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ESG
Jessica Ground
Artificial intelligence (AI) is touching almost every corner of the global economy. But what are the implications for environmental, social and governance (ESG) issues?
On the one hand, AI brings powerful potential to tackle the myriad of ESG data challenges. On the other hand, ESG risks associated with the rise of AI, such as data protection, labour rights, and energy and water consumption are emerging. What do investors plan to do about AI?
The impact of AI on ESG issues is just one of the thought-provoking issues we explore in our latest Global ESG Study.
Our annual survey gathered the views of 1,130 institutional investors and intermediaries across Europe, the Middle East, North America and Asia-Pacific . We used this year’s Global ESG Study to gain insights on ESG trends, risks and opportunities against a backdrop of ongoing geopolitical tensions, a fluid political landscape and evolving regulations.
Among the insights revealed in the report, here are five key findings.
1. ESG adoption holds steady in a volatile world
ESG adoption remains at an all-time high globally, and inches even higher in Europe, the Middle East and Africa (EMEA). According to the study, this commitment to ESG is driven primarily by the need for investors to comply with regulatory requirements and to manage financially material ESG risks.
Receding concerns about greenwashing may also have contributed to the high ESG adoption level. In 2024, approximately four in 10 (42%) global investors think greenwashing is prevalent within the asset management industry – the lowest level since our study started in 2021. Regulations and enforcement actions have helped allay concerns, according to respondents.
Perceived prevalence of greenwashing within asset management since 2021
2. Investors lean in to multi-thematic strategies
Single-themed strategies, which focus on specific issues like clean energy or water & sanitation, often account for a notable portion of the ESG funds market. However, appetite for exposure to a diverse set of investment themes has fuelled demand for multi-thematic ESG strategies.
The survey respondents point to several potential benefits of multi-thematic ESG strategies compared to single-thematic ones. The top three perceived benefits include diversification, the potential for better risk-adjusted returns and broader ESG impact. In addition, nearly a third cite the potential benefits of lower volatility and reduced style bias.
The survey also indicates a growing recognition that both companies leading the sustainability charge and those in transition play important roles as the world moves towards a more sustainable future. The share of investors favouring a mix of both leaders and transitioners has risen for the second consecutive year, to 52%. This trend could continue over the next two to three years, with 55% planning to invest in a combination of leaders and transitioners.
3. Investors look to AI for help tackling ESG data challenges
Among the barriers to ESG adoption, difficulties with the consistency and reliability of ESG data are most widely cited. The rapid development of AI offers hope that this emerging technology might help solve the ESG data puzzle. Although only 10% of respondents currently use AI to analyse ESG data, more than half plan to do so in the future. The potential of AI to enhance ESG data analysis is a promising development for investors seeking to improve their ESG strategies.
“I would say our number one challenge when it comes to ESG is comparability of data and standardization of data,” says a portfolio manager at a UK wealth manager. “There are so many different standards, and everyone looks at things in such a different way. It’s really difficult to get your head around.”
Areas where AI is expected to most aid ESG analysis
4. The rise of AI brings new ESG investment risks
While AI offers potential data solutions, it also introduces new ESG investment risks.
The AI boom has brought potential “S” risks associated with the technology into sharp relief. Six out of 10 respondents see the social impact of AI as the most material “S” issue over the next 12 months. More than two-thirds believe that will likely be the case over the next three years.
Data protection and privacy, cited by three-quarters of respondents, is seen as posing the most material AI-related risk for investment. Labour rights/job displacement is viewed as another material social risk related to AI.
AI’s transformative potential is powered by high electricity consumption. It should come as no surprise that more than half of respondents view energy consumption and greenhouse gas emissions from AI as a material ESG risk in investing over the next two to three years. About a quarter of respondents point to AI-induced pollution and e-waste issues as a key risk.
AI-related ESG risks that investors view as most material
5. Geopolitical risks loom large
Geopolitical risks are seen as significant headwinds that could divert attention away from ESG issues and make international cooperation more challenging. Nearly three-quarters of respondents see the geopolitical risk outlook as most likely to hinder progress in 2024, against the backdrop of wars in Ukraine and Gaza and elevated tensions between the U.S. and China.
Elevated geopolitical tensions and ongoing wars have also prompted some rethinking of common ESG approaches. A question that has been much discussed recently: Should the defence industry be excluded from ESG strategies if doing so would help with the self-defence of a sovereign and protect democracy? Nearly two-thirds of respondents agree that geopolitical tensions may lead to new approaches in industry or sector exclusions.
Evolving attitudes to industry exclusions such as defence could support the case for active investment approaches. It is more challenging for passive index funds to take such a granular view and capture evolving nuances. In fact, more than half (55%) of investors surveyed say political headwinds to ESG strengthen the case for an active approach. This suggests investors value the ability of active managers to potentially take advantage of market opportunities and proactively manage risk.
To explore how investors around the world are thinking about these ESG topics:
Find out how Capital Group approaches sustainable investing:
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Glossary
Active vs. passive – ‘Active funds’ are managed by managers who attempt to surpass an index over time, while ‘passive funds’ track an index.
Greenwashing – Interpretations of what constitutes greenwashing can vary, but broadly the term relates to giving a misleading impression on the ESG or sustainability characteristics of a product, activity or organization.
Leaders – Best-in-class companies in sustainable sectors with high ESG ratings.
Natural language processing (NLP) – A subfield of artificial intelligence (AI) that uses machine learning to enable computers to interpret, and communicate with, human language.
Risk-adjusted return – A calculation of the gain, or potential gain, from an investment that considers the degree of risk that must be accepted to achieve it.
Sovereign/sovereign investors – Refers to investors that are either sovereign States themselves or are intrinsically linked to a sovereign State, the most common types of which are State-owned enterprises (SOEs) and sovereign wealth funds (SWFs).
Style – In investing, style refers to the investment approach or objective that an asset manager uses with the ultimate goal of generating returns.
Thematic investing – A form of investment that aims to identify macro-level trends, such as lean energy or technology, and the underlying investments that stand to benefit from those trends materializing.
Transitioners – Companies looking to transition their business models to a sustainable future.
All data attributed to Capital Group and ESG Global Study 2024 unless otherwise stated.
Past results are not a guarantee of future results. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.
Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.