The rise of the algorithms: how AI is transforming sustainable investing
In a world where sustainability is a key factor in investment decision-making, AI can provide deeper, more dependable clarity and scrutiny.
Sustainable stock is rising. Companies and individuals alike are increasingly looking to make their money have more of an impact by putting in place a sustainable strategy.
Whether it’s a trend driven by socially conscious millennials, or simply borne out of the recognition of the importance of risk management, investors are increasingly looking to generate measurable environmental or social impact – alongside a healthy financial return. And the good news is there are more and more such opportunities in the market.
Francesca Spoerry is a Copenhagen Business School MBA graduate turned impact investment professional, and she believes that “a world isn’t too far off where we look at risk, return and crucial impact as a matter of course when making investment decisions. Sustainability is increasingly influential – it was one of the key threads of my MBA and why I chose CBS.
“CBS gave me the tools to move into my current position as I had been working previously with Morgan Stanley in London in a role that didn’t have anything to do with sustainability. I knew that Copenhagen, as a city, is such a fertile ground for this expertise and that CBS is one of Europe’s leading business schools. I learned all the critical factors around sustainability, how to think about it analytically and what needs to happen to make change. And today we can see that change is happening – the desire for sustainable investments is a key market driver.”
However, investors need to be equipped with the right information if they are to make informed
decisions. Francesca continues: “You need to dig much deeper than just the financial statements
you’re presented with, so that you can understand the social and environmental impacts a company
has – all of which affects profitability in the long run.”
Where the traditional approach falls short
Andreas Rasche, Associate Dean for the CBS Full-time MBA and co-editor of “Sustainable Investing: A Path to a New Horizon” (Routledge), explains, “Investors traditionally look to environmental, social and governance related factors to make their decisions. But these are largely self-reported by companies. This leads to positive bias, with studies suggesting up to 90% of negative incidents are omitted from reports.” Data accumulation is slow, reporting lags behind the company’s actual position and the reports cannot properly incorporate factors that are not easy to measure.
And while a company may look like it delivers to a sustainable mandate when reviewed globally, it can be hard to disaggregate data to look at local positions. Problems in a particular part of the business, or area of the world, may not become apparent. It is next to impossible for a busy analyst to cover the breadth and depth of the data available for perhaps 70 stocks.
How can AI assist sustainable investment decisions?
Professor Rasche explains that, “AI gets to the heart of a company’s sustainability efforts, even those things you can’t pin down to a balance sheet. Sustainability information is often hidden, needing numerous different approaches to get to the core of it. Investors want to know the risk profile of a company vis-a-vis its sustainability. And AI can help them choose the options that fit best with their investment strategy and values.”
AI provides investors with the opportunity to interrogate vast, disparate datasets far quicker and more thoroughly than would be possible otherwise, capturing information from a huge number of internet sources. These include social media or global news sources to find out what’s happening on the ground, or GPS or satellite imaging to identify land misuse or deforestation.
As Professor Rasche notes, “It’s the ability to combine all of these data sources in real time, to capture sentiment and to identify missing or skewed metrics that is key. It takes the reliance away from the company’s balance sheet reporting. This is the information that sustainable savvy investors want and need to make their decisions.”
AI-based investment decisions – are we there yet?
As AI and machine-learning continue to advance it’s difficult to imagine a future where they don’t play an important role in sustainable investment. AI can complement traditional analysis to improve ESG-related decision-making or act as a standalone tool to drive an investment profile. But as with so many things, it’s cost, talent and simply the vision to make it happen that may be stalling progress.
As Rasche tells it, “Right now, there are leaders within funds who are embracing AI and they’re already outperforming other funds in the hedge-fund space and seeing the best returns. We see the visionaries moving now, it won’t be long before the rest move too.”