Financial Services
The Role of Artificial Intelligence in Advancing ESG Investing
"AI will be a value play - and a boon for sustainability", says a recent PwC report titled 2025 AI Business Predictions. It raises a crucial point: While AI has the potential to drive sustainable solutions, its energy demands pose a challenge. The computational power required for AI is so immense that scaling it could strain our energy resources. However, it has vast potential to drive corporate sustainability initiatives and aid a faster shift to renewable energy. The key is to use AI thoughtfully by focusing on strategic decisions that add value, not just scale. One such pertinent use case is how AI can help investors use sustainability data to integrate Environmental, Social and Governance (ESG) factors into their investment decisions.
Increasingly, investors want to align their portfolios with sustainable values, forcing enterprises towards responsible reporting on their ESG initiatives. ESG considerations have moved beyond being a moral imperative to a strategic necessity in a world grappling with the far-reaching impact of climate change and rising social inequities. Enterprises, world leaders, governments, and all stakeholders are now held accountable for their decisions through an ESG lens. As such, investors seek sustainable returns and measurable positive impact from companies.
A World Economic Forum (WEF) report says 2025 will be a year of nature-positive finance. And Artificial Intelligence (AI) is poised to play a pivotal role in bringing this about. Its impact extends beyond corporate sustainability initiatives to the global capital markets as investors make informed, ESG-aligned decisions. This shift can have a notable stock market impact, as companies with strong ESG performance may likely attract more sustainable investments, potentially influencing market valuations.
Decoding the intersection of AI and ESG investing
A Statista report says investors and firms shy away from engaging with ESG due to a lack of knowledge and comparability of ESG data across issuers and regulatory or legal constraints. AI is helping change this scenario significantly by unlocking unprecedented insights. Traditional data collection and analysis modes often struggle to keep pace with the dynamic and opaque nature of ESG aspects, making things complex for investors. They do not see the complete ESG impact of the companies they invest in. It is crucial to assess risks and make informed investing decisions.
From parsing vast climate risk datasets to helping reshape sustainability strategies, AI paves the way for more equitable, transparent and accountable ESG investing. The intersection of AI and ESG investing heralds a paradigm shift in investment decisions, bringing in more accuracy, reliability and precision. Considering the PwC prediction that the ESG-focused institutional investment will touch US$33.9 trillion by 2026, the impact of AI can be immense. Let’s see how AI makes this happen.
Key roles of AI in advancing ESG investing
- Supercharging ESG data analysis
- Strengthening risk detection and mitigation
- Enhancing ESG Integration into portfolio strategies
AI can gather massive data from multiple sources and process it using sophisticated natural language processing (NLP) algorithms to provide precision insights into environmental, social and governance aspects. These insights from social media, news industry reports, and other sources provide investors with a comprehensive understanding of a company’s ESG performance. The scope for human errors in data collection, entry, and processing stands eliminated, making the process highly reliable and efficient. Here is how it helps with the ESG factors.
Environmental: AI helps identify areas of improvement for energy use, supply chain optimisation and other operations. These measures help reduce the carbon footprint and speed up the transition to renewable energy.
Social: AI can help spot inequity patterns in opportunities, health and safety at workplaces, such as biases in hiring, promotion, or other welfare schemes like loans. Of course, the caveat here would be to ensure ethical AI usage to prevent algorithmic AI biases from creeping in.
Governance: AI can streamline reporting through accountability and transparency with rule-based systems that alert investors. Ensuring timely corrective actions also strengthens compliance. There are AI tools that help investors understand ESG performance against benchmarks and international standards and regulations in real time.
One of the key insights investors seek is about risks. AI can detect potential risks related to climate change, labour standards, supply chain, etc. It can also predict future ESG risks to help companies prepare and mitigate to prevent potential losses, assisting investors to understand the broader implications of their decisions. By providing precise insights into ESG performance, AI enhances transparency and mitigates investment risks – a critical aspect of risk management in the capital market.
AI can help investors integrate their financial and ESG goals through customised portfolio construction algorithms for precision ESG investing. It helps shape strategies and outcomes across global capital markets. The Statista report mentions a growing acknowledgement that investments in sustainable securities can perform equal to or even better than non-ESG portfolios.
In the long term, AI’s role in ESG investing will help evolve the policies and framework around institutional investing, especially for standardising reporting and ratings.
How can Infosys BPM help?
Infosys BPM’scapital market BPM services span asset management, wealth management and investment banking. We help financial institutions deliver measurable results through a dedicated Centre of Excellence (CoE) that covers key aspects such as best practices, regulations, benchmarks, training, partnerships and more.
