At the crossroads of innovation, technology, and sustainability, artificial intelligence has the ability to have a dramatic impact on ESG investing – something which most investors are taking more seriously. Before we get into the details related to AI and ESG, let us first understand the term – ESG.
What is ESG investing?
ESG stands for Environmental, Social, and Governance. ESG investing refers to investing practices that prioritize environmental, social, and governance factors. It is about sustainable investment, where investments are made considering: the environment, human wellbeing, and the economy.
The concept of ESG investing is on the assumption that the financial performance of organizations is widely affected by social and environmental factors. Let us break the three parameters down so you
can understand ESG better.
The three pillars of ESG
E for Environment: It aims toward the conservation of natural resources. Businesses that adopt greener practices while operating for the sustenance and upkeep of the environment and resources for future growth come under this category.
S for Social: For every organization, its workforce (people) is the most crucial asset. Socially developed companies treat their employees with the utmost respect and take care of their wellbeing. For example, measures against occupational hazards, employee safety, and fair treatment of all genders are signs of socially developed companies.
G for Governance: This parameter is the base on which all companies are evaluated. Investors have always been looking for companies with good governance. Governance in ESG refers to a company being ethical and transparent in disclosing all its financial documents. Since they take governance seriously, the company will not be impacted by regulatory reforms.
Why is ESG investing important?
The title of the world’s first ESG study, published by UN Secretary-General Kofi Annan in 2005, was Who Cares Wins.
ESG investing is important because it considers not only the company and its investors but much more.
It pays attention to the world we live in, how ethical the world of capitalism is, and how we treat fellow humans. Today, many investors are giving importance to ESG parameters. The idea is simple: when investors invest in ethical companies, the domino effect on the world will speak for itself.
Struggle for ESG investors
Investors across the globe have no clue about the ESG data collection and interpretation process. The absence of standardized reporting methodologies and ESG datasets makes it difficult for issuers to disclose meaningful information on sustainability.
Data, in most cases, is not widely available. In most places, it will be manually collected by analysts. It leaves data providers little choice but to produce subjective qualitative assessments. Such an approach means that different ESG research companies and data providers use their own, often
inconsistent methodologies to generate ESG scores. This is where AI comes in to help ESG investors.
AI and ESG investment
Now that you understand ESG parameters and their importance, we can move to the technology part – How is AI helping in ESG investing?
AI can unearth crucial data for investors looking for sustainable investments. However, discerning unreliable information will be a challenge. For the same reasons, humans will not be replaced by AI
anytime soon.
Today, AI has made it possible for computers to automate complex tasks at incredible volumes and speeds. Thus, it has revolutionized how an organization can use data. These AI capabilities are proving useful for ESG investing.
ESG investing has become popular among investors. They are interested in knowing how companies operate based on these factors. The data on these parameters definitely affects their buying decisions.
How can AI help in ESG investing?
AI’s potential in ESG investing comes from sentiment analysis algorithms. These are algorithms that allow computers to analyze the tone of a conversation. These programs are trained to read a specific conversation type and analyze the tone by comparing the words used to a reference set of existing information.
Is it getting too complicated and technical? Let us try and understand it with an example. The program can be trained to read the transcripts of a company’s quarterly earnings. Based on what the CEO speaks, the program will use Natural Language Processing (NLP) to identify if the CEO in the
conversation has talked about ESG-related topics. It tries to conclude how committed a company is to mitigating environmental risks if there was a discussion related to the topic.
Is AI being used for ESG investing?
Yes. We have mentioned many times that AI is the future, and it finds applications in all possible areas. In 2021, UK-based fintech company All Street launched Sevva. It is the world’s first AI platform that provides ESG ratings for all private or public companies. Sevva does real-time rating, and it is done on the United Nations Sustainable Development Goals (SDGs). It covers all 70,000 publicly listed companies globally, any private company, and any fund.
Where are we going with AI and investing?
We have come a long way concerning AI and ESG investing. However, we still have a long way to go. AI technology promises a lot. If all that can be solidified by the results of their output – ESG investing and investing, in general, will become more accessible.
Investors who trust and understand technology can make the most of the equity market. Over the years, investors have stayed away from direct equity investment because they feel it is risky. Also, because they do not understand the market. All that has changed: Jarvis Invest makes it possible for thousands of investors to use AI for equity investment. You can explore the app and get started with your equity investment.