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Does AI help or hinder ESG investors?


At Charles Stanley, we are being asked if investment in Artificial Intelligence (AI) is compatible with Environmental, Social and Governance (ESG) investing. How does AI affect ESG in companies and can it help investors for the good? These are important questions that go the heart of the accountability and transparency issues which the adoption of AI pose.

As AI is a set of computer programs and systems, many still to be developed or refined, the simple answer is some AI is helpful and compatible with ESG and some is not. Indeed, AI can be designed deliberately to promote ESG investing itself. More data, more algorithms and more computer analysis can be applied by AI with the purpose of improving the ESG properties of an investment portfolio. The guiding mind behind the portfolio and the AI itself would need to instruct AI programs to give strong weight in investment choices to reliable data, illustrating good results under the ESG headings. The same is true for any company or institution adopting AI to assist it. It can be a force for good if that is specified by the user. AI used responsibly will help companies become better citizens.

The present way of including ESG considerations in portfolios is to evaluate underlying investments for their performance under ESG headings. In the case of environmental, companies are potentially awarded better ratings if they have a clear path to net zero for themselves and if they are currently doing better at controlling their CO2 outputs in relation to the scale of their operations and the comparable performance of their industry or sector. It requires a lot of data to be assembled, but also entails substantial judgments to be made about what to count, what is feasible, and what allowances to make for activities that still do need some fossil fuel to work. Some ESG investors will invest in oil and gas majors themselves as long as these giants are investing substantially in alternative forms of energy and have a policy to cut back their fossil fuel activities. Others will not invest in businesses that still rely heavily on fossil fuels, preferring purer investments in challenger technologies and activities like wind and solar energy. Where AI is a means of accessing more data more quickly and analysing it more effectively with ESG in mind, it is a natural ally of the ESG investor.

What risks does AI pose to ESG investing?

Conversely AI programs could be used by investors who do not believe in the need to drive to net zero. It could be asked to find the fossil fuel investments that are undervalued owing to the net zero policies adopted by many. AI can be used in an investing company to accent things other than favourable ESG outturns when building a business. Like many other business inputs of technology and data processing, AI is available for users with very different viewpoints and ambitions. AI itself will impose some strain on the planet to the extent that it requires a lot of energy to run the extra computers, often based in countries where fossil fuels still provide most of the electrical power.

The challenge facing legislators and regulators is to see if they need extra laws and rules to circumscribe bad actors using AI to disrupt or to undertake criminal activity. It is true that AI as a series of techniques and aids to action starts from a position where anything done using it which entails committing criminal offences or breaking rules of good corporate and individual conduct can be prosecuted or disciplined under existing laws. Theft or fraud by a cleverer computer will still be traceable to a person who set it up and takes the profits from the machine’s actions, so they can still be arrested and charged. If a company uses AI in ways which offend against the principles of good governance, the directors will still be liable for censorship when the malpractice is revealed. Nonetheless there may well be a wish by legislators to update general laws against crime and bad practice to mention ways in which AI allows or assists such conducts. Abuse of AI will become clearer when there is more of it about and when criminals and others have seen how to exploit it.

The changing digital landscape has already begun to affect the way investors think about the markets and their portfolios. If you’re looking for support with your investments, our experts can help. Explore Charles Stanley’s Investment Management services today or call 020 3797 6853.

The value of investments, and the income derived from them, can fall as well as rise. Investors may get back less than invested. Charles Stanley & Co. Limited is authorised and regulated by the Financial Conduct Authority.


By John Redwood, Chief Global Strategist, Charles Stanley Wealth Managers


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