The sustainable finance community kicked off last weekend with a bit of a gut punch.
The financial institutions behind trillions of dollars huddled under the Glasgow Financial Alliance for Net Zero (GFANZ) umbrella appear to have traded in their criteria for credibility in return for membership consistency. Like excess Halloween candy across the nation, many of those trillions for transition finance are now stashed out of reach.
The alliance will no longer require but instead encourage signatories to commit to the United Nations’ Race to Zero campaign, in which it was "firmly grounded" just a year ago. The criteria had held financial firms to restrict fossil fuel financing in line with the International Energy Agency’s call for a fossil fuel phaseout.
It’s a move that the reputable responsible investment group ShareAction sees as extremely concerning as it regards having "any chance of preventing the worst impacts of climate change."
But fear not, says Mark Carney, the United Nations’ special envoy on climate action and finance — data will hold banks accountable for climate progress.
Blame the pedantic, former UC Berkeley paper-grader in me, but data doesn’t have agency. The idea that, as Carney said, "Over time you will see people who are lagging," isn’t much reassurance for a few reasons.
For one, no credible scientific bodies on climate breakdown are proclaiming an urgent need for "more data over time," but rather that there are some things we have enough data to know we need to stop, such as financing new fossil fuel development, and others we need to start, such as following through on transition finance commitments. Neither involve longer time horizons.
Second, the idea that sharing companies' progress, or lack thereof, on net-zero financing will in fact discipline them feels unfounded. In the absence of significant policy changes on carbon regulation or pricing, it's hard to see where this discipline would come from.
That’s not to suggest that filling the data gap for climate finance isn’t a priority. The transition to a clean and just economy is a political and moral challenge, and it’s a data challenge too.
The scaling of our portfolio alignment tools will happen in part by that tool being used by a range of different users on the financial services side but also by a range of different services providers.
OS-Climate, an open source data project that is part of the Linux Foundation, is helping to solve this challenge as a "public utility." It’s working to address the cost of data, modeling, software development and computing for the necessary tools in transition finance.
I talked with Truman Semans, OS-Climate’s founder and CEO — and a former United States Treasury economist and financial mechanisms lead for the negotiating team to the U.N. Framework Convention on Climate Change (UNFCCC) — to get a sense of how the platform is enabling, as he put it, more "do, do, do, and less blah, blah, blah."
Grant Harrison: OS-Climate is "establishing an open source collaboration community to build a data and software platform that will dramatically boost global capital flows into climate change mitigation and resilience." Translate, please?
Truman Semans: I’ll first add that it’s a community of practice and action. The Linux Foundation, of which we are a part, is a very well-established host of large-scale open source projects. It has developed, over the course of the last 20 years, licensing collaboration structures and supporting structures that allow large numbers of stakeholders to work together and identify what needs to be done — and then to execute that in [software] code.
In the applied case of OS-Climate, we work together as a community of practice around the aligning of investment portfolios and banking portfolios. We got input from members and then from other stakeholders, like the portfolio alignment team for COP26, on methodologies that were expressed in words and then converted those methodologies into math and code to create the portfolio alignment tool.
So that tool is being used within, for example, Allianz Investment Management, which is the project leader at the firm for target-setting in decisions around portfolio, strategic asset allocation with respect to, for example, sectoral allocations, geographic allocations around the composition of investment portfolios. And this is all in service to meeting their net-zero goals as part of the Net-Zero Asset Owner Alliance.
Harrison: Part of OS-Climate’s goal is to "accelerate the shift of global investment away from relatively GHG-intensive and climate-vulnerable companies, technologies and infrastructure into mitigation, resilience and adaptation." What key ingredients need to be mixed with open source climate data to make this shift happen, and happen rapidly?
Semans: The scaling of our portfolio alignment tools will happen in part by that tool being used by a range of different users on the financial services side but also by a range of different services providers. We have some of them in our in our midst in the United States climate community like EY, but then others like BCG, who are looking at this, and other members of the Big Four, for example, that can use that the tool we have developed — which is a public good — in advice to a large range of clients.
