As the significance of responsible investing gains widespread recognition with investors, a surge of online tools utilising AI has flooded the market, promising to revolutionise the way in which companies and portfolios undergo ESG assessment. Yet, amid this influx, questions arise: Is the incorporation of AI truly advantageous in this context? How can you be confident in the quality and reliability of what is being delivered? With so many tools around, how do you choose the right one? Will the role of an analyst be replaced by AI?

Let’s start by addressing the first question. One of the significant contributions of AI to the assessment of ESG factors lies in its ability to process vast amounts of data from diverse sources. AI algