Ebook: Navigating AI in ESG & Risk Management: Unveiling the Mechanics
September 18, 2024
•
5 mins read
With all the buzz around Generative AI, it’s easy to forget that artificial intelligence (AI) has been driving innovation across industries for years. Environmental, Social, and Governance (ESG) and risk management are no different. However, at the rate AI is advancing and as the amount of raw data available for analysis continues to expand, the need to understand AI is more pressing than ever.
AI is transforming ESG, turning complex data into predictive insights and reshaping our approach to risk. But what does this mean for the industry, and how can professionals leverage this technology to maintain a competitive edge? The future of AI in ESG and risk management is not just a matter of technological advancement but a narrative of how we evolve with it.
This ebook dives into how AI works when applied to ESG, shares a few practical examples of what it looks like in real life, and offers a few predictions for what comes next.
Dive deeper into the mechanics of how AI works in ESG and equip your organization with the insights needed to enhance your ESG practices. Fill out the form below to access your copy.
One of the biggest challenges in risk monitoring is sifting through mountains of irrelevant data. Whether you're using search engines, financial news platforms, or even specialized in-house analytics, you end up with too much noise. Scrolling through to page 12 of Google is not only time-consuming, but leaves you with the nagging feeling that you could still be missing something.
Artificial Intelligence (AI) is a hot topic, with new breakthroughs and possible applications popping up every day. The question is no longer simply “can AI help me with that?” but rather “how can I use AI to help with that?” For Environmental, Social, and Governance (ESG) controversy and risk monitoring, AI is used to sift through enormous data sets at unparalleled speeds, bringing critical insights to the forefront faster and more efficiently than humanly possible.
When there are hundreds of companies to monitor, for example in a large investment portfolio or a group of suppliers, the advantages of AI are obvious. But what about smaller portfolios? How do you know it’s time to start using AI? Based on our experience working with private equity firms, asset managers and commercial banks, we’ve pulled together five signs that it’s time to consider AI.
1. Overwhelmed by Data: There's Too Much Noise
An AI-powered tool filters out the noise, even in situations where seemingly only humans would be able to do it, giving you the peace of mind that there’s no controversy lurking in the dark corners of the web. All of the key information is gathered in one place, ready for you to evaluate and decide the best course of action.
2. Difficulty Finding Critical Information: The Black Hole of Private Companies
On the flip side - sometimes instead of finding too much data, you can’t find any data at all. For private companies, information can be scarce, especially for smaller companies based overseas, where the only news coverage is local and in the local language. In this case, ESG ratings agencies often aren’t able to fill the gap either. There are millions of firms worldwide and less than 50,000 of them are covered by rating agencies (source).
AI, on the other hand, enables systematic coverage and statistically relevant results without human intervention, analyzing millions of websites and providing coverage on millions of public & private companies. If you are struggling to find information on a company, AI might be the answer.
3. Can't Accurately Analyze an Event: The Context is Missing
Beyond the actual controversy or event itself, understanding the context and history around it is essential for risk assessment. Is this a one-off concern or part of a recurring pattern? To get the full picture, you need to take a closer look not only at the company in question, but the key players, i.e. key executives, and the industry as a whole to understand if this is within the norms.
AI has an important role to play here also. By simply expanding the search, AI can provide you with a full picture of the controversy, including a quick summary and a benchmark against competitors in just a matter of minutes.
4. Missed Critical Window for Action: The Cost of Inefficiency
Markets can change quickly - and it’s only getting worse as information is spreading faster and more widely. The more time it takes you to gather and analyze information, the less time you have to react. This can be a challenge whether you are monitoring 30 companies or 100’s. If you find yourself trapped in a cycle of reacting to news rather than acting proactively, AI can help. Because AI scans and analyzes information in seconds, the alerts to potential controversies are in near real-time, allowing you as much time as possible to take action.
5. Missing ESG Expertise: The Knowledge Gap
To top it all off, ESG is complex and constantly evolving. Understanding what data is relevant and how to evaluate it requires real expertise. ESG rating agencies provide some guidance, but they typically leverage self-reported data - which is naturally biased. Take greenwashing for example where a company misleads its stakeholders, investors, and consumers about its environmental practices by communicating positive environmental performance contrary to its actual, less positive execution. It’s difficult to identify greenwashing using self-reported data.
Because AI relies on external stakeholders, such as online forums or news sources, it offers an unbiased take on a company’s ESG performance. Additionally, by choosing an AI with ESG expertise built-in, you benefit from an expert analysis without increasing the burden on your team.
As the speed and amount of information available continues to grow, AI offers a scalable way to monitor your partners, suppliers and portfolio. To learn more and find out if AI is a good fit for your company, contact our experts at SESAMm.
Over the past decade, many organizations have improved their carbon footprints, from recyclable and biodegradable packaging and single-use plastic to planting trees and reducing their greenhouse gas emissions. However, some businesses and companies looking to boost their eco-friendly image without committing to serious changes and addressing environmental issues have been associated with false green marketing. We call this "Greenwashing."
What is Greenwashing?
