Emerging AI and ESG Reporting Trend Raises New Governance Risks

The Rise of AI in ESG Reporting

Artificial Intelligence (AI) is increasingly being integrated into environmental, social, and governance (ESG) reporting. As disclosure rules become more detailed, corporates and financial sectors are turning to AI and alternative data sources (alt data) to enhance extra-financial reporting. This shift aims to address issues like missing climate data and to improve climate risk assessments.

Efficiency and Challenges of AI in Financial Sector

AI offers efficiency in processing large volumes of data, with machine learning identifying patterns and natural language processing understanding textual and voice data. These capabilities could significantly automate and accelerate ESG assessment processes. However, the rapid advancement in AI and alt data technologies presents new governance risks that are not fully understood by users.

Data Quality and Methodological Integrity

While AI and alt data can complement traditional ESG ratings, concerns about data quality and methodological integrity persist. ESG ratings often lack correlation due to differing methodologies and handling of missing data. AI could potentially enable faster and more frequent evaluations of a larger number of companies.

Insights from Industry Experts

Marie Brière from Amundi Institute and Carmine de Franco from Ossiam note that AI is not a revolution but an enhancement to existing analytical methodologies. The use of AI and alt data is becoming increasingly crucial for understanding and managing climate-related risks.

Corporate Adaptation to AI in Reporting

With the implementation of the EU’s Corporate Sustainability Reporting Directive (CSRD) and other frameworks, automated ESG reporting solutions are emerging. Companies are beginning to adapt their reporting styles in anticipation of AI and alt data use by investors.

Proceeding with Caution

The rapid evolution of AI and alt data technologies is outpacing regulatory frameworks, leading to governance challenges. David Duffy from the Corporate Governance Institute warns of the risks associated with using technology without fully understanding it. Yannick Ouaknine from Societe Generale emphasizes the importance of maintaining checks and balances when integrating these tools into financial decision-making.

Complementarity of AI Tools

The integration of AI in ESG reporting should be seen as a complementary tool, not a standalone solution. Users bear the responsibility of ensuring data quality and addressing biases in AI-generated assessments. The focus remains on the essential technical and sector expertise needed for informed investment decisions.

This trend highlights the growing intersection of technology and sustainability, underscoring the need for a cautious and well-informed approach to leveraging AI in ESG reporting.