How should AI be Incorporated for ESG Investing?
Investors looking to improve their sustainability reporting and assessment can follow a template provided by organizations like mallowstreet Insights, a research center providing important inputs to pension trustees and their asset managers.
To achieve best practices, asset managers should focus on four key areas: data, integration, clarity, and articulation. Managers should evaluate current sustainability reporting and assessment practices against these 4 components elaborated in the template and recognize areas where improvement is needed, and where AI can come in.
1. Data
Asset managers should prioritize the ability to measure sustainability impact for effective reporting. Regulators are pushing for more disclosure in line with climate-related financial recommendations, so asset managers need to ensure quality improvements in their data supply chains. Lack of proper data can lead to greenwashing, where funds are falsely labeled as green, and whitewashing, where investee companies manipulate data to overstate improvements. Investors want reliable sustainability scores that reflect changes over time and impact the value of assets.
Learn how Greenfi can help with its simplified and organised ESG data collection and aggregation with a plug-and-play data platform, data lake and data models. Eliminates manual data engineering processes to save cost and time.
2. Integration
Asset managers need an integrated approach to sustainable investing. Pragmatism is crucial in the core portfolio, including only securities with high ratings in both alpha and sustainability potential. This approach prevents poor data from undermining performance. Investors interested in specific sustainable themes should have access to thematic funds with longer time horizons. Determine if your portfolio is balanced and if poor data has the potential to undermine performance.
Greenfi’s comprehensive 360-degree unified view to examine all ESG aspects of a business, customers, portfolio, transactions, investments and suppliers eliminates navigating fragmented systems.
3. Clarity
Asset managers should provide detailed explanations of how implementation is done at the fund or mandate level. This includes information on investment policy, adherence to international standards, data sources, real-time tracking, definitional templates, corporate engagement policy, and resources dedicated to engagement practices and outcomes. Investors want a direct line of sight between sustainability policy and its impact on the ground.
Greenfi offers instant access to the latest cross-border ESG regulations, automating decision-making. It ensures full transparency, tracing each step back to the regulatory source. This guarantees correct decisions on trading for all asset types, financial transactions, and global regulations.
4. Articulation
Asset managers should improve sustainability articulation in the fixed-income space, which currently receives less attention than equities. Equities have more data availability and easier engagement through proxy voting and AGM attendance. Fixed-income instruments are perceived as overly quantitative, focusing on interest rates, inflation, credit quality, and liquidity risks. By additionally providing clearer explanations and details about how sustainability factors are considered in fixed-income investments, asset managers can contribute to a more thorough and effective sustainability strategy.
Greenfi’s technology helps with ESG risk assessment in the fixed-income space, combining expertise with data and AI technology to identify risks in customers, products, portfolio, and supplier choices.
Outlook to 2024
It is a mammoth task of assessing available data and filtering out the noise. Inconsistencies in data and company disclosures can be overcome by cross-referencing and extrapolation with the help of AI. Make it possible to incorporate data into research and investment processes. Leverage on AI to extract meaningful alpha signals from data sets and make data-driven bets on strategies that work.
Contact us to learn more and see the demo – hello@greenfi.ai
