From ESG to AI - a new era of connected capital markets

Capital markets are experiencing a fascinating period of evolution with the growth of climate-related investing and recent step-change advances in artificial intelligence (AI). At this year’s SXSW Sydney conference, I?was honoured to join a panel session to discuss these trends. Fellow speakers were Dr Guy Debelle, Adviser to the Investment Committee, Australian Retirement Trust, and non-executive Director at Tivan, as well as Dr?Sandra Peter, Director of Sydney Executive Plus at the University of Sydney Business School.

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ESG is here to stay

The title of the session was “There is Beauty in a Connected Marketplace: Capital Markets in the Age of ESG & AI”, evoking how deeper human considerations frame so many contemporary capital allocation decisions. Whether it be minimising their carbon footprint, energy usage or effect on biodiversity – right through to ethical sourcing, supply chain integrity and employee well-being – companies face increased market pressure to demonstrate progress on environment, social and governance (ESG) indicators.

The incursion of businesses into perceived political causes has drawn a backlash in some markets – note recent commentary on companies that took a public position on Australia’s Voice to Parliament referendum. Or, look to the United States, where Texas has effectively restricted public pension funds and insurers investing in ESG-themed securities, even as it becomes one of the world’s leaders in clean energy tech.

Yet demand for this type of disclosure is being driven by long-term investors who want to understand an organisation’s true impact and future prospects.

In Australia, large corporates have had little choice but to align with ESG reporting expectations to attract international capital. Corporate responsibility is increasingly good business. As Guy noted on stage, there is substantial evidence for the link between ESG and a company’s financial performance.

It is worth noting that all three pillars of ESG are individually important, and methodologies do vary, at times leading to surprising outcomes. For example, last year Tesla was excluded from the S&P 500 ESG index in the US – even as other firms in higher polluting industries remained in – due in part to claims of employee bullying and racial discrimination, as well as ethics and governance concerns over its autopilot feature. It has since been readmitted after providing greater disclosures around its material sourcing and hiring practices.

Delivering investors good quality data

Today, ASX recognises the critical role of high-quality data in investor decisions. In this regard, ASX deploys sophisticated analytics to deepen our own insights, share data across the ecosystem and grow our customer-facing information services business.

At its best, a connected market is built on basic standards and agreed metrics that help investors to efficiently allocate capital where it delivers most value. Taxonomies that assist with clear reporting on a firm’s activities can allow an investor to make rational choices aligned with their risk appetite, time horizon and personal preferences.

Global ESG standards led by organisations such as the International Sustainability Standards Board can still be tailored to Australia’s relatively carbon-intensive economy. ASX has published its own ESG Reporting Guide for Australian Companies. Further government–industry collaboration is also well advanced (for example, Guy is Co-chair of the Australian Sustainable Finance Institute’s Taxonomy Technical Expert Group).

Due to be released in mid?2024, the sustainable finance taxonomy will provide common definitions of what constitutes sound environmental practice in Australia. As all businesses clamour to present themselves in the best light – and the Australian Securities and Investments Commission cracks down on ‘greenwashing’ – objective science-based benchmarks are the only solution.

Climate reporting obligations coming next

From next year, Australian companies will progressively face new climate reporting obligations. This includes Scope 3 emissions – which measure an organisation’s carbon footprint across its customers and suppliers. Getting this right will require a substantial uplift in real-time data-sharing across value chains and AI has an important role to play.

This could mean using traditional machine learning to seek patterns in existing data or fill in missing data. Companies are also experimenting with the latest generative AI tools that rapidly produce content. As Sandra said, “Everyone’s trying to do it; everyone knows somebody who’s been doing it”. However, the risk is that AI can be used to manipulate data in whatever way an organisation wants – perhaps to mask unsustainable practices, tailor greenwashing messages to specific audiences or even generate fake sustainability reports.

This is an area where technology is likely to move faster than regulators. Again, the antidote to greenwashing involves clear, internationally-aligned taxonomies and standards, stronger accounting and auditing procedures – and holding company directors accountable for misleading claims.

Finding the ‘beauty’ in a connected market

Evolving disclosure and reporting obligations require businesses to be careful stewards of data. Protecting the organisation from cyberattacks is now a core part of corporate governance. Every company also needs to consider ethical and governance issues around AI.

I can only agree with Sandra, who noted that in this new era, data and AI must be woven into the core strategy of a business rather than simply seen as an IT issue.

The potential remains for an AI-enhanced trading landscape where investors have the real-time information needed to flow capital to where it is most productive – and achieve good in the world.

Optimising the use of data and technology; building the business bottom line; truly understanding a company’s impact and simultaneously creating a healthy, habitable planet for future generations. They’re all connected and there has to be beauty in that.

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