Spatial finance and sustainability

Satellite technology has become ubiquitous. Satellite imagery has made geospatial data available like never before. Coupled with the increasing availability of real-time geospatial data and advances in artificial intelligence, data-driven decision-making can help fight the climate crisis. The term “spatial finance” was coined by the Smith School of Enterprise and the Environment at the University of Oxford and is based on the understanding that economic outcomes, the natural environment, and geography are interlinked.

Spatial finance integrates geospatial data and analysis into financial theory and practice. Spatial finance helps businesses discover a balance between capitalizing on the earth’s rich bounty and protecting it. Executives are already using this new approach to determine future investments, reduce operational risks, and shape partnerships.

Spatial finance can help identify sustainable investment opportunities by providing financial institutions with more accurate and comprehensive information, enabling them to make better decisions that balance economic outcomes with environmental considerations. Thus, a bank can look at satellite imagery and adjust its investments in an automobile company. Integrating geospatial data into financial decision-making processes allows financial institutions to assess the location of a company’s or a country’s assets and infrastructure using ground data, remote sensing observations, and modelled insights. This offers a potentially transformative means to gain improved quantitative ESG insights. In addition, spatial finance can help increase transparency within the financial system for practitioners and data providers alike, allowing sustainability-related risks to be better managed through the use of geospatial data.

Geospatial data and technologies provide relevant insights across all economic sectors with a direct or indirect link to the physical economy and are a key focus for spatial finance. By illuminating sustainability risks and opportunities as never before, spatial finance can help qualify new categories of risks and extend measurement to places that was previously not possible, thereby creating a smoother transition to sustainable development. 

Spatial finance will help companies and NGOs in averting the biodiversity and climate crisis and alleviate the ensuing social issues. It also increases a company’s operations to become more transparent and makes the company more accountable. In addition, spatial finance helps bring a balance to business – balancing environmental and financial objectives. Overall, spatial finance is expected to help financial institutions identify sustainable investment opportunities and enhance sustainable development goals. 

The emergence of tree-free paper

Paper is a versatile product and has many uses. It is used for printing, packaging, decorating, writing, cleaning, filter paper, wallpaper, book-end paper, coated worktops, toilet tissue, currency, security paper and several industrial and manufacturing procedures. The global production of paper and paperboard will reach 476 million tons by 2032. Studies estimate that about 42 million trees are cut down daily for paper and other products. It is estimated that in one year, one mature tree absorbs 48 pounds (or 21 kgs) of carbon dioxide. Thus, 332 million metric tons of carbon absorption capacity is being destroyed each year to produce paper. A more sustainable approach to paper production is needed.

Tree-free paper is slowly starting to gain prominence. A wide variety of alternative fibres can replace wood-pulp paper. The sources for tree-free paper include:

* Agricultural residues – for example, sugar cane bagasse, husks, and straw.

* Fibre crops and wild plants – such as bamboo, kenaf, hemp, jute, and flax.

* Textiles and cordage wastes.

There are also non-fibre sources, such as calcium carbonate bound by a high-density, non-toxic polyethylene resin.

The paper industry is highly competitive with low margins and is always searching for cheaper and widely available alternatives. Traditional paper production requires constant planting, cutting and replanting of trees. Although, many paper producers have moved to recyclable paper, it still doesn’t solve the problem of managing forests, as their lifecycle still starts with planting trees. There is also a limit to how many times paper can be recycled. The tree-free paper solves that problem.

Tree-free paper is beneficial for the environment by preventing deforestation. Of course, there is a risk that forest owners may shift the land use to other purposes as they would lose an earnings stream. If the trees no longer need to be planted, there will be a reduction in the use of pesticides and fertilizers. Tree-free paper production creates employment opportunities, generates income, and supports social and cultural values. 

Green Deposits 101

The Reserve Bank of India has announced the framework for accepting green deposits of regulated entities (RE).

What is a green deposit?

A green deposit is an interest-bearing deposit received by the regulated entity for a fixed period and the proceeds are earmarked for being allocated towards green finance. These are like your regular fixed deposits issued by banks, and the only difference is that the money collected can be invested only in specified activities.

Why green deposits?

The framework’s purpose is to encourage regulated entities to offer green deposits to customers, protect the interest of the depositors, aid customers in achieving their sustainability agenda, address greenwashing concerns and help augment the flow of credit to green activities/projects.

What are the specified activities?

