AI for ESG (Environmental, Social, and Governance) is quickly becoming a critical tool for organizations seeking to become more sustainable. Sustainable investments were predicted to be worth $30 trillion in 2018, a 34% increase over 2016. Investors (and the general public) are increasingly interested in determining if and how enterprises are ecologically and socially responsible. Simultaneously, boards and management have realized that ESG is critical to their firms’ long-term sustainability. It’s no surprise, therefore, that over 90% of S&P 500 companies are already publishing ESG reports in some form.
As firms face unprecedented ESG concerns, artificial intelligence (AI) can help establish more responsible business practices. However, organizations must employ AI responsibly since the computational power required to gather, analyze, and act on huge volumes of data is huge.
How AI Addresses Challenges
Data collection and standardization
Collecting and standardizing data on ESG performance can be difficult and time-consuming. Many organizations struggle to gather the necessary data, particularly for social and governance metrics. Additionally, without widely accepted standards for ESG data collection and reporting, comparing performance across organizations is challenging.
AI can help automate the data collection process, reducing the time and resources for gathering and processing ESG data. It may also standardize data by recognizing patterns and trends, making it simpler to compare performance across organizations.
It can be challenging to determine which ESG issues are most material to an organization and its stakeholders. Materiality is often context-specific, and different stakeholders could have different priorities. Organizations must identify ESG issues that matter to them and their stakeholders and report on those issues meaningfully.
AI makes this possible by analyzing large amounts of data, including social media and other online content, helping identify patterns and trends. Organizations can thus identify the ESG issues that are most important to them and their stakeholders.
Assuring the accuracy and integrity of Environmental, Social, and Governance (ESG) data is crucial for making informed investment decisions and promoting sustainable business practices. However, due to the reliance on self-reported data, it can be challenging. Self-reported data could be biased and manipulated, leading to inaccuracies and unreliable information.
AI plays a significant role in addressing these challenges by validating and verifying self-reported data. The algorithms can analyze large amounts of data and identify patterns and anomalies that indicate inaccurate or unreliable information. Additionally, AI can assist in data gathering and collection, ensuring that information is collected in a consistent and unbiased manner. Furthermore, AI can create a more efficient and effective assurance process by automating data cleaning, analysis, and report generation tasks. This can help reduce the risk of human error and improve the overall accuracy and integrity of ESG data.
Integrating ESG information into financial reporting and decision-making can be challenging. Many organizations still view ESG information as separate from financial information and may not fully integrate it into their decision-making processes.
AI can assist in integrating ESG data into financial reporting and decision-making by providing organizations with an automated and streamlined data collection, analysis, and reporting process. It can help organizations to understand the potential risks and opportunities associated with their operations and make more informed decisions. By providing insights not immediately apparent when looking at financial data alone, AI enables organizations to make better-informed decisions considering long-term sustainability.
Organizations may find it challenging to balance short-term financial goals with long-term sustainability objectives. This may cause organizations to prioritize short-term goals over long-term sustainability initiatives.
AI can help by providing insights into the trade-offs between different ESG initiatives and the potential financial and reputational risks. Additionally, AI can monitor the progress of ESG initiatives and identify areas of improvement. As a result, organizations can stay on track to achieve their sustainability objectives. Furthermore, AI can analyze data from various sources and provide early warning signals of potential reputational risks and financial impacts.
Some organizations may have a limited understanding of ESG issues and the impact of their operations on the environment and society. This makes it difficult for them to identify and report on the most material ESG issues. AI can help organizations better understand the environmental and social impacts of their operations by providing them with insights into data that they may not have been aware of or able to gather previously.
As ESG reporting becomes more important for organizations, it is important that they address these challenges to ensure that they provide accurate, reliable, and meaningful information to stakeholders.
Benefits of Using AI for ESG
By integrating data from sensors and other sources to assist with decision-making, AI has the ability to make greener judgments and mitigate environmental hazards caused by climate change. A research paper from Elsevier shows that over 20% of energy savings can be achieved by forecasting and adjusting the building’s real-time energy needs based on sensor data.
Other applications include:
- Optimizing energy usage and resource consumption in buildings
- Reducing waste in industrial processes, leading to lower energy costs and emissions
- Predicting equipment failure, reducing frequent and costly maintenance, downtime, and emissions
- Assessing data from weather stations, satellite imagery, and other sources
- Supporting the management of natural resources such as forests and water systems (e.g., flood prediction)
AI can assist in studying social networks, identifying patterns, and addressing social concerns more quickly and correctly. Research published in an Elsevier journal indicates that AI can estimate the demand for healthcare services and improve the deployment of healthcare staff and resources, particularly in disadvantaged regions. According to the study, this method can result in more effective resource allocation and better healthcare results.
Other use cases include:
- Optimizing the use of staff and resources in healthcare
- Identifying patterns and trends connected to social concerns (e.g., poverty, prejudice)
- Assisting in educating underprivileged regions through AI-enabled individualized learning experiences
- Identifying and mitigating reputational risks for companies, leading to higher customer retention and revenue
- Monitoring employee sentiment, leading to lesser dissatisfaction, higher engagement, and reduced turnover rate
- Predicting and mitigating potential employee turnover, leading to fairer recruitment processes
- Improving employee engagement, training, and development
Having a more efficient way to function is only one example of how AI can promote the “G” of ESG. It can, for example, be used to study public spending and service delivery. It can help firms make better-informed, data-driven decisions that include environmental, social, and governance aspects.
A study published in the journal IEEEAccess showed how government forms and applications were rapidly and accurately processed through AI-led automation. This reduced the burden on individuals and organizations while increasing the speed and accuracy of decision-making.
Other use cases include:
- Automating government forms and applications to make quick and accurate choices
- Analyzing data from policies and public statements to make educated conclusions
- Monitoring business operations for compliance with laws and regulations, such as anti-money laundering (AML) and know-your-customer (KYC) rules, leading to fewer legal and financial penalties.
- Detecting patterns of a fraudulent act to cut back on potential financial losses and reputational damage
- Higher cost savings, improved efficiency, and increased sustainability
The Future of AI-led ESG Initiatives
Data is the common thread in AI’s ESG applications. Over the past decade, data has grown from 6.5 zettabytes in 2012 to 97 zettabytes in 2022, enabling current AI technology uses . Through automated data management and analysis, AI technology generates intelligent ideas. As exponential data growth continues, AI could replace time-consuming manual labor. Instead of having people sift through massive amounts of data, AI would sort and extract key information in a fraction of the time.
AI, IoT devices, and machine learning can automate laborious tasks and help firms comply with stakeholders without incurring unnecessary costs. Unstandardized frameworks and poor data collection can be solved by artificially intelligent historical analysis and document tracking. Setting goals, evaluating results, and reporting ESG progress are easier with AI and organizational data. AI-powered ESG assessments improve industry-wide ESG data and help utilities assess their sustainability progress.