally4
Wind and solar capacity addition, by year of FID

2021 59 56 9 125

2025 200 103 21 324

2030 237 202 20 459

0 100 200 300 400 500 18

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+159% +42%

Solar PV2 Onshore wind Offshore wind

New investment in energy transition by

capital type ($M)5
25,000
11 Private equity Public equity
22,500 and credit
21
20,000 Venture capital Debt
32
17,500
46
15,000
16
12,500
2
10.000
2
7,500

5,000

2,500

0
22

22

23

23

23

22

22
t2

v2

c2

r2

ay
g

pt

ar

n
Oc

Ap
No

De

Ju
Ja

Fe
Au

M
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Despite these costs, there are plenty of arguments that these investments
are worth the money. Apart from the main argument, which is the survival
of our planet, there are those who have argued that in the long term this will
cost less. A study by Oxford University researchers found that decarbonising
our energy system globally by 2050 would save the world at least $12 trillion.
Meaning that this upfront cost may be ultimately more affordable as well
as sustainable.

4 Source: McKinsey & Company

5 Source: S&P Global
Further to this, governments can produce a number of incentives to
encourage the further development of green energy. Noreika argued that
to make clean energy “even more affordable for citizens, innovative finance
mechanisms and government incentives are essential. Governments can offer
tax credits, subsidies, and low-interest loans to promote renewable energy
adoption. Innovative financing models like community solar projects allow
citizens to collectively invest in renewable energy, reducing individual costs.”

Sheren added to this point: “A key policy initiative enacted immediately by

governments and international organisations like the World Bank can be a
critical trigger to help eliminate all subsidies for the oil, gas, and coal industries 19
and divert those funds toward renewable energy and storage projects.”

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Lowering data centre energy consumption

Data centres can make that transition to using renewable energy, but there
are other ways to lower their overall demand for energy consumption.

Clune stated: “Data management certainly plays a meaningful role, especially

on the demand side in helping to measure and manage how and when we
consume energy in a way that benefits the overall system.”

Sheren said the financial sector needs to “shift our focus on ‘greening’
carbon-intensive sectors such as cloud storage and data centres that
are mostly powered by coal and gas. Given that these critical
infrastructures are pivotal to the digital age, migrating power
generation to renewable energy sources will be the lynchpin to creating
a more sustainable tomorrow, with less reliance on major polluters.”

Cloud has in more recent times been looking to as the more energy efficient
option, as Noreika argued: “Beyond this, new forms of data management,
such as cloud computing, can also play a pivotal role. Cloud-based solutions
enhance energy efficiency and optimise energy consumption.”

However, the storage of cloud data still has a carbon footprint. It’s important
that we are also working to make data centres, cloud or otherwise, more
energy efficient. There are ways of retrofitting existing data centres to make
them more efficient.
Cooling accounts for a large part of a data centre's energy consumption.
Retrofitting existing cooling systems or changing to more efficient cooling
systems can have a huge impact on improving this demand.

A study published earlier this year by academics from Selcuk University

and Concordia University conducted a case study on a data centre in Turkey
which showed some innovative ways of doing this. They used a free cooling
system combined with a PV generator, which has the lowest payback period
of 6 years at a minimum initial retrofit cost and an 83% reduction in cooling
demand.
20
Noreika concluded: “Accelerating clean and affordable energy delivery

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requires a combination of renewable energy sources, innovative finance
mechanisms, government incentives, and advanced data management.
Collaboration among governments, industries, and citizens is crucial to
driving this transformative change towards a sustainable energy future.”
05
HOW IS AI BEING USED TO
ADDRESS CLIMATE CHANGE
AND NATURE-RELATED RISK
IN SUSTAINABLE FINANCE?
As the world plummets further into climate disaster and ecological crisis, 21
every organisation has an obligation to actively work towards becoming more

| THE FUTURE OF ESGTECH 2024

a sustainable and ethical institution

Within the financial services sector, corporations have an influence on how

sustainability is being addressed, to what extent they are working towards
net zero targets and decarbonisation, and how new innovations can drive
sustainable action. This power cannot be taken lightly, as more and more
consumers and regulators are demanding that companies be held accountable
for their environmental impact.

As companies undergo digital transformation and embrace cloud platforms

which dial-in sustainable and ESG efforts to the frameworks of a business,
artificial intelligence (AI) is the next grand frontier for which financial
institutions are embarking on – and sustainability is an unavoidable path
on this journey.

As AI has become a key aspect in new innovations across many industries

including financial services, new questions arise: how we can leverage AI
to form more sustainable decisions and translate them into action? How
do we hold ourselves accountable and use this new technology ethically
and strategically to cultivate the best outcome for our planet and our
surroundings? The following chapter will examine AI’s role in the sustainable
finance industry and the complexities that arise with AI integration and an
abundance of data.
How can AI be used as a problem-solving tool?

Greenwashing is a prevalent issue in the financial services industries, with

banking giants such as HSBC, Citi, and JP Morgan Chase having faced
greenwashing accusations in the attempt to appear sustainable and ESG-
oriented while not putting any real effort or action beyond a statement.
With many ESG considerations, companies self-report, which is proves
problematic as there is a risk that they omit the negative aspects of their
operations and highlight what they are doing right.

