4Most (Europe) Limited Public Funding

Awaiting Public Project Summary

This project aims to develop a Green Credit Score which will enable financial institutions and public authorities to assess Climate and Environmental Risk (CER) for small and medium enterprises (SMEs). The availability of this score will help drive more sustainable lending and funding decisions, incentivise more SMEs to become environmentally responsible, and ultimately support the UK's Government Net Zero emission targets. Whilst sustainability data and assessment for larger corporates is gathering momentum thanks to TCFD recommendations and regulatory requirements, there are major difficulties in securing suitable information relating to SME's sustainability, and quantitatively assessing their carbon footprint and sustainability plans. At the same time SMEs are critical to achieving the UK's carbon reduction targets as they represent c.50% of UK business emissions. Despite this, only 11% have any measure of their carbon footprint. The project will focus on gathering a dataset set of objective environmental responsibility indicators for SMEs through a variety of means, including direct questions, third party modelled data, energy metering and open banking inferred carbon intensities, assessing the utility and consistency of each. Then a proprietary algorithm, Knowledge Elicitation Process, will be used to embed expert understanding of the impacts of climate change into the relative riskiness of individual organisations and overall sectors. On this basis, a Green Credit Score will be developed, which will enable financial institutions and public authorities to assess CER for SMEs, using objective and measurable environmental responsibility criteria. The Green Credit Score will inform SMEs of their current carbon footprint, advise of key risks to their business as a result of transition risks in the economy and provide tools to help mitigate those risks and reduce direct and indirect carbon emissions. The Green Credit Score will provide improved access and pricing of credit based on evidence that demonstrating a capability for planning and risk management in CER will be viewed positively by lenders. For lenders, the availability of a Green Credit Score will help meet environmental sustainability commitments and lead to improved reputation, with a potential to increase market size. They will be able to assess credit worthiness more accurately, taking into consideration wider environmental factors, which will ultimately reduce their future credit losses. For the financial sector as a whole, the availability of a Green Credit Score will address the lack of focus on CER for SMEs, changing the way the sector works and keeping environmental responsibility high on the agenda.

Large national and international banks, and insurance companies are increasingly required by their regulators, shareholders and ultimately customers to ensure they can continue operations under economic stress. The recent “Great Recession” (2008-13) has brought into sharp focus the need for improved approaches to estimate the amount of capital and provisions needing to be held in a range of situations. At present approaches focus on a combination one-size fits all regulatory models based on over-simplified models of economies (e.g. the Vasicek formula that underpins the Basel II & III international accord) or ad-hoc estimates based on a narrow range of bland potential scenarios (e.g. 1:25 year recession). Large financial institutions currently typically have no systematic approach to estimating what would happen in possible but extreme scenarios such as UK exit of EU, virus pandemic or allout war in Ukraine, nor an understanding of the “boundary surface” of extreme scenarios under which the bank could fail – known as reverse stress testing and a key requirement of UK and international risk regulation. The great problem with regulating banks and other financial institutions is that it is easy in retrospect to prevent the last crisis. What regulators and bank management have consistently failed to do is to be well prepared for the next one. Regulators internationally are increasingly demanding banks to be forward looking in their risk assessments. 4most Europe Ltd seek to help Banks and other financial institutions to be better prepared ‘what-if’ scenarios and to meet the stringent regulatory standards by developing a cloud based Probabilistic Graphical Model (PGM) tool tailored to estimating stressed economic parameters. This will enable banks and other financial institutions to be better prepared for possible but severe scenarios and hence reduce exposure to cataclysmic disruptions of the financial system, which clearly has a very large global social benefit