Portfolio Analytics That Will Build Financial Resilience in the 21st Century

The BlackRock Investment Institute describes portfolio resilience as being “consistent, diversified, risk-aware, and flexible.” As the financial sector faces increased pressure to respond to climate change – including forthcoming ESG reporting requirements and a growing awareness of greenwashing – financial institutions must be proactive about understanding and mitigating these risks in their portfolios to adapt to this new reality.

At the center of financial resilience is data-driven intelligence and portfolio analytics – tools that give financial professionals deeper insights into portfolio risks in ways that haven’t been possible in the past. Whether it’s monitoring drought risk or identifying stranded assets, these modern risk decision-making tools can help build financial resilience by presenting data in an intuitive, geospatial format.

This post will show how GIS tools and data integration can help financial professionals in all industries mitigate portfolio risk in the 21st century.

Financial Resilience Starts With Nature

The World Wildlife Fund uses the term “spatial finance” to refer to the ways in which the natural world and the financial world are linked:

“Financial decisions need to take these risks and opportunities into account…. With the advance in geo-spatial and earth observation data combined with artificial intelligence and machine learning, new opportunities are rapidly developing to manage risk, opportunity, and impact.”

They describe the ways in which “asset data” – the precise geophysical location of an asset, such as a farm or factory – can be combined with “observational data,” ranging from smart meters and environmental sensors, to publicly-available GIS data, to ESG reports produced by subsidiaries or parent companies.

Taken together, this data can help lenders to better identify risks on various timeframes and at various scales, improving overall portfolio resilience.

Why Portfolio Resilience Matters

Portfolio resilience matters because the risks that financial institutions face today may not be the same risks they face tomorrow. In many industries, such as the agricultural sector, water stress represents a growing threat to borrowers’ livelihoods, their supply chains, and the industry overall. Lenders and investors who proactively identify these risks can work to mitigate them and reduce their impact on their portfolios.

For example, the Water and Wastes Digest explains that “Our Water Future is Digital” and how new technologies can improve water conservation and infrastructure:

“Engineering and construction of new water infrastructure has changed substantially due to the rise in digital solutions, and the pandemic has only accelerated this shift…. Smart water tools, whether digital twins or dashboards, break down the traditional silos — both cultural and structural — by integrating databases and information systems so institutional knowledge can be centrally captured and shared.”

Data integration and portfolio analytics can help financial institutions stay competitive in a changing market, while also collaborating with other stakeholders toward long-term resilience.

Using Portfolio Analytics to Identify Risk

In the past, risk assessments could focus on a single metric, such as the credit risk of the borrower. Now, it’s clear that financial risk in the traditional sense is just one part of the equation, and that other factors, including social and environmental risks, must play a role too.

For example, in the agricultural industry, a water risk assessment must take more than a borrower’s risk profile into account. They may be constrained by physical water scarcity, a lack of access to water rights, or pumping restrictions under regulations like SGMA. To properly determine their water risk, financial professionals must be able to assess all of these factors accurately and efficiently, using modern portfolio analytics.

Portfolio Analytics Must Reflect the Geospatial Nature of Risk

Because these risks are geospatial by nature and can vary widely from one region or watershed to another, the portfolio analytics tools used by financial professionals must reflect that. The right tools can help users focus on the relevant information, before drawing connections between multiple data points and identifying areas for improvement.

As a report by Franklin Templeton explains,

“Companies and sectors lacking understanding of their water sources and footprints, lagging in disclosure of water risk, and/or postponing adjustments to the regulatory reforms … all present long-term risks to investors….. We must recognize that broader environmental risks are beginning to pose business-relevant vulnerabilities today.”

Investment firms aren’t the only players who recognize the importance of data. A recent bill proposed in California would set aside $5.1 billion in funding for new water security measures – including $91 million to “augment the state’s water data infrastructure to improve forecasting, monitoring, and assessment of hydrologic conditions.”

Since much of this data is available to the public through the California State Geoportal, financial professionals can integrate it into their portfolio analytics software.

Digital Solutions for Lending Workflow Management

With digital finance solutions on the rise, modern, nimble fintech offerings are finding it easier to compete with traditional lenders. The right GIS platform can serve as a one-stop-shop for financial professionals, allowing decision-makers to aggregate data into a single cloud-based portal that can streamline lending workflow management.

As the Credit Union National Association explains, “A single solution can minimize the number of integrations and touchpoints …. when trying to piecework multiple platforms designed to perform various components of the loan origination process….”

“Old methods of serving borrowers are no longer an option for lenders that want to remain relevant in a highly competitive environment.”

Using the Right Portfolio Analytics in Lending

The right portfolio analytics tools can help lenders keep up with the digital revolution, improving relationships with borrowers and making it easier to share data with other stakeholders. With a digital, cloud-based interface and on-demand reporting options, lenders can reduce the time it takes to make an informed decision about a loan.

Ag finance institutions, in particular, can integrate bank data with environmental data, such as wildfire risk, water quality, water availability, endangered species zones, and more. They can also export parcel or portfolio reports, and view details about specific loans and parcels, all in the context of environmental and risk data sets.

By using portfolio analytics software to provide a more complete picture of risk, lenders can maintain their financial resilience in a changing economic landscape.

The Bottom Line

Financial resilience in the 21st century will require an expanded definition of risk – one that takes ESG (environmental, social, and governance) factors into account, along with traditional borrower risk data. By using portfolio analytics tools, banks and lenders can streamline their lending workflows and improve their overall resiliency.

Because risk is fluid and spatial in nature, GIS (geographic information system) tools can save lenders time and money, improving operational efficiency and incorporating 21st-century technologies into the decision-making process.

Contact the team at AQUAOSO to learn more about portfolio analytics, or sign up for the newsletter to get updates on this topic and other water security issues.

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