Both concepts are integral to modern corporate governance – and they’re here to stay. David Duffy, CEO of the Corporate Governance Institute, explains how to prepare your business for this ‘brave new world’.
AI and ESG are two boardroom topics that have more in common than you might think.
The bottom line is two undeniable certainties:
AI and ESG are crucial to modern corporate governance.
Both are here to stay.
As with any essential governance topic, it’s crucial that both are integrated into a robust corporate strategy. Doing so will highlight a synergy that you perhaps didn’t realise was there all along.
Interplay of forces
Both concepts are shaping the future of corporate governance.
AI grants us the ability to generate content and analyse data in ways that were never previously possible. Meanwhile, ESG represents a new constitution of principles and strategy.
They’re not only hot topics but they hold the same importance in the minds of investors, consumers, and regulators – the people whose rules companies need to play by if they want to succeed long term.
But where is the overlap? Ultimately, all three pillars of ESG are affected by the AI revolution, but the category that matters most of all is G – governance.
Why?
Without governance, there is no ESG
Companies invest time and money into ESG to ensure their business practices don’t harm the planet, its people, or themselves. Paradoxically, the third component is the most important.
A company can’t pursue environmental and social policies unless it is run correctly. It’s one of two reasons the “G” in ESG should command our attention the most when it comes to AI.
The other is the fact that AI has the potential to deliver huge, positive change in pursuing good governance.
Revolutionary data-driven insights
Artificial intelligence means directors and executives are able to collect, analyse, and interpret ESG-related data at unprecedented scale and speed.
In some ways, it’s a miracle crossover, considering ESG data has only become more complex and cumbersome. To the ill-prepared board, the new information and requirements can easily be too much. Enter AI – the answer to the data nightmare.
Through natural language processing and machine learning, AI algorithms can sift through vast amounts of textual and numerical data, including reports, news, social media, and financial disclosures.
It lets governance experts identify ESG trends and critically learn how ESG factors effect their organisation. This is precisely the engagement that investors want to see.
Automating reporting
Reporting is everything to ESG, and new rules from regulators and investors mean it’s only getting harder… or at least it would if AI hadn’t arrived to provide the essential boost.
AI can streamline beyond belief. It can help ensure accuracy, consistency, and efficiency in ESG disclosures, reducing the risk of errors or omissions.
Furthermore, AI can identify discrepancies between reported and actual ESG performance, helping organisations maintain transparency and credibility. This eases the burden and enhances the reliability and timeliness of ESG information for stakeholders.
Predictive risk assessment
There’s no getting away from the primary governance responsibility of being able to manage risk. Failure to do it brings the possibility of serious reputational or financial damage.
Nobody wants this, and businesses are scrambling for ways to avoid it.
What AI brings is a vastly increased capacity to analyse historical data, market trends and other external factors to paint accurate pictures of corporate risk, both in the short and long term.
The caveat
The biggest opportunity for AI and ESG (particularly governance) is the capacity and insights; the biggest pitfall is assuming that AI can just solve everything at the click of a button.
Each of the advantages above comes with the caveat that AI is nothing more than a tool.
It’s a tool unlike any other, for sure, but if not used in the right way, then all the benefits it could potentially bring are lost.
You’ve probably heard this warning already as AI becomes commonplace in daily life. But hear it again from this governance perspective: directors have some of the biggest responsibilities in the business world; if they misuse AI, the fallout will be substantially greater.
In conclusion
AI is a transformative force in ESG, and it all starts with governance. If AI isn’t applied to the ‘G’ first to ensure innovative, solid leadership, then the ‘E’ and the ‘S’ stand far smaller chances of maturing properly.
AI-driven insights enhance decision-making, streamline compliance, predict and mitigate risks, and foster stakeholder engagement.
Companies should recognise this connection now because it’s vital in navigating the intricate landscape of ESG principles. What’s more, this is a connection that will only become stronger as the years go on. Now is the time to get on top of it.
The Corporate Governance Institute is a global leader in the education and certification of existing and aspiring boardroom directors.