*Renewable energy

*Energy efficiency

*Clean Transportation

*Climate change adaptation

*Sustainable water and waste management

*Pollution prevention and control

*Green buildings

*Sustainable Management of Living Natural Resources and Land Use

*Terrestrial and Aquatic Biodiversity Conservation

The framework also lists areas where these funds cannot be deployed. These include:

Projects involving new or existing extraction, production and distribution of fossil fuels, including improvements and upgrades; or where the core energy source is fossil-fuel based.

 *Nuclear power generation.

 *Direct waste incineration.

 *Alcohol, weapons, tobacco, gaming, or palm oil industries.

 *Renewable energy projects that generate energy from biomass using feedstock originating from protected areas.

 *Landfill projects.

 *Hydropower plants larger than 25MW

What are the regulated entities?

(a) Scheduled Commercial Banks, including Small Finance Banks (excluding Regional Rural Banks, Local Area Banks and Payments Banks) and

(b) All deposit-taking Non-Banking Financial Companies (NBFCs), including Housing Finance Companies (HFCs).

How do we know the money is invested properly?

he allocation of funds raised through green deposits by REs during a financial year shall be subject to an independent Third-Party Verification/Assurance, which shall be done annually. While assurance is required, the regulated entities cannot wash their hands of their responsibilities.

The RE shall place a review report before its Board of Directors within three months of the end of the financial year. 

The Right to Clean Air

Delhi often struggles to breathe. So, do Tokyo, Shanghai and Dhaka. Air pollution is estimated to kill 7 million people worldwide each year. The problem is severe and needs immediate action. In August 2022, United Nations General Assembly passed a historic resolution declaring that everyone on the planet has a right to a healthy environment, including clean air, water, and a stable climate. While this is not legally binding, it could be vital for protecting the planet and its people.

Image: NIKLAS LINIGER / Unsplash

Belgium passed a law in December 2022 that improves indoor air quality in closed spaces that are accessible to the public. This would require restaurants, gyms, and bars to meet air-quality targets and display real-time measurements of carbon dioxide concentrations — a proxy for how much clean air is piped in.

In India, we have The Air (Prevention and Control of Pollution) Act, The Air (Prevention and Control of Pollution) Act of 1981, and, The Environment (Protection) Act of 1986 (EPA). At least 155 countries are legally obligated – through treaties, constitutions, and legislation– to respect, protect, and fulfil the right to clean air. At the same time, roughly 80 countries had no air quality standards or guidelines at all. Hence, while these push for cleaner air, the impact on the ground has been far from satisfactory.

Lack of clean air results in premature death and harmful effects on the cardiovascular system, including increased hospital admissions and emergency department visits for heart attacks and strokes.

Air pollution negatively impacts the enjoyment of many human rights, particularly the right to life and health, especially concerning vulnerable groups.

SEBI moves ahead on ESG

The Securities and Exchange Board of India (SEBI), recently, approved the regulatory framework for ESG (Environmental, Social and Governance) disclosures, ratings and investing.

Disclosures

SEBI has introduced BRSR Core that is applicable to top 150 companies by market capitalisation. It has reduced the number of key performance indicators across the value chain to report on to around 50 and requires these items to be reasonably assured (audited).

A glide path will be prescribed for applicability of BRSR Core, beginning with the top 150 listed entities by market capitalisation from FY2023-24, which will be gradually extended to the top 1,000 listed entities by FY2026-27.

The requirements are to be based on a comply or explain basis from FY 2024-25 for disclosures and FY 2025-26 for assurance.

Ratings

Considering that emerging markets have a different set of environmental and social challenges, Sebi said that ERPs will be required to consider India or emerging market parameters in ESG rating.

ERPs will have to offer a separate category of ESG rating — Core ESG Rating — which will be based on the assured parameters under BRSR Core.   tings. 

The regulatory framework for ERPs would be through the introduction of a new chapter in the SEBI credit rating regulations.

Investing

Sebi has decided to introduce a new scheme category, enabling the launch of multiple schemes on ESG-related factors. It has decided to mandate ESG schemes to invest at least 65 per cent of assets under management (AUM) in listed entities, where assurance on BRSR Core is undertaken.

There will be a mandatory third-party assurance and certification by the Board of AMCs on compliance with the objective of the ESG scheme. Sebi mandates enhanced disclosures on voting decisions with a specific focus on environmental, social and governance factors.

It Also mandates disclosure of fund manager commentary and case studies, which highlight how the ESG strategy is applied to the fund or investments.