Greenpeace and the Environmental Protection Agency define greenwashing as making false and misleading claims about a product's environmental benefits or practices, services, technology, or company practices. Greenwashing typically involves companies spending more money on advertising and marketing than on implementing sustainable business practices that minimize environmental impact. These false green claims can deceive consumers into believing that a product or company is more environmentally friendly than it is, leading to increased sales and profits. As a result, false advertising, misleading initiatives, and groundless claims have increased green investors' exposure to risks emerging from potential lawsuits from activist groups, image deterioration, and some heavy loss in assets invested.
Why is Spotting Greenwashing Important?
Greenwashing is a growing concern for investors as they look to make sustainable and responsible investments. Therefore, spotting greenwashing practices is important for these firms. Here's why.
The deceptive practices used by greenwashers can have significant implications for the integrity of investments made in what investors believe to be sustainably operated companies or sustainable funds. In other words, greenwashing makes it difficult for investors to distinguish between genuinely committed to sustainability companies and those merely making false claims about their environmental practices. As a result, investors may unknowingly invest in companies that are not as sustainable as they claim to be, which can harm their financial returns and the environment. Therefore, it's essential for investors to be aware of greenwashing tactics and to carefully research companies before investing in them to ensure that their investments align with their values and contribute to a more sustainable future.
What Are the Challenges to Detecting Greenwashing?
It's challenging to produce an accurate assessment of environmental, social, and governance (ESG) factors, which gives companies the opportunity to cover or hide ineffective and fake green initiatives. According to Regtank, some of the main challenges to detecting greenwashing practices are the following:
Lack of reporting standards: some investors believe that we haven’t universally agreed upon a set of standards to determine whether a product is ESG compliant.
Lack of transparency: greenwashing companies don’t disclose the specificities of their “green campaigns,” which makes it difficult for investors and consumers to fact-check and evaluate their sustainability claims.
Limited consumer awareness: false marketing strategies could be based on a combination of the consumer’s eco-consciousness and brand loyalty. As a result, consumers become less aware of the misleading strategies greenwashing companies use to sell their products.
Ultimately, these factors may contribute to the inaccuracy and limitations of ESG data and scores, which makes it easier for greenwashers to get away with their false marketing campaigns. Consequently, detecting greenwashing requires scrutiny of environmental claims made by companies and an understanding of the complex supply chains and manufacturing processes involved in producing products and services.
To learn more about greenwashing and have access to real-life case studies, download this comprehensive report:
How Does Artificial Intelligence Detect Greenwashing?
As greenwashing practices increase, activist investors, experts, journalists, and even the general public are spreading awareness of the issue using social media, news outlets, forums, and blogs, among other means. Recently, artificial intelligence (AI), particularly natural language processing (NLP), has proven to be effective in the early detection of greenwashing by analyzing vast amounts of qualitative data publicly available on the web. At SESAMm, for example, we apply our NLP capabilities to identify companies likely to engage in greenwashing practices by analyzing text in billions of web-based articles. Our data lake contains over 25 billion web–sourced articles, sourced from four million news, blogs, social media, and forum discussions on five million public and private companies in more than 100 languages. We run these articles through our AI platform tool, TextReveal®, and systematically craft reliable, timely, and comprehensive insights to detect greenwashing, generate ESG alerts, and identify related risks.
The Rise of Greenwashing
Greenwashing, the deceptive practice where companies claim to be more environmentally friendly than they actually are, has become a growing concern in recent years. By analyzing the frequency of web mentions of greenwashing over time, we can observe important trends and understand the factors contributing to this phenomenon.
Recent analyses indicate a significant increase in greenwashing mentions since late 2019. This rise aligns with a growing public awareness of the climate emergency and the increase in media outlets and social media accounts dedicated to exposing greenwashing. The number of mentions escalated from fewer than 200 to over 23,000 in the last quarter of 2023, highlighting the increasing scrutiny of corporate environmental claims.
A noteworthy pattern is the regular occurrence of spikes in greenwashing mentions during the third quarter over the past three years. This timing corresponds with the "pre-COP" periods, leading to critical international climate change management conferences. These periods see heightened discussions around sustainability, with increased attention on companies' environmental practices.
Figure 1: Greenwashing mentions over time.
Greenwashing in the Energy Sector
The energy sector, particularly the oil industry, has faced significant scrutiny regarding greenwashing. In this context, companies like Shell and ENI have been prominent due to the frequency of greenwashing mentions associated with them.
Figure 2: Examples of greenwashing mentions in the energy sector over time.
For Shell and ENI, the volume of greenwashing mentions has fluctuated, with notable increases in specific quarters. For example, Shell saw spikes in mentions during the second quarter of both 2021 and 2022 while experiencing a drop in the third quarter of 2022. ENI has faced similar fluctuations, often linked to legal actions and publicized environmental issues.
Shell's Greenwashing Mentions, ESG Risks, and Initiatives
Shell, a British multinational and prominent player in this sector, has faced considerable scrutiny for such practices. The company has experienced notable spikes in greenwashing mentions and has been involved in several ESG-related risks.
