The Rise Of Spatial Finance

Linda D. Klein

In corporate finance, the ability to quantify and analyze the effects of business on nature, and of nature on business, is becoming an essential competitive advantage. And it has a name: spatial finance.

Coined by Oxford University’s Sustainable Finance Group, the practice is based on the understanding that economic outcomes, the natural environment, and geography are interlinked. This geographic approach encompasses what’s known as “geoaccounting”—the methodology of setting up measures that aren’t just economic, but balance-driven.

This new calculus is already being used by executives to determine future investments, reduce operational risks, and shape partnerships.

During the COVID-19 pandemic, for example, some investors relied on satellite imagery of Chinese automobile plants to assess economic activity and adjust investments. Hedge funds have used remote sensing to monitor oil inventory levels, lumber supply, and crop yields.

One particularly innovative application of spatial finance is the ability to measure environmental variables, like the carbon-trapping power of untilled soil or the effect of pollinators—or invasive species—on agriculture or timberland.

Increasingly, spatial finance means economic value can finally be assigned to environmental factors that are otherwise challenging to pin down:

· Estimating returns on logging a plot of trees may be a familiar exercise—but what’s the value of not logging it, and instead generating offsets to sell in the carbon market?

· A sugarcane mill located near Costa Rican rainforests might offer low production costs, but is it worth the reputational risks posed by its environmental impacts?

· A mining opportunity in Australia might appear a sound investment, but how exposed are the assets to the threat of wildfire?

Bringing Balance to Business

Spatial finance relies on innovative geospatial technologies including a modern geographic information system (GIS), remote sensing, and artificial intelligence.

The rise of the practice is being magnified by the abundance of near real-time imagery and information generated by satellites, drones, and IoT sensors – and the use of machine-learning algorithms that rapidly process images and sensor readings for insights, anomalies, or patterns.

Businesses that use these elements can take a geographic approach, using GIS to enable insights from mapping and analysis that incorporates business infrastructure, supply chain information, economic and environmental data, and risk profiles. The result is an organization achieving location intelligence, which allows executives and operational leaders to anticipate places where business outcomes and sustainability priorities might be at odds, or where they are in sync. They can then tailor strategies accordingly.

As a first step, many companies turn to spatial finance to identify climate risks. Using GIS software, they can plumb thousands of data layers that are updated daily or weekly on measures like heat indexes, water quality, and deforestation. Even a baseline geospatial capability can help CEOs, chief sustainability officers, chief risk officers, and other key decision-makers anticipate the sustainability issues that financial institutions, regulators, investors, insurers, and other business partners might flag.

Sustainability: Assessing Risk and Opportunity

One area where spatial finance is fast gaining traction is in policing reputational and regulatory risks. Many financial contracts these days include environmental, social, and governance (ESG) guidelines around measures like carbon emissions. For multinational companies and the banks and investors that provide them with financing, a lack of transparency on supply chain impacts or the actions of business partners can trigger fines, damaging headlines, or even legal action.

A bank that adopts the Equator Principles, for instance, a major benchmark of socially responsible practices for financial institutions, has to consider the impact of loans on critical biodiverse habitats. With a GIS-powered dashboard, bank executives can see where companies in their portfolio might be operating in proximity to protected sites and monitor impacts and outcomes via remote-sensing data.

Financial institutions—which often invest over decades—increasingly recognize the importance of minimizing methane emissions, habitat destruction, and other activities that harm the natural world and heighten climate risks. Their spatial finance analysts rely on advances in location intelligence technology and location analytics to translate those factors onto the balance sheet.

For example, S&P Global, using NASA satellite imagery to study public water utilities, has determined that utilities sited near ecosystem resources like evergreen forests had better outcomes on debt metrics; against the backdrop of droughts and water scarcity, that kind of insight can influence credit ratings and municipal debt markets.

In yet another example, involving the United Nations-sponsored Millennium Ecosystem Assessment,

investors, insurers, lenders, and other stakeholders can take into account “ecosystem services,” utilizing GIS with AI to contextualize satellite imagery and sensor data. The term, “ecosystem services,” identifies the benefits that society and the planet derive from healthy wildlife and ecosystems. For instance, rather than seeing trees only in terms of the dollar value of timber, spatial finance can quantify a forest’s value as a carbon sink, as a source of revenue from hunting or other recreational activities, or as a natural bulwark against soil erosion.

Armed with such metrics and a geographic approach, a company can understand how to optimally manage land for a combination of uses including commercial forest management, mining, or conservation.

The same kind of analysis can extend to other natural resource and energy firms exploring a transition to land uses such as real estate development, infrastructure, or renewable energy.

Healthy ecosystems—rich in natural resources—foster ideal conditions for biodiversity. And economic opportunity often follows.

Guided by location intelligence, spatial finance helps businesses discover a balance between capitalizing on earth’s rich bounty and protecting it for future generations.

To learn more about how organizations can use spatial finance and location intelligence to ensure sound, sustainable business practices, visit esri.com/en-us/industries/sustainability/overview.

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