AI, an indispensable tool for managing ESG risks and opportunities.

27 November 2023 by National Bank Investments
Solene Hanquier from NBI with David Ung from Manulife Investment Management

ESG analysts have access to thousands of reports and millions of data to support their analyses. Artificial intelligence (AI) is no longer a luxury, but an essential tool for managing ESG risks and opportunities.

Access to reliable data has long been the main obstacle to the growth of responsible investment. 

In the past, ESG analysts used a dozen sources of information to evaluate a business. Today, they have access to thousands of reports and millions of data to support their analyses. 

How AI disrupted the ESG integration process 

It is here that the use of AI has become a must in responsible investing because it quickly identifies credible sources of information and extracts data useful to ESG integration processes. 

"For example, an analyst can accelerate their research by using a function of intelligent synonyms, i.e., identifying all keywords attached to a specific topic or topics for his research through thousands of reports in a few seconds.” David Ung, Director, Sustainable Investment - Manulife Investment Management 

Concrete examples and some nuances

If we take the restaurant industry, AI can handle repetitive tasks allowing employees to focus on more high-value-added chores reducing error risk and indirectly food waste. 

On the other hand, this could lead to tensions and labour disputes related to a shift in work structure. In an ESG framework, the issue is not whether AI represents a risk or an opportunity for a company, but whether it negatively or positively magnifies the sustainability issues facing that company. 

What the future holds 

AI can be expected to process a perpetually increasing amount of information related to responsible investing activities. For example, more complex mathematical calculations could predict a portfolio's future carbon emissions, or even predict whether a company may be involved in an ESG controversy. 

However, issues related to the ethical use of AI will continue in the same direction, and this may become an important ESG and regulatory issue in the coming years.

Solène Hanquier

Hi David. Well, right from the start, I would like to thank you for accepting our invitation to participate in this webinar. We all know that artificial intelligence is transforming many fields and responsible investment is no exception. So, I would like to begin with my first question. Could you please share with us how you leverage artificial intelligence in your responsible investment processes?

David Ung 

Well, first, thank you, Solenne, for the invitation. It's a pleasure to be here to talk about such a passionate topic. For us, artificial intelligence is becoming a crucial element in responsible investment. When you think in the past, responsible investment analysts would rely on mainly a bit more than a dozen of sources of information to evaluate a company. Today, the reality is that we have access to hundreds or thousands of reports out there. and to millions of ESG data publicly available. So for me, artificial intelligence is becoming a must to quickly identify credible sources of information, but mostly extract the most useful data for ESG integration processes. And just to give you an example, a responsible analyst today could speed up his or her research by using what we call a smart synonym function. we're tracking relevant keywords on one or many different topics among thousands of reports in a matter of seconds. A second function that we're using is called the sentiment. So when we get new data or new information, are they more positive or are they more negative for the company that we're looking at? So again, artificial intelligence can help us clarifying if this is more of a positive or negative news in our radar. And lastly, I would say, artificial intelligence can be used for quality control, whether to ensure that relevant information is not omitted or to identify if the collected data show some sign of anomalies, right? So this is really important for us using artificial intelligence responsible investment.

Solène Hanquier 

So, it seems very powerful to enhance your processes and I wonder what's the impact for companies in your portfolio. I guess they also use artificial intelligence for their ESG strategies. Can you give us some examples?

David Ung 

really important question that we ask ourselves internally. You can imagine the investment team are seeing a lot of report going around on artificial intelligence, and we're trying to determine what is the impact. And the more we explore the topic of artificial intelligence, the more we realize that it has what we call an implying, an amplifying impact or effect on ESG risk, but also on ESG opportunities as well. If we take the example of a company in the restaurant industry. Well, obviously artificial intelligence could be beneficial by taking over repetitive tasks such as taking customer orders, for example. So this allows more time for employees to focus on tasks that may be more beneficial or add more value to the business. And then also personalized or let's say more precise customer order taking, thanks to artificial intelligence, well, could lead potentially to a reduction in food waste. or even on increased customer satisfaction. So really beneficial, right, Salen? But on the flip side, you can imagine that as some jobs are likely to be replaced by artificial intelligence, well, employees are starting to be concerned about their job safety. And this could lead to more interruptions or more frequent conflict at works. So something that needs to be monitored by employer and that may lead to potential negative impacts. If we stay in the same example of a restaurant, well, when it comes to customer order taking using artificial intelligence, well, you can imagine that the absence of human contact could lead customer to feel a little bit more disconnected from restaurants and potentially leading them to frequent those less often. Another example of negative impact using artificial intelligence, well, let's think of the automation of kitchen tasks.that could result in a lack or absence of human oversight on, let's say, the food ingredients being used or simply on the cooking process. And that could lead to potential health and safety issues to consumers. So I'm using one example of a restaurant. But when we look at the entire portfolio, we're seeing the same reality for most of our companies. Often the question is not whether artificial intelligence is more of a risk or more of an option for those companies. but rather how artificial intelligence may amplify negatively or positively the easy issues that these companies face today and to...

Solène Hanquier 

So we're really at the beginning of the journey of artificial intelligence. And if you could tell us, what do you think the future holds in terms of artificial intelligence and responsible investment?

David Ung 

Every time people ask me this question, I wish I had a crystal ball, which I don't. But in my humble opinion, I think artificial intelligence will help us in collecting a higher volume on information and hopefully a more credible type of information that will be useful for our responsible investment activities. I may even think that artificial intelligence can help us in identifying which sorts of information are credible in our research.Another use of artificial intelligence could be in more, let's say, complex mathematical models, which can help us, let's say, predict future carbon emission of our portfolio or even predict if a company may be involved or not in potential ESG controversies. So, these are potential benefits for using artificial intelligence for responsible investment activities. However, on the flip side, there's also some concerns and risks in our industry.There's a lot of discussion on the ethical use or non-bias use or artificial intelligence. And I believe that will occupy an important place on the regulatory front in the years to come. So clearly a topic that we need to continue investigating, monitoring in the responsible investment space.

Solène Hanquier 

So a lot of controls need to be in place to make sure that we use artificial intelligence in the best way. Well, thank you very much for your invaluable insights, David. It was a pleasure to have you. And we will definitely continue tracking the evolution of artificial intelligence and responsible investment and continue having those kind of conversations. Thank you, David.

David Ung 

Well, thank you, Solène and National Bank. Always a pleasure to be invited in those type of calls and I'll be happy to be here in the future.

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