Machine Learning Methods in Climate Finance: A Systematic Review
Andres Alonso-Robisco (Banco de España), Jose Manuel Carbo (Banco de España) and Jose Manuel Marques (Banco de España)
Preventing the materialization of climate change is one of the main challenges of our time. The involvement of the financial sector is a fundamental pillar in this task, which has led to the emergence of a new field in the literature, climate finance. In turn, the use of Machine Learning (ML) as a tool to analyze climate finance is on the rise, due to the need to use big data to collect new climate-related information and model complex non-linear relationships. Considering the potential for the use of ML in climate finance and the proliferation of articles in this field, we propose a survey of the academic literature to assess how ML is enabling climate finance to scale up. The contribution of this paper is threefold. First, we do a systematic search in three scientific databases to assemble a corpus of relevant studies. Using topic modeling (Latent Dirichlet Allocation) we uncover representative thematic clusters. This allows us to statistically identify seven granular application domains where ML is playing a significant role in climate finance literature: natural hazards, biodiversity, agricultural risk, carbon markets, energy economics, ESG factors & investing, and climate data. Secondly, we do an analysis highlighting publication trends; and thirdly, we show a breakdown of ML methods applied by research area, aiming to spur further innovative work from ML experts.