Figure 3: Shell greenwashing and ESG mentions over time.
Greenwashing Mentions
We can see an increase in greenwashing mentions in the first half of 2023. Around that period, Shell faced allegations and lawsuits concerning its environmental claims. The company was criticized for misleading U.S. authorities and investors about its energy transition efforts. Additionally, Shell faced public backlash for labeling fossil gas as 'renewable' while reporting record profits. A notable incident involved a shareholder suing Shell's executives over climate risks.
ESG Risks
Shell has faced several ESG-related risks, including legal challenges and pollution issues. In 2021, the company was sued by New York City over climate change-related advertising and filed an arbitration claim against Nigeria concerning a spill dispute. In March 2023, Shell faced another oil spill, this time in another region in Nigeria, Rivers State, and also saw institutional investors backing a lawsuit against its board over climate risks. The mid-2023 period saw Shell agreeing to pay $10 million for air pollution violations at a Pennsylvania petrochemical plant. Despite its net-zero pledge, the company announced plans to increase fossil fuel production.
ESG Initiatives
Despite its challenges, Shell has also engaged in various sustainability initiatives. In late 2021, the company announced plans to purchase power from the world's largest offshore wind farm. Mid-2022 saw a leadership change with the company's CEO stepping down as Shell aimed to align with its climate goals. The company also planned to deploy 10,000 EV chargers across India as part of its global strategy. In mid-2023, Shell committed to investing $10–15 billion in developing low-carbon energy solutions. Although the company abandoned its lower oil production target, it maintained its commitment to reducing emissions.
Shell's journey underscores the challenges of aligning environmental claims with real actions, emphasizing the importance of transparency and genuine sustainability efforts.
ENI's Greenwashing Mentions, ESG Risks, and Initiatives
ENI, an Italian multinational oil and gas company, has faced scrutiny for such practices. The company has experienced fluctuations in greenwashing mentions and has been involved in a number of ESG-related risks.
Figure 4: ENI greenwashing and ESG mentions over time.
Greenwashing Mentions
ENI's greenwashing mentions are fairly low. However, the company has been featured in discussions about greenwashing, especially with recent developments. In early 2022, the company faced criticism for inconsistencies in emissions data and greenwashing activities, as highlighted by the Sereno Regis Study Center. Greenpeace also criticized ENI for using the Sanremo Music Festival as a platform for greenwashing. In May 2023, ENI faced a lawsuit for allegedly lobbying and greenwashing to promote fossil fuels despite being aware of their environmental risks. Greenpeace sued the company, accusing it of knowingly contributing to climate change.
ESG Risks
Over the past 4 years, the oil giant's ESG risks have been few but not inexistent. ENI has encountered several risks, including legal challenges and pollution issues. In 2022, ENI's environmental strategy was deemed a failure, and concerns arose about a pipeline spill into the East Irish Sea. The company also faced legal actions in 2021, including an appeal against a court ruling in an illegal waste case and warnings from the Legality Network to reduce greenhouse gas emissions or face prosecution.
The company faced a lawsuit in early 2023 for allegedly having prior knowledge of the climate crisis. In another incident, a report found that ENI and Shell were responsible for significant pollution in Bayelsa, requiring a $12 billion cleanup.
Shell and ENI both face the challenge of balancing economic interests with environmental responsibility. Despite allegations of greenwashing and environmental risks, both companies have taken steps towards sustainability, such as investing in low-carbon solutions and renewable energy projects. Their experiences highlight the importance of transparency, genuine commitment to environmental responsibility, and the role of public scrutiny in holding companies accountable.
Greenwashing and ESG Investing
In sum, certain companies advertise their sustainability and green initiatives, while in reality, they are making false claims and practicing greenwashing, as evidenced by our analysis using SESAMm's AI and ESG reports. We use AI through TextReveal to generate alternative data for use cases, such as ESG and SDG, sentiment, private equity due diligence, corporate studies, and more. Our technologies can reliably ensure the credibility of ecological initiatives and serve global investment firms, corporations, and investors, such as private equity firms, hedge funds, and other asset management firms, to enhance their investment strategies.
Conclusion
In conclusion, the issue of greenwashing represents a substantial obstacle in the journey towards genuine environmental sustainability, misleading consumers and investors and diluting the efforts of genuine sustainable enterprises. Nevertheless, the emergence of advanced technologies such as Artificial Intelligence (AI) and Natural Language Processing (NLP) indicated a new era of accountability. Innovators like SESAMm are at the forefront, deploying these technologies to effectively unravel and counteract greenwashing practices. This empowers investors, asset, and portfolio managers to discern and align their resources with legitimately sustainable entities. The call to action is clear: a collective demand for transparency and responsibility is crucial.
Reach out to SESAMm
TextReveal’s web data analysis of over five million public and private companies is essential for keeping tabs on ESG investment risks. To learn more about how you can analyze web data or to request a demo, reach out to one of our representatives.
Juliette Fafa and Thibaut Gunsey will join the conference virtually. Feel free to reach out to them and schedule a meeting to learn more about our ESG technologies.
.avif)
.png)