A Clear View of Sustainability
Hitachi’s new digital platform aims to boost investment in sustainable finance, using IOT and blockchain technologies to improve the visibility and verification of environmental projects.
There’s no question that projects related to sustainability are of the utmost importance today. Several frameworks and initiatives set targets for the world to meet: for example, the UN’s Sustainable Development Goals (SDGs), the COP21 Nationally Determined Contributions and the Environmental, Social and Governance (ESG) framework. It is a top priority for civil society and for public and private organisations to achieve these targets and stay within sustainable development pathways. But how can organisations prove that a project is contributing to achieving them? How can you compare the contributions of multiple projects? And if you’re an investor, how do you know a project is genuinely contributing and on target? The difficulty of answering questions like these is one of the main obstacles holding back the growth in sustainable investment and the projects it supports.
Historical mobilisation of capital
According to Efrain Tamayo from Hitachi’s European R&D Centre, sustainable finance has enormous potential. “In aggregate, it represents a historical mobilisation of capital, an opportunity for industry sectors to engage and innovate solutions and products aligned with sustainability, and a way to build new infrastructure or to replace aging infrastructure in a sustainable manner.”
The need for measurable outcomes
However, for the growth in innovative financial instruments such as green loans, green bonds and sustainability-linked loans to speed up, the market needs more trust and accountability. This means being able to prove that projects being financed have social and environmental outcomes that can be both measured and compared. Achieving this can be complex. For example, in a clean transportation project, metrics may need to cover multiple phases, including procurement, construction and manufacturing as well as energy consumption and CO2 emissions during operation. Similarly, in construction, buildings may be built to high environmental standards but not monitored during their lifespan to ensure that they perform as expected.
Reporting is complex, too. Which metrics do you choose? How do you report to different stakeholders? What happens when one project’s metrics are aggregated with another’s? How can you attribute the right contribution to the right market participant? There’s a need for clarity and standardisation as well as transparency. It’s especially important for sustainable finance participants, who need to know how to evaluate and select projects, allocate finance and verify impacts and risks.
The financial and non-financial rewards for providing verifiable evidence of environmental and social contributions can be significant. They include improved insurance terms, reduced or target-based interest rates, reduced perception of risk, grant awards, compliance and improved brand image.
New platform to accelerate investment
Hitachi’s new Sustainable Finance Platform brings our experience of digital technology and decarbonising energy and transportation together with the finance sector. It combines cutting-edge technologies to accelerate investment by overcoming the obstacles that the industry is facing.
Internet of things (IoT) technology is used to capture performance data accurately, meaning sustainability reporting is “built in”. Then, a blockchain layer extracts the data and stores it to create an immutable, verifiable record of performance. Blockchain can also selectively report data to different audiences – e.g. investors, project owners, the public, auditors and regulators. This means, for example, that utilities need not feel concerned that releasing performance data will create privacy or competition concerns. Information is transparent – but also secure.
The power of an ecosystem
When this platform becomes host to a critical mass of projects, it has the potential to become an ecosystem that can be the driving force for sustainable investment. First, it will lower the bar for investment in sustainable finance. With the ability to accurately compare financial assets based on their sustainability impacts and risks, investors and underwriters will have more choice and be able to make better decisions. Second, project owners will have improved access to finance and be able to meet environmental targets more cost-effectively. Finally, there is potential for a self-reinforcing network effect: aggregated sustainability projects can drive the supply of sustainable finance, while verifiable evidence of impacts and fund allocation can stimulate demand from investors.
A new way of doing business
Efrain Tamayo notes that the sustainable finance platform is unique for Hitachi: “Typically, our new business is technology-driven, with R&D departments or business units finding new ways to solve specific problems. This project is driven by a societal issue – the need to accelerate sustainability – with technology as the enabler. Our platform can create a new way of doing business in this space that will benefit all the different participants involved”.
- VTT Webinar: https://info.vttresearch.com/green-recovery-and-rebooting-cities
- Hitachi Technology 2020, Hitachi Review: https://www.hitachi.com/rev/archive/2020/r2020_03/19/index.html#sec10
- FCA – Regulatory sandbox – cohort 6: https://www.fca.org.uk/firms/regulatory-sandbox/regulatory-sandbox-cohort-6
- Thought Leadership article: https://www.innovatefinance.com/blogs/hitachi-2/