The Future of Environmental Financial Products is Digital

In recent decades, we have seen business models disrupted thanks to advancement in digital technology. From the rise of remote working teams to more recently the emergence of decentralised finance, the world is going through radical change. Our future is digital, whether we like it or not.

Similarly, climate change is transforming the business landscape – and will only continue to do so. The Paris Agreement has created an urgency among governments, institutions and major corporations to commit to ambitious sustainability goals. Yet when it comes to the complex challenge of avoiding a climate crisis, we are still using manual, analogue processes in areas where technology can bring about reduced risk, greater certainty and optionality.

What are environmental financial products and why are they important?

A prime example of manual processes in the climate market is how we create environmental financial products, or green financial products. Such products represent the rights of one or more environmental attributes, whether that be a MWh of renewable energy or a metric ton of CO2 avoided. These are typically renewable energy certificates (RECs) or carbon credits.

Environmental financial products are critical to slowing climate change as they incentivise positive behaviour and fund environmentally-positive development. They allow organisations to efficiently achieve emission reductions and offset their carbon footprints by funding renewable energy, energy efficiency or other activities that avoid, reduce or sequester carbon (e.g. reforestation and other forest, agriculture and land use activities). This in turn encourages the development of such projects.

Without environmental financial products, it would be far more difficult for many types of industry to have a direct positive environmental impact and strive for decarbonisation. Take commercial properties and nearly any type of factory, for example – assets that make modern life possible. While these assets continue to reduce their carbon footprint directly through energy efficiency and renewables, their remaining negative environmental impact will still need to be offset in order to avoid dangerous levels of climate change.

Given the important role environmental financial products play in allowing enterprises and institutions to meet sustainability targets, it is critical that the product itself is highly provenanced. If the source of the underlying data is not reliable, we would not be able to prove that positive environmental impact has actually been created.

Use of carbon-relevant data in traditional carbon offsets and RECs

Most traditional approaches used to monitor, report and verify emissions reductions and RECs use intermittent, manual processes to determine the environmental impact of projects. Data collection is labour-intensive and time-consuming, often severely when the number of emission-reducing projects seeking environmental finance increases. The direct costs, lost time and occasional late delivery penalties to the project owners can be high as well. The periods between measurement dates can be significant, meaning the visibility of environmental product output between measurement dates is low. This makes it difficult for project owners to predict output volume and timing and thus, revenue.

Furthermore, the end product is often not tied to the underlying environmental data in a granular or permanent manner that can be easily traced. This means the ability to tie, say, a specific REC to a specific MWh from a specific project device at a specific time is low. The environmental market has had a long history of trying to deal with double counting (or more) of data – selling the rights to the same MWh of renewable energy or metric ton of CO2 avoided more than once.

As the production and use of environmental financial products is inextricably data-driven, it is absolutely essential, and now possible, that such data be handled in a manner that brings about reduced risk, greater certainty and optionality.

How can a digital solution help us achieve climate goals faster?

1. We can increase efficiency and transparency, in collaboration with high quality market standards and other players

When it comes to offsets and RECs, a digital solution will help minimise many of the issues that currently exist in the market. Such a solution could include verifiable digitally-captured data that is linked to a digital financial product. This digital product could be custodied, transferred and retired, delivering a higher quality and more versatile product in collaboration with reputable market standards and registries. Such a system allows for open access to underlying data on an ongoing basis, and ties specific underlying data to specific products.

2. Real-time digital data capture is verifiable and auditable

Digital data capture means the product benefits from provenanced data, captured on a real-time basis, without significant manpower or frequent manual periodic checks. This offers a more efficient and less expensive solution, coupled with higher quality, more frequently captured data. This ongoing, real-time monitoring gives the project owner a greater understanding of what the output at the end of a period is likely to be.

Ongoing accurate data allows project owners to plan future production and even create risk management products on top of that data.

3. We can end double counting by permanently tying data to carbon credits and RECs

Finally, the digital end product can be permanently tied to a batch of data, giving greater certainty to the buyer about the source of the product, including details of the project, the meter and the time period – making double counting and other fraud far more difficult.

While not a total panacea for stopping climate change, environmental financial products provide a tool for helping to achieve our climate goals sooner. A digital data and product solution is able to provide the creators and buyers of environmental financial products like RECs and emission reductions access to cheaper, better product, with superior underlying data, in a form that is more easily tradeable.

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Allinfra is building technology solutions to help your organisation achieve ESG goals. Learn more about our sustainability data management software, Allinfra Climate.