AI will stop the anti-ESG backlash

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The backlash against Environmental, Social, and Governance (ESG) investing can be quelled with an overhaul from Artificial Intelligence (AI), according to Nigel Green

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The bullish analysis from the CEO of deVere Group comes as Norway’s $1.6 trillion sovereign wealth fund bucks the recent trend among institutional investors by saying it will continue to advocate for investments based on environmental, social and governance (ESG) factors.

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It also follows reports that BlackRock, the $9 trillion asset manager, was estimated to have more than tripled its security spending on CEO Larry Fink in 2023, following criticism over the firm’s pro-ESG investments stance.

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The backlash against ESG has not only drawn widespread public attention, but also exacerbated a growing divide across the Atlantic.

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While investment firms in the EU proudly tout their endeavours to swiftly achieve net zero greenhouse gas emissions, among other goals, numerous counterparts in the US are either sidestepping the issue altogether or claiming they must prioritize client preferences.

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Nigel Green comments: “ESG has become a lightning rod for controversy, particularly in the US where Republican lawmakers, among others, have framed it as ‘woke capitalism,’ at odds with traditional investment principles.

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“The resultant backlash, including blacklisting of major financial groups and legislative restrictions in certain states, underscores the urgent need for a re-evaluation of ESG frameworks.

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“But we believe there’s a transformative potential in emerging technologies, particularly Artificial Intelligence (AI), which will redefine and revitalize responsible investing.”

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While the rift between EU and US investors on ESG widens, there remains a common ground: the recognition of individual investors’ growing interest in responsible investing.

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Yet, to harness this momentum effectively, a fundamental shift is required in how we evaluate companies through an ESG lens.

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“This shift goes beyond mere rebranding; it necessitates a major change in assessment methodologies, moving away from rigid scores and checklists towards deeper, more nuanced analyses aligned with investor priorities,” notes the deVere CEO.

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“This is where we see AI poised to revolutionize ESG assessment by leveraging its unparalleled capabilities in data analysis, pattern recognition, and predictive modelling.”

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One specific application lies in Natural Language Processing (NLP) algorithms, which can sift through vast amounts of textual data from corporate reports, news articles, social media, and regulatory filings.

“By discerning nuanced signals of ESG-related risks and opportunities, AI-driven platforms provide investors with holistic insights into a company’s sustainability performance.”

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In addition, AI-powered predictive analytics enable investors to anticipate ESG-related market shifts and identify emerging risks and opportunities.

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“For instance, machine learning algorithms can dynamically adapt to evolving ESG trends and investor priorities, ensuring that investment decisions remain aligned with the most pressing sustainability challenges of our time.

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“By incorporating real-time data feeds and sentiment analysis, AI empowers investors to make informed decisions that drive positive societal and environmental outcomes while delivering competitive financial returns.”

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AI-driven risk management tools offer unparalleled precision in aligning investment portfolios with investor-defined ESG objectives. Optimization algorithms can construct diversified portfolios that not only maximize financial returns but also mitigate ESG-related risks.

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By incorporating sophisticated risk modelling techniques, AI quantifies and manages ESG-related risks, enhancing the resilience of investment portfolios in the face of environmental, social, and governance disruptions.

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AI’s transformative potential extends beyond financial markets to real-world impact, particularly in environmental and social domains.

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For example, AI-powered geospatial analytics and remote sensing technologies enable investors to monitor and assess environmental metrics such as carbon emissions, deforestation rates, and water usage with unprecedented accuracy and granularity.

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By integrating satellite imagery, IoT sensors, and AI algorithms, investors gain real-time insights into supply chain sustainability, identify potential ESG-related risks, and drive targeted interventions to mitigate environmental degradation.

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Similarly, with social impact investing, AI-driven analytics can assess companies’ social license to operate and their contributions to societal well-being.

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By analyzing demographic data, socioeconomic indicators, and community sentiment, investors can gain insights into companies’ diversity and inclusion practices, labor standards, and community engagement initiatives.

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“Through AI-enabled social network analytics, investors can identify opportunities to promote social equity and foster inclusive economic growth,” says Nigel Green.

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He concludes: “The convergence of AI and ESG investing offers a compelling vision for the future of finance – a future where sustainability is not just a checkbox, but a fundamental driver of value creation and societal impact.

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“By embracing AI-driven innovation, investors can transcend the limitations of traditional ESG frameworks, unlock new sources of value, and catalyze positive change on a global scale.

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“Ultimately, AI will be the foot on the brake of the anti-ESG backlash.”