Central banks turn to AI for climate risk assessment

Central banks have embarked on a pioneering initiative, utilising artificial intelligence to enhance the assessment of climate-related financial risks, Reuters reported on Tuesday.

The collaborative effort, spearheaded by the Bank for International Settlements alongside the Bank of Spain, Germany’s Bundesbank, and the European Central Bank, has led to the development of the Gaia AI project.

This innovative tool is designed to meticulously analyse a plethora of company disclosures, ranging from carbon emissions to green bond issuance and net-zero commitments.

The advent of Gaia marks a significant advancement in the realm of regulatory data analysis. Traditionally, the lack of a unified reporting standard has resulted in a disparate array of public information, making it challenging for regulators to obtain a clear picture of the financial impact of climate change.

Gaia’s sophisticated algorithm is adept at navigating through the diverse definitions and disclosure frameworks, thereby providing a much-needed layer of transparency and facilitating the comparison of climate-related financial risk indicators.

As the world moves towards more stringent climate-related disclosure mandates, Gaia’s role becomes increasingly vital.

Its ability to swiftly incorporate new key performance indicators (KPIs) and institutions into its analysis paves the way for a comprehensive climate risk assessment on an unprecedented scale.

Recent data analysis by central banks on 20 indicators from 187 financial institutions over five years indicates an increasing adoption of net-zero goals and green bond issuance, though not consistently worldwide. Future plans may involve public access to the Gaia AI tool, enhancing transparency in climate risk analysis, and pioneering AI use in finance.