Additionally, sustainable reporting is complex and requires a multitude of 22

details – from scopes 1 to 3 of carbon emissions, environmental impact,

| THE FUTURE OF ESGTECH 2024

energy consumption, and more – often companies are not aware of the
correct reporting criteria. These situations can generate inaccurate reports,
making it more difficult for stakeholders and regulators to make informed
decisions. AI can solve a major part of the reporting issue in ensuring
transparency by bringing together various complex datasets within a
company and form a solid and accurate report.

A 2022 paper by the European Capital Markets Institute outlined that AI

could be used in textual analysis to identify controversies on ESG conditions.
Tools such as Natural Language Processing (NLP) through software such
as RepRisk and Truvalue Labs can monitor a variety of sources to screen
companies’ ESG policies, allowing regulators and governmental bodies to
hold them accountable.

Organisations such as the Task Force on Climate-Related Financial

Disclosures (TCFD) used machine learning in annual AI Reviews of over one
thousand global firms to identify disclosures concerning five different types of
climate-related risks in company annual reports. The use of AI is expanding
in the regulatory space to assess risk and compliance with data.

Leveraging satellite and geospatial data with AI to monitor

nature-related risk

Satellite, sensor, and geospatial data has also been on the rise in reporting on
carbon emissions and environmental impact on biodiversity. These present
a new form of data being introduced to the space, monitoring pollution,
groundwater quality, deforestation, waste, and more through geographical
coverage. The key advantages of geospatial data are that it is high resolution
and is difficult to manipulate.
Laimonas Noreika, CEO and co-founder of HeavyFinance, commented:
“AI plays a pivotal role in sustainable finance, particularly when integrating
satellite-based geospatial data into city design. The convergence of AI
and geospatial data offers transformative potential in understanding and
advancing sustainable practices in urban environments.”

Jon Trask, CEO of Dimitra, a blockchain-based enterprise system for

AgTech, explained how geospatial satellite technology and AI is
being used to support sustainable farming:
23
“We use geospatial imagery gathered by drones. We ran a project

| THE FUTURE OF ESGTECH 2024

earlier this year to use drones to analyse corn in Papua New Guinea
and essentially built an AI system that will identify where the pests
are on the corn so that farmers can precision spray versus using
pesticide completely across the field. In this area, this farming
organisation has 11,000 hectares and lost almost 50% of their crop
in 2019 due to fall armyworm, and fall armyworm wasn’t an issue
before that.

Farmers had to change their farming practices to work with their

environment and modify their strategies. Farmers always need
to make decisions regarding pests and sustainability and create
that balance. So, through our app we help farmers with
recommendations and making decisions around sustainability.”

Trask explained that in Brazil, Dimitra’s technology uses geospatial data to

measure crop health and report on moisture, nutrients, chlorophyll, and with
making carbon estimates. Gathering a wide net of data, Dimitra can inform
farmers on how to adjust their strategies according to what their environment
needs, providing farmers with easily-implementable actions so they can farm
as sustainably as possible.

Similarly, geospatial data can be used to map out widespread spaces for
the objective of sustainable urban planning. By being able to detect specific
the state of the landscape, geospatial data can be used to better understand
how to integrate architecture with the needs of the land, and create a
sustainable city.
What are the ethical concerns with AI and maintaining
transparency?

AI methods can be difficult to discern and can be manipulated depending

on the methodologies of collection. There is not a standard form of reporting
ESG ratings as yet, therefore when analysing this data there is a risk that it
can be manipulated.

On the advent of AI, Noreika stated: “The vast volumes of asynchronous

data from shareholder disclosures, satellites, and social media present both
challenges and opportunities. AI enables the processing of this data at an 24
unprecedented scale and speed, uncovering valuable insights regarding

| THE FUTURE OF ESGTECH 2024

environmental, social, and governance factors that impact investments.
By analysing this data, we can gauge the sustainability performance of
companies, identify trends, and inform investment decisions effectively.

“However, inferring meaning and making decisions based on this data

requires careful consideration. AI-driven algorithms must be transparent,
interpretable, and unbiased to ensure equitable decision-making.
Furthermore, the quality and reliability of data sources must be
rigorously assessed to avoid misinterpretation or greenwashing.”

While AI technology could open up new avenues for growth and development
in the sector, especially when it comes to monitoring sustainable efforts and
holding corporations accountable for their emissions and environmental
impact, it is critical that regulation keeps AI in check and that data sources
can be traced back, to avoid AI becoming a black box technology.

Noreika also commented on ethical concerns of using AI capabilities in the

sector: “It is possible for AI to create issues, such as an over-reliance on
automation, which could lead to a lack of human oversight and accountability.
Ethical concerns regarding privacy and data security must be addressed
to maintain trust in AI-driven sustainable finance practices. It is crucial to
strike a balance between the opportunities AI presents and the ethical and
transparency challenges it poses, ensuring that sustainable finance remains
responsible and equitable.”

