The untapped potential of AI in responsible investing

By Newsdesk

November 23 2023
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In a rapidly advancing world where artificial intelligence (AI) is interweaving into every fabric of our lives, responsible investing is no exception.

The untapped potential of AI in responsible investing

With AI's transformative presence, the ESG (Environmental, Social, and Governance) and responsible investing sector is on the cusp of exploring possibilities yet to be fully unearthed. Speaking to Money Management, Jono Broome, associate director of client advisory at Morningstar Sustainalytics, emphasises that the utilisation of AI in this domain is still in its infancy stages.

"We are in such an infant stage of understanding and developing these technologies that it’s likely we haven’t yet discovered or come up with even a fraction of what these applications might be," said Broome, who highlighted the rich potential of AI in processing vast amounts of unstructured, qualitative environmental and social-related information into meaningful insights for the responsible investing (RI) industry.

A survey by Bloomberg Intelligence polling 250 C-suite executives and investors resoundingly endorses AI in ESG contexts, with nine out of 10 respondents considering AI more a "friend than foe." The promising horizon seen through the survey indicates AI's capability in enhancing traceability, improving data quality, and identifying controversies irrespective of language barriers.

However, Broome wisely tempers this enthusiasm, stressing the complexity of AI's effects on ESG and RI, "It’s difficult to simply categorise the role that AI will play in ESG and responsible investing as either ‘good’ or ‘bad’ or ‘friend’ or ‘foe’,” he said. Broome predicts both positive and unexpected negative impacts, hinting at outcomes that may only become apparent upon implementation.

At Morningstar Sustainalytics, Broome witnesses AI's benefits firsthand – notably in driving efficiency for investment managers dealing with copious unstructured ESG data and facilitating timelier data delivery to clients. He also acknowledges the upcoming challenges, mainly around understanding AI technology's integration into responsible investing and addressing concerns around greenwashing.

Moreover, Broome foresees a notable evolution within the ESG and RI space, accelerated by intensive scrutiny and regulatory actions, such as those by ASIC, to confirm the authenticity of asset managers' environmental and social claims. "A general maturing of the industry as the ESG debate goes mainstream. Those players with well thought through responsible investment strategies will be well-versed and resilient to healthy debate and scrutiny," Broome posits.

Broome expects further regulation of ESG research providers worldwide, bringing more transparency to their methodologies, to the advantage of global investors. "Regulation will continue to play a critical role in the maturation of the RI industry in Australia and globally, particularly as we see pioneering legislation play out in jurisdictions such as the EU, and policymakers observe how we can learn from them."

Recently, leading global organisations—the CFA Institute, the Global Sustainable Investment Alliance (GSIA), and Principles for Responsible Investment (PRI)—collaborated to standardise responsible investment terminology, laying groundwork for clear communication and comprehension across the industry.

As AI continues to embed itself within ESG and responsible investing, onlookers and participants alike anticipate what wonders—and challenges—it may unveil on this journey towards a more insightful and efficient investment landscape.

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