Artificial intelligence (AI) technologies are increasingly being used by financial institutions to improve their environmental, social, and governance (ESG) performance and ability to promote ESG practices.
This includes making more sustainable investment decisions as well as contributing to a more environmentally and socially responsible financial ecosystem.
AI algorithms can be used to assess ESG-related risks for financial institutions
Financial institutions can use AI algorithms to analyse vast amounts of data related to ESG factors and assess the risks associated with lending, investment, and underwriting activities. ESG-related data—like carbon emissions, diversity and inclusion metrics, or corporate governance practices—can efficiently be analysed during this process and financial institutions can use this analysis to score companies based on their ESG performance.
These can then be used to create risk profiles and identify and mitigate potential ESG risks more effectively. For example, it could identify companies that participate in greenwashing, where companies exaggerate their ESG credentials for marketing purposes. Overall, it would help with creating more transparency and accountability.
Using AI to promote impact investing
As people are becoming more aware of the issues society faces, such as climate change, impact investing has become increasingly popular globally. This refers to investments made in companies that aim to generate environmental and social good—whether that is by decreasing carbon emissions or building houses for those in need.
AI can help investors manage their portfolios’ social impact using big data and proprietary impact methodologies to produce sustainability analyses. Furthermore, where it is difficult to undertake extensive due diligence before investing due to a lack of comprehensive research and data on sustainable investment options, AI can enable quick access to relevant ESG data.
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By applying machine learning (ML) algorithms to ESG criteria, AI can be used to assess companies more efficiently. An example of a bank using AI in such a way is JPMorgan, which launched its Sustainable Investment Data Solutions for institutional investors in June 2023.
It is vital for ESG reporting to be accurate
AI can also help financial institutions streamline the process of ESG reporting and compliance by automating data collection, analysis, and reporting. Using natural language processing (NLP) and ML, AI algorithms can obtain relevant ESG information from corporate reports. Financial institutions can then generate comprehensive ESG reports, which comply with regulatory requirements and provide transparency to stakeholders. Companies must conduct ESG reporting accurately especially as new ESG regulations are emerging.
Financial institutions can benefit greatly from AI to further their ESG practices, however, it is also important to combine this use with human expertise to ensure that the technology is used ethically and responsibly.