If you add up even just the names that I've mentioned right here, you get advice for hundreds of financial institutions, hundreds and thousands of companies. In terms of climate impact, we can identify companies that have not set good targets, those that have and those that are doing well or less well on meeting their stated targets. We then help to inform the investment decision-making, which is informed by how those companies and the associated securities — equities, bonds and different project financing instruments — and make decisions to invest in and finance those that are on track toward the Paris [Agreement] goals.
Harrison: That response brings to mind another part of your mission, which is to enable the design of better policy to effectively engage capital markets in addressing climate change. In a paradigm (particularly in the United States) where robust climate policy is absent, how does OS-Climate’s platform help to enable better policy design?
Semans: In a number of different ways. One is that good data is needed throughout the ecosystem for robust decision-making. We are not a data source, but as a data aggregator we help in data management, which serves the use by policymakers or those organizations that are informing policy. We do not have a lobbying arm, we don't have government affairs, we're a 501(c)(6) that also has a 501(c)(3) arm. We do not spend anything on government affairs, but all of our members have massive spend on this.
Our tools are free to use by our members or anybody else for that matter. For example, our transition analysis tool: If we had Corporate Average Fuel Economy (CAFE) standards that were advanced in the years of implementation of the fleet requirements, the efficiency requirements and these kinds of things, we would have policy results X, Y and Z, and how capital would flow is associated with that if you're thinking about how Inflation Reduction Act (IRA) money would be spent.
In terms of climate impact, we can identify companies that have not set good targets, those that have and those that are doing well or less well on meeting their stated targets. We then help to inform the investment decision-making ...
So we're not just talking about resilience, we're talking about mitigation. So we've got a physical risk and resilience tool that is developed with BNP Paribas as the lead and with other members involved. They're using it for the assessment of assets at risk and capitalization requirements and things like that. It's a geolocation tool that looks at the expected probability of the risk of occurrence and severity of different kinds of events that affect a location. So, in that case, the IRA money can be targeted to where resilience interventions can help communities at risk to adapt to the threats that are coming at them.
Harrison: Can you share more about what is meant by the "hard and soft infrastructure" that makes up OS-Climate’s public utility?
Semans: So the hard infrastructure is the ones and zeros. It's sitting in our GitHub repositories, but what those ones and zeros achieve is essentially an interlinked platform of, on the one hand, the data commons — basically pipes for data to flow and data to be managed. So pipes and valves, if you will.
And then the soft infrastructure is like an electricity co-op … With a co-op, it's got an elected board, and the elected board makes decisions about how the funds are allocated, and makes decisions on how infrastructure is built out, etc. So under the Linux Foundation, we use their structures of licensing, cooperation and structures of support to be an effective community of practice and action. And that’s not just in service to our members. We exist in the sustainable finance ecosystem of stakeholders from academia, government, a range of different industries, NGOs — all of these are welcome to and encouraged to engage in the function of the utility and in the development of hard infrastructure.
Harrison: You mentioned the presence OS-Climate will be having at COP27. What are you expecting from the conference — positive, negative or otherwise?
Semans: These are my opinions, not necessarily those of our members. I think that COP27 is going to be very fraught; with a sense of unmet goals by countries, by a sense that there's a lot of greenwash out there, by a sense that the Global South is being ignored. In many ways, by a sense that there are these massive and looming adaptation challenges around the world we've been seeing all year. And, a whole lot of questions like, "What the hell is going on here? What can be done to speed up progress toward Paris goals?"
Part of my own personal background that I bring to the leadership of OS-Climate is that, for four years, I worked in the U.S. Treasury Department, and served on the U.S. negotiating team to the UNFCCC. I directly negotiated with parties to the climate change convention, the UNFCCC, particularly on Article 11. Article 11 is about the financial mechanism under the convention that is set up to finance the incremental cost of implementing the convention. So I worked with large corporations on understanding, among other things, the policy drivers associated in national governments with the implementation of the Convention and also in international institutions that were involved in the the financial mechanism — the Global Environment Facility and others — and then to develop and understand scenarios of how this would play out and to make wise decisions on R&D, corporate development, product development and on large capital projects.