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Intelligent Investments: The Use of AI in ESG Investing

24 Feb 21
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by Safa Rahim, MA candidate in International Affairs, former intern at 4IP Group

ESG has been identified as one area where one-size fits all investment strategies do not work. Therefore, it is unrealistic to suggest that a single set of metrics and one methodology will meet the needs of the entire investor universe (The Economist,2019)[1]. The challenges lie in both the collection and the analysis of ESG data. One way to mitigate these challenges identified by experts is by the use of Artificial Intelligence or AI. AI allows investors to collect and analyse information more efficiently than before. AI has the power to identify key data for investors seeking sustainable investments by filtering essential data that investors lack.[2]

The technologies enable the processing of data in addition to specialised features like analysing the tone of text using ‘sentiment analysis’. Sentiment analysis, also commonly known as opinion extraction, opinion mining, sentiment mining and subjectivity analysis looks at the use of natural language processing and text analysis techniques to systematically identify, extract and quantify subjective information and attitudes from various sources. The sentiment could be related to the financial health, credit risk, business dealings, growth expectations for employee satisfaction. The inclusion of AI into investing patterns increases “intelligent investments”.

The year 2020 saw some of the most innovative platforms launched in the ESG sector. For instance: Climate Action 100+, an investor-led initiative has been developed to ensure regulatory compliance in order to mitigate the evils of climate change.[3] Another such platform developed in 2020 was the Arabesque S-Ray Temperature Score, which is a unique new metric that measures the extent to which corporations across the world are contributing to the rise in global temperature.[4] Forbes anticipates the investors to integrate anticipatory regulatory changes as well as the risk perceptions in sustainable investment into their decision making with the help of technology, resulting in the rise of ‘intelligent ESG investing’.[5] These new technologies are to create a trend as more investors around the world are seen to align the objectives of their companies with the objectives of the Paris Agreement in 2021. This is particularly the case as companies will have to make radical changes to their portfolios or face a drastic reduction in the sectors that are qualified for investment.[6] Regions like Europe have already developed comprehensive roadmaps in the form of the Green Deal, and in justifying what type of investments should be encouraged.

The infrastructure sector surprisingly lags behind the public equity and fixed income sectors in ESG presence, despite the fact that infrastructure sources are responsible for over 60% of Global Greenhouse Gases. According to the UN PRI, the challenges for integrating ESG metrics into clean infrastructure investment vehicles include:

  • Difficulty weighing the value of different environmental and social outcomes across regions and investment horizons. For example, how does one determine whether it is more valuable to mitigate a unit of greenhouse gas emitted in Germany in 2020 versus electrifying a village in Rwanda in 2025?
  • Difficulty applying a consistent rating framework across unique investments. There are no standardized ESG metrics for the infrastructure sector.
  • Monitoring investments to ensure that the anticipated benefits are realized.

Urban Matrix One is the first company to use explainable Artificial Intelligence to attempt to solve these problems. They use unique data sets and algorithms to estimate and monitor environmental, social, and economic outcomes for global infrastructure investments. They allow investors to customize their priorities and compare the value of different environmental and social outcomes. They enable investors to monitor the environmental, social, and economic returns of their investments in real time.

They believe these tools will allow asset managers to capitalize on institutional and retail dollars devoted to ESG strategies and put this capital to work creating a more sustainable world.[7]


[1] Green Intelligence: Asia’s ESG Investing, data integrity and technology. (2019). The Economist Intelligence Unit. https://eiuperspectives.economist.com/sites/default/files/green_intelligence_eiu_e_fund.pdf

[2] Laidlaw, Jennifer. (2019). Amid global push for sustainable investing, AI could be crucial catalyst. S&P Global Market Intelligence. 

https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/54265151

[3]  Climate Action 100+ Website: https://www.climateaction100.org/

[4] Arabesque Website: FAQs. https://www.arabesque.com/docs/sray/marketing/temperature/Temperature_Score_FAQ.pdf

[5] Kell, Georg. (2020).  Will 2021 be the Transition Year for Climate Action. Forbes.   https://www.forbes.com/sites/georgkell/2020/08/17/will-2021-be-the-transition-year-for-climate-action/?sh=7714c53d4d79

[6]  Lee, Linda-Eling & Eastman, Meggin Thwing.(2020). 2021 ESG Trends to Watch. MSCI https://www.msci.com/www/blog-posts/2021-esg-trends-to-watch/02227813256

[7] Source: Infrastructure & ESG Investment. One of the most notable investment… | by dan lichtenberg | Urban Matrix One | Medium accessed 23rd of February 2021.

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