As datasets vary based on the structure of their collection, biases can emerge
within the data. To ensure that new AI technologies are without bias, there
needs to be a collaborative effort in generating AI and producing explainable
AI platforms that maintain transparency.
AI offers numerous benefits and multiple paths towards growth, efficiency,
and action within the sustainable finance sector. However, there are downfalls
to the endless data available and a likelihood of bias within data collection.
Moving forward, financial institutions must consider the risks of integrating
AI capabilities into their sustainable finance agendas as well as the reward,
and determine what can be done to mitigate the risks wrought by AI
technology.

25

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06
HOW BEHAVIOURAL SCIENCE
CAN BENEFIT THE ‘JUST
TRANSITION’ FOR CITIES?

“By 2050, 68 per cent of the world’s population is projected to be urban,” 26

according to the United Nations. This reinforces the idea that sustainable

| THE FUTURE OF ESGTECH 2024

cities will be important to the overall well-being of humankind.

Beyond the actual objectives, plans, and approaches associated with

creating environmentally resilient, socially and economically sustainable,
regeneratively-focused cities, there needs to be strong awareness of the
human impacts of these initiatives. Who are the people or organisations that
will benefit, or might be impacted in negative ways, by the implementation
of these policies? Might behavioural science help guide the creation and
implementation of a “just transition” in a given locality?

Experts from the environmental education, social justice, management

consulting, and finance fields tell us that it’s important to carefully explore
“all the angles” of proposed sustainability and resilience policies and
programs in cities around the globe. We asked two of them to answer the
following questions:

● Who are the potential winners and losers when cities change to meet
sustainable finance goals and funds are raised to improve the environment
of inhabitants?

● What mitigations should be considered? What is the role of behavioural

science to inform this change?

Brodie Boland, partner, McKinsey & Company, said sustainability measures

have many powerful and positive impacts, when properly planned and
implemented, within communities. A major consideration, Boland explained,
is to look beyond the direct outcomes of a particular policy or project to its
ancillary benefits as well.
 “The focus of sustainable finance investing in cities should be in
areas that generate significant co-benefits. Many sustainability
efforts also have positive impacts on health, equity, resilience, and
economic growth.” Some immediate and lasting benefits can come
from taking sensible and often widely acceptable steps, Brodie
said. “Investing in greener buildings can improve the health of
those within them, increase transportation access for residents
of all income levels, and reduce risks to residents from hazards
such as heat waves or storms. When done right, sustainable cities
are better cities.”
27

| THE FUTURE OF ESGTECH 2024

However, re-making a city’s infrastructure and operations is not a ‘slam-
dunk’ exercise for any city. Indeed, none of this is easy, said Laimonas
Noreika, CEO and co-founder of European agricultural lender HeavyFinance.
“The transformation of cities towards sustainability is a complex process, and
the role of behavioural science is paramount in ensuring a 'just transition.'
When cities change to meet sustainable finance goals and raise funds to
improve inhabitants' environment, it's crucial to consider who the potential
winners and losers are in this transition.”

There are potential “winners” from the move to more environmentally-centric

modes of governance and operation. The Lithuania-based Noreika said
winners “may include residents who benefit from improved infrastructure,
reduced pollution, and enhanced quality of life. On the other hand,
potential losers might comprise vulnerable communities displaced by urban
development or those facing increased costs due to sustainability initiatives.”

Noreika cautioned policy-makers not to neglect an important step:

carefully consider ways to mitigate potential harm caused by well-meaning
sustainability measures. That’s one area, he felt, behavioural science
is critically important, by “providing insights into human behaviour,
decision-making, and preferences. It can inform the design of policies and
interventions that minimise negative impacts on vulnerable populations.”

Psychology and behavioural economics can also be important factors

in bringing all parties involved on board with solutions. It can help, he
explained, “in public acceptance and engagement with sustainability
initiatives”, sharing an example of one way this might work. “Policymakers
can design communication campaigns and incentives that encourage pro-
environmental behaviours, making the transition smoother and more
acceptable to the community.”
07
CONCLUSION

The financial services industry has massive potential to make significant 28

contributions to the green transition. By committing to net zero and nature

| THE FUTURE OF ESGTECH 2024

positive goals outlined by the TCFD and TNFD will mean that banks, asset
managers, fintech firms and other similar organisation will be doing more
than just paying lip service. It is evident that ESGTech is a true catalyst for
the sector and will continue to be.

While technology already has a major role within a financial institution, there
is so much more that can be done with blockchain, tokenisation, greening
data centres, rich data analysis, AI, integrated psychology and behavioural
economics. Participation in ESG goals has not been an option for a long time
and it no longer makes financial sense to not take sustainability seriously.

In the likelihood of a worsening environmental situation, financial institutions

stand to make a loss, despite currently having the capital to push the necessary
changes forward. It is imperative that companies make these changes in 2024,
as we are quickly running out of time to make a difference.
09
ABOUT FINEXTRA

This report is published by Finextra Research. 29

| THE FUTURE OF ESGTECH 2024

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