How generative AI is transforming ESG Reporting
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Among the most promising applications for Generative Artificial Intelligence (GenAI) is in Environmental, Social, and Governance (ESG) compliance and reporting for large businesses.
As the demand for ESG-related data rapidly expands and compliance teams spend more and more of their time on ESG initiatives, GenAI-enabled software solutions offer a way to ensure compliance, save time, and provide companies with a competitive advantage in the increasingly important business arena that ESG compliance has become. According to the Thomson Reuters 2020 State of Corporate ESG report 77% of respondents believe AI will have a significant or transformative impact on their work in the next five year.
Graphic taken from the 2024 State of Corporate ESG report.
ESG’s importance–and data demands–are growing
In today’s business world, a corporation’s reputation (to say nothing of its stock price) is increasingly tied to its ability to meet various ESG targets–some self-imposed and others required by law.
Everything from a company’s energy efficiency, water usage, and waste-management practices to its labor policies, product safety measures, and governance rules are covered under most corporate ESG programs. And once a company commits itself to a set of ESG standards, an enormous audience of interested parties–e.g., shareholders, consumers, regulators, activists, media–is inevitably watching to make sure the company fulfills its promises.
Unfortunately, as regulatory scrutiny increases, data demands multiply, and the consequences of non-compliance become more serious and costly, those responsible for ensuring ESG compliance (primarily ESG compliance teams, CFOs, tax and finance professionals) are being overwhelmed with ESG-related busywork.
It takes considerable resources (time, money, human capital) to collect, store, and analyze the increasingly large amounts of data that ESG compliance requires. Ensuring the consistency and reliability of that data throughout the supply chain also involves technological resources that many companies still lack.
Complicating matters further is the fact that the regulatory landscape around ESG is constantly changing. For example, the European Union (EU) recently passed its long-awaited Corporate Sustainability Reporting Directive (CSRD), a wide-ranging mandate that significantly expands the scope and depth of ESG-related information that companies are required to disclose.
By 2026, all but the smallest companies operating in the EU will be subject to CSRD rules, and it is widely believed that the CSRD will soon serve as the framework for an emerging global standard on sustainability reporting.
How GenAI is transforming ESG management
GenAI is an ideal application for ESG compliance because it combines the speed of machine learning for data collection with GenAI’s ability to organize, analyze–and learn from–that same data.
ESG compliance processes typically involve a series of repeatable steps, many of which are easily automated. GenAI-powered ESG compliance tools can save time and resources for employees by automating key functions. For example, gathering ESG data on suppliers within an international supply chain may take over a year. GenAI-enabled software, however, can complete the same task in a fraction of the time. GenAI’s most promising application is to assist decision-makers with advanced data analysis and prediction modeling. By understanding a company’s ESG benchmarks and targets and comparing them with its current trajectory, GenAI can help companies understand their ESG profile at any given moment and identify areas in need of improvement.
Use cases for GenAI in ESG reporting and monitoring
For example,
Enersys
, a maker of next-gen batteries and other stored energy solutions, uses a version of ChatGPT Enterprise that analyzes sustainability metrics in ESG-related areas such as emissions, waste, and travel. Team members claim that they can uncover actionable insights faster than they could manually analyze the data. Enersys’s system can also automatically respond to customer data requests and produce internal reports. Furthermore, the company’s sustainability team is exploring the idea of using GenAI to review its Climate Disclosure Project (CDP) questionnaire responses to identify data gaps and areas in need of improvement.Strengthening auto supply chainsAnother interesting use case for GenAI is automobile manufacturers who are transitioning to electric vehicles (EVs) and, in the process, significantly altering their supply chains. As mentioned earlier, GenAI can accelerate the process of new supplier screening and onboarding and can immediately flag any areas of possible concern.
During the auto industry’s turbulent transition to EVs, these onboarding efficiencies can help automakers maintain reliable, resilient supply chains. Advanced screening capabilities ensure that a manufacturer’s supply chain reflects its values in terms of labor, sourcing, energy efficiency, waste, and other key ESG measures. The benefits of ensuring compliance are not the only ones. They may also help save the world. Companies that are serious about ESG are sending a signal to stakeholders that they are concerned about these issues and will do whatever it takes to meet ESG obligations. Indeed, according to the
Thomson Reuters 2024 State of Corporate ESG Report
, 82% of respondents agreed that the role of corporate performance will grow in the future, and 71% agreed that their company is willing to invest in ESG to gain a competitive advantage.
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Why GenAI is necessary to meet rising ESG demands
As climate change grows more volatile and political influence on supply chains becomes unavoidable, more companies than ever are viewing their ESG initiatives not only as an organizational responsibility, but as an excellent opportunity to strengthen and differentiate their brand.Unfortunately, the process of ESG compliance has become so cumbersome and time-consuming that the people responsible for it are often overwhelmed. GenAI-based ESG tools can help companies stay on top of regulatory changes, improve accuracy and save time. And, as these GenAI-powered programs “learn” a company’s business, they can also be used to help decision-makers model scenarios and develop plans for a more competitive and sustainable future.
For a more complete overview of how GenAI is impacting ESG compliance, download a free copy of the
2024 State of Corporate ESG Report
.
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