BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe. Project Gaia leverages generative artificial intelligence (GenAI) to analyze climate risks in the financial system. The experiment showed potential in helping banks navigate the new reality of climate change by making it easier and faster to assess the risks that climate change poses to their business. The recent BIS report notes that this capability can extend beyond climate risk analysis in banking, offering potential applications in suptech and regtech
Project Gaia used large language models (LLMs) to automatically extract climate-related data from publicly available corporate reports. This data could pertain to a company's carbon emissions, green bond issuance, and net-zero commitments. The Gaia architecture consists of structured and unstructured data storage, data processing pipelines, LLM integration and a user interface ꟷ all on top of a cloud platform. The solution connects to an external LLM service via an application programming interface (API). The report explains a set of concrete design choices that allow the Gaia Proof-of-Concept (POC) to overcome technical challenges such as LLMs’ long response times, randomness (non-repeatability) in their responses, and hallucinations. These design choices are result of a thorough optimization process, which has entailed over 50,000 LLM queries to date.
The report describes the key steps of KPI extraction using LLMs, along with the design choices related to each step. The report notes that Project Gaia has proven the feasibility of climate-related financial risk analysis using AI and LLM. By tapping into public information readily available today, Gaia provides an efficient and reliable source of climate risk-related data. Furthermore, Gaia offers harmonized metrics despite the heterogeneity of naming and definitions across different jurisdictions and companies. For example, Gaia relies on each KPI’s definition rather than its name when searching corporate reports, thus it does not require harmonization of guidelines or regulatory requirements. This is crucial in instances where slightly different wording and definitions prevail for similar concepts (for example, Scope 3 emissions are sometimes referenced as financed emissions or indirect emissions). Thus, Gaia promises to overcome potential differences in official disclosure frameworks and offers much needed transparency and comparability of climate-related information.
The report notes that the significance of Gaia goes beyond climate data analysis, as the Gaia platform can be easily configured to extract new types of KPIs. Gaia offers a generic solution to extract desired KPIs contained in a predefined set of PDF reports. Within the financial sector, AI-based KPI extraction from large bodies of textual documents is being touted as a “game changer,” for example, in regulatory and supervisory use cases. As per the report, prospectuses for financial instruments is another area in which information is dispersed in the form of unstructured texts that can be leveraged. The Gaia PoC demonstrates the power of chowreating AI-enabled intelligent tools to automate existing workflows.
Visit Moody’s Website to find out how Moody’s leverages artificial intelligence in its applications to support your business.
Related Links: Project Gaia
Keywords: International, Europe, Banking, ESG, Regtech, Suptech, Climate Risk, Generative AI, BIS
Featured Experts
James Partridge
Credit analytics expert helping clients understand, develop, and implement credit models for origination, monitoring, and regulatory reporting.
Hasan Cerhozi
Hasan leads Moody’s Analytics ESG methodology development. He is expert on carbon transition, nature related risks and is a guest lecturer at ESSEC Business school on sustainable finance.
Michael Denton, PhD, PE
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
Previous Article
Singapore to Mandate Climate Disclosures from FY2025Related Articles
OSFI Issues Phase2 Consultation on Climate Scenario Exercise for Banks
The Office of the Superintendent of Financial Institutions (OSFI) recently announced a consultation on the second phase of the Standardized Climate Scenario Exercise (SCSE) for banks and other financial institutions it regulates in Canada.
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.