ESG, Investments

AI providing cut-through for ESG investing


ESG investing is complex, but artificial intelligence is allowing investors to better identify more true-to-label opportunities in this space.

Environmental, social and governance (ESG) investing has come a long way. When socially responsible investing was first floated as a concept in the 1960s, it simply meant investors would exclude entire industries from their portfolios, such as tobacco production or those businesses aligned to the South African apartheid regime.

Investors would identify possible investments and then look for any reasons not to invest. The fact ESG factors are driving investment decisions is nothing new.

But the landscape has changed and ESG is no longer being seen as an afterthought or a hygiene check before investing. Indeed, the reverse is true – companies that underperform in ESG won’t even make it past first base with all investors. They are a non-starter.

We have COP26 to thank for reinforcing this message with an already ‘woke’ investor. The “Vanguard 2021 SMSF Investor Report” showed a growing interest in ESG investing and reported more than half of SMSFs said a lower return would not deter them from making an allocation to ESG-credentialled investments.

But understanding what companies are doing to improve their own footprint is time consuming. There is bewilderment and division in opinions on how to evaluate ESG policies and even what constitutes a sustainable investment. Governments have not standardised the methodologies that businesses use to set targets.

Enter artificial intelligence (AI) as the investors’ short cut.

The inconsistency in reporting ESG and multiple data sources is paving the way for AI investment solutions so investors don’t need to wade through greenwash and subjectively evaluate opportunities against the principles of responsible investment or PRIs. For a trading platform like ours, AI is essential because the markets move quickly.

It has created the ability to fully automate trading based on ESG criteria that meet the demands of traders who care about the impact of their investments, but need to be able to trade quickly to take advantage of the speed of the markets. It is a large and complex investment universe.

Investors are not just looking at companies that solve ESG problems through technology; they are also seeing opportunities to invest in companies across all sectors, including the traditional sin sectors – those that are making strides to improve their ESG impact. Businesses in these industries are eager to be seen to be adopting net zero targets and identifying the pathway for decarbonising their businesses.

For those who are eager to invest directly into green technology, there is also a whole investment ecosystem around innovations, for example, electric vehicles (EV). From an investor perspective this is an exciting area with more government investment in infrastructure set to accelerate the take-up of EVs.

To gain exposure it’s not just a matter of piling into Tesla stocks. Investors are also looking at what the large incumbent car manufacturers are doing to retain market share, as well as supporting infrastructure such as charging stations and batteries. The United States is where investors are getting direct exposure to EV stocks, whereas in Australia exposure is more indirect through mining companies, for example, that are producing battery components.

The investment universe is vast and investors are now able to gain access to those companies at the click of an iPhone. On our own app we are currently seeing well-credentialled ESG buying opportunities with Altium (ALU), Appen (APX) and Charter Hall Group (CHC), based on an AI algorithm that uses over 250 news feeds, with over 10 million pieces daily, that indicate these companies are vigilant about their ESG requirements and appear undervalued compared to their peers.

ESG factors are a key part of the operations of every single company and pressure on these organisations to improve will not abate. But the current situation is a little like the Wild West and companies can cherry-pick their metrics to paint a very green picture. Without common sustainability reporting standards and an opaque narrative around ESG, investors are using AI to step into the breach to help them make decisions that are in line with their values.

Tui Eruera is the founder of Jaaims.

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