The ESG (Environmental, Social, and Governance) industry is rapidly evolving as more companies and investors recognize the importance of sustainable investing. This year promises to be pivotal as company reporting expectations become more acute.
According to S&P Global, in 2022, corporate boards and government leaders faced rising pressure to demonstrate that they were adequately equipped to understand and oversee ESG issues.
While historically, companies could satisfy ESG expectations through minimal initiatives relating to sustainability or community impact, investors, regulators, and the broader public are now exercising greater scrutiny of corporate sustainability efforts.
Beyond the original scepticism relating to ESG, as the industry evolves, more standards and regulations are transforming the landscape. New bodies, such as the recently formed International Sustainability Standards Board, will likely have a role in deepening accountability in the industry. Developments in this area are happening worldwide, including in China, with its plans to merge climate change factors into financial policy.
To equip investors with a more robust understanding of these evaluations, the Securities and Exchange Commission (SEC), in collaboration with the European Union and regulators in Asia, is also actively working on defining clear standards for ESG. The Corporate Sustainability Reporting Directive (CSRD), which came into force early this year, will be vital in enforcing compliance with sustainability-related information.
Beyond these upcoming regulatory developments, ESG considerations directly impact companies’ reputation, trust, and credibility. According to a recent Kyndryl research, more than 75% of younger shoppers consider ESG issues when making purchase decisions today.
Artificial intelligence (AI) has an increasingly important role to play in the ESG industry.
On a practical level, due to its vast ability to process large amounts of data, it can efficiently evaluate companies’ sustainability and ESG performance and assist them in meeting compliance requirements.
More importantly, AI has a critical role in unlocking the value of data and fostering innovation opportunities. We are facing unprecedented challenges relating to preserving our global environment and health. There are less than eight years to achieve the Sustainable Development Goals (SDGs), which were proposed by the United Nations in 2015 as an urgent call for action in a global partnership.
Since the AI Asia Pacific Institute’s inception, we have been working to address AI’s social, ethical, and legal risks. Beyond these implications, lies the question of why we believe AI holds power to create a better world. AI can accelerate these SDGs.
From climate change to unleashing more sustainable cities and communities, AI holds great promise to administer challenges and advance these goals. Governments and private companies worldwide are increasingly gravitating toward technology to solve critical challenges. By leveraging technology to streamline processes, collect and analyze data, and communicate more effectively, new levels of efficiency, cost-effectiveness, and increased transparency are possible.
This growing intersection, ESG and AI, reflects a need to mitigate risks and foster impact. It forces us to ask the question: how do we innovate responsibly and ensure that, in the process, we are working to solve some of the world’s most urgent and critical problems?
In this sense, AI has a role to not only advance impact into specific sectors, such as energy and food distribution, but it also allows investors to collect and manage information at a larger scale when accounting for environmental, social, and governance implications.
To maximize the potential of this technology, an argument can be made that a shift in the approach to governing AI must occur. AI is a two-edged sword. The adaptive nature of this technology makes it so that it’s the first-time technology can truly model itself around the human experience. When correctly implemented, intelligent technologies enable better understanding and can positively influence critical sectors, such as healthcare, education, agriculture, and manufacturing. For this reason, topics such as fairness, explainability, transparency, and accountability gain significant importance. Policy has the potential to facilitate human-centric outcomes and foster a balance between innovation and governance. Countries like Singapore and the UAE recognise this and are among the first governments to create a policy accelerator and RegLabs to govern emerging technologies.
One of the challenges the industry still needs to tackle is the need for a common baseline for standards consistent across jurisdictions and industries. This applies not only to the AI industry but also to ESG. It is critical that, to sustain the positive impact, we have consistency and clarity around governance and rules.
To date, we have not progressed as required to meet the SDGs by 2030. While we contemplate what needs to change, it is necessary to approach these goals from the perspective that they are interconnected. Much like technology, it requires interdisciplinary collaboration to mobilize the adequate resources for a common future.