The new EU taxonomy comes at a time when fintech is converging with blockchain, IoT (Internet of things) and AI (artificial intelligence). What that means is that the real economy is starting to develop a system where real objects (refrigerators, hot-water heaters, wind turbines, automobiles, nearly anything, really) can capture proof-of-impact data, analyzed by intelligent algorithms, and uploaded in real-time to digital ledgers. This advancement is set to entirely transform reporting on green finance.
EU Taxonomy
EU issued the taxonomy on sustainable investment last month. It helps to define the universe of activities that will remain in a net-zero emissions economy in 2050 and beyond, and the types of activities that can support the transition to a low-emissions, climate-resilient economy.
The taxonomy will in some cases require investors to come up with new types of data, at a more granular level, than the aggregate company performance. This will mean short-term costs such as developing monitoring and reporting process, training and education to establish new systems and processes. These new systems may as well be digital systems that can serve the dual purpose of digitizing European economic actors even further and increasing the demand for taxonomy measurement and reporting fintech solutions. The timing is right, too: 5G is starting to rollout in some countries as the main enabler of IoT deployment, and can support fintech and finance to track taxonomy-aligned assets and projects in new ways.
Convergence of IoT, Blockchain and Artificial Intelligence
The taxonomy comes at a moment in the digitalization journey of finance where distributed ledger technology (blockchain), AI, and IoT are all starting to converge.
IoT devices provide information about the geographical position, internal position, and environmental conditions of various objects. IoT-enabled asset tracking solutions will allow investors to actively track specific metrics about the underlying assets of their investments without human involvement.
Imagine the incredible diagnostic and predictive value of being able to harvest and cross-tabulate data from taxonomy-aligned activities in agriculture, forestry and fishing, manufacturing, construction, information and communications technologies, electricity supply, water, transportation and storage, to name a few. Thanks to 5G-enabled IoT, this data can be harvested not only in massive quantities but in real time. This is where the convergence with artificial intelligence is crucial as AI can make sense of the data onslaught and help analyze what’s relevant for taxonomy disclosure purposes.
IoT may be in its infancy, but connected devices are already being used to monitor carbon emissions. Europe’s networks have made big progress in implementing 5G, which is going to further enable the neural network of IoT to report on green metrics in an automated fashion.
Re-Designing Disclosure Regime
Processes for reporting on green metrics will transform as the technologies mature and adoption increases in the financial sector. “Self-reporting” will start to mean something entirely different, too. It will not be companies and investors reporting taxonomy metrics about, say, their real estate holdings—the buildings themselves will report. Thanks to IoT, inanimate assets themselves will be automatically uploading data to digital ledgers to offer real-time proof of impact in full transparency. With a node of their own on the digital ledger, regulators also can receive real-time data reporting for supervisory purposes.
Impact Data Captured from the Sky
Green impact data, travelling directly from objects and infrastructure to investor platforms’ taxonomy data, can also increasingly be captured from satellite imagery. Recently the nonprofit WattTime announced that it is going to use satellite imagery to precisely track the air pollution (including carbon emissions) coming out of every single power plant in the world, in real time.
Financial service institutions can use monitoring from space to capture taxonomy metrics both for disclosure but also for insights on financial risks.
Taxonomy Challenges
The EU has the most advanced disclosure regulation of any region in the world. Other regions could adopt the EU’s regulatory protocols, modifying to suit local circumstances. And instead of being perceived as just a compliance agenda, a broader uptake of the European model could drive new business opportunities to satisfy the demand for more and better data.
EU could initiate taxonomy fintech challenges mobilizing all fintech hubs in the Union to compete for designing automated data harvesting systems. This would provide a valuable opportunity, especially for the smaller companies and investors, to explore ways to leverage fintech to ease the reporting burden and for the fintech community to start engaging hands-on with the taxonomy and data for climate change response.
An EU-led initiative of fintech challenges could spur formation of new innovative partnerships between fintech, IoT and AI providers to kick-start a new phase of digitization of the financial system, connecting finance and the real economy in new and beneficial ways.