HSBC is using data from an ESG book in an AI developed by Arabesque AI to track the performance of over 1,000 stocks of global companies which are expected to benefit from developments in ESG risk management. 

ESG reporting for companies is a growing international phenomenon. Between 2019, and the most recent data available in 2021, ESG reporting by large companies grew to 95%, up 91% from 2019, according to the international federation of accountants. 

This is due in large part to government bodies introducing mandatory ESG reporting requirements. Companies operating in Europe, the UK, the United States, and many other countries now need to report ESG publicly. 

The UK has had mandatory ESG disclosure protocols in place for over 1,300 of the largest companies and financial institutions since April of 2022. 

ESG reporting is built on three main pillars, looking at the climate-related impact of a company, along with its longer term environmental sustainability.

Reporting also takes into account the ethical practices of a company such as employee treatment, and respect to labour law. Finally, the reporting looks into the businesses’ transparency in accounting, conflicts of interest, corporate governance, and other key issues. 

The ripple effect of this has seen ESG become a critical vector in the decision making process of investors. According to a report by Bankrate, 89% of investors considered ESG issues as part of their investment approach in 2022. 

This is also in line with Scotland’s global capital investment plan launched in 2021. The plan looks to attract investment through posturing Scotland as a global hub for ethical investment, by promoting ESG reporting.  

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“Based on our back-tested data, tilting investments towards stocks exhibiting ESG momentum showed excess returns per annum versus S&P global benchmarks during the same period. In other words, there is a positive correlation between companies transitioning to more sustainable business practices and their returns,” said Yasin Rosowsky, co-founder and VP of engineering at Arabesque AI.

The burgeoning ESG investment sector has now intersected with AI. Arabesque AI has made an index which uses AI algorithms to gather information from ESG news and non-governmental organisations (NGO) to calculate an ESG ‘momentum score’.

This gives investors the ability to see which companies are transitioning to more sustainable business practices. Unique to this AI model is its ability to decipher if a company is improving its ESG rating, or may be on the decline.