Central banks use AI to assess climate-related risks

Central bankers said on Tuesday they have broken new ground by using artificial intelligence (AI) to collect data for assessing climate-related financial risks as the volume of disclosures from banks and other companies is set to rise.

The Bank for International Settlements (BIS), a forum for central banks, the Bank of Spain, Germany's Bundesbank and the European Central Bank said their experimental Gaia AI project was used to analyse company disclosures on carbon emissions, green bond issuance and voluntary net-zero commitments.

Regulators of banks, insurers and asset managers need high-quality data to assess the impact of climate change on financial institutions. However, the absence of a single reporting standard confronts them with a patchwork of public information spread across text, tables and footnotes in annual reports.

Gaia was able to overcome differences in definitions and disclosure frameworks across jurisdictions to offer much-needed transparency, and make it easier to compare indicators on climate-related financial risks, the central banks said in a joint statement.

Despite variations in how the same data is reported by companies, Gaia focuses on the definition of each indicator rather than how the data is labelled.

Furthermore, with the traditional approach each additional key performance indicator (KPI) and each new institution requires the analyst to either search for the information in public corporate reports or contact the institution for information.

"With Gaia, adding new KPIs or new institutions is quick and easy. This makes it possible to extract and analyse a multitude of KPIs from a large number of institutions, opening up the possibility of climate risk analysis at a scale that was previously unimaginable," the banks said.

Listed companies, including banks and insurers, face new mandatory climate-related disclosures under new global, US and EU rules which will lead to more detailed information compared with the voluntary approaches to date.

Gaia looked at 20 key indicators for 187 financial institutions over five years from documents in English and a small number in Spanish and German. The results showed how more financial firms are committing to net-zero targets and issuing green bonds, but not in a uniform manner across the globe.

"The flexible design may serve as a model for AI-enabled applications in a broader range of use cases for central banks and the financial sector."

The central banks said one possible next step would be to make Gaia publicly available as an open web-based service for analysts.

Reuters