Behind The AI Algorithm – The Questions Every Buyer Should Ask Climate Financial Data And Analytics Providers

Artificial intelligence (AI) has dominated headlines since the release of ChatGPT in 2022, sparking a wave of rapid innovation and adoption across industries. At Verdantix, we’ve expanded our research into AI with a dedicated AI Applied team and AI insights integrated into every solution we offer, including sustainable finance. But as with any transformative technology, it’s critical to separate substance from hype – especially in finance, where decisions must adhere to prudent investor standards and regulatory frameworks.

Climate data present a unique challenge for AI: helping to translate vast, complex datasets into actionable insights for investors and lenders. Early Verdantix research highlights several promising applications of AI in climate finance, such as automating sustainable bond analysis to reduce greenwashing, applying AI to enhance satellite data interpretation for insurers to accurately price physical hazards, and leveraging AI to uncover firm-level reputational risks. These cases deliver tangible value to financial professionals, from asset managers tracing sustainable bond activity or monitoring portfolio company climate risks, to insurers incentivizing homeowners to reduce site-level vulnerabilities and accurately pricing climate risk exposure.

In our report, Strategic Focus: AI Governance Controls For Climate Finance Vendors, we expand on these capabilities and explore additional use cases. These span from closing data gaps through emissions estimation and private asset identification to extracting climate financial risks from vast unstructured data sources, such as spatial datasets, to support pattern detection and regulatory disclosures.

Organizations partnering with AI for climate risk assessment within finance should treat the technology as just that, a partner – not a golden ticket. While discussions around job displacement dominate many industries, full automation is neither practical nor desirable in climate finance. Comprehensive AI governance – especially when dealing with challenging, unstructured, forward-looking and patchy climate data – is essential not only for regulatory compliance but also for establishing investor trust and ensuring the integrity of financial decision-making.

When onboarding new climate finance vendors, financial institutions should be vigilant about understanding their AI functionality. Verdantix recommends that financial decision-makers press third-party vendors on the following:

• How and where AI is used in their data and analytics pipeline?
• How do they source and ensure data quality to train and run their AI models?
• What controls are in place to ensure outputs are explainable?
• What testing and controls are in place to manage model drift?

As financial institutions deepen their use of climate data and analytics, it’s increasingly important to understand how vendors apply AI throughout their workflows. Financial institutions should expect clear explanations of how models are governed and how they work. To access more details, financial institutions should read the full report – Strategic Focus: AI Governance Controls For Climate Finance Vendors – and sign up to Vantage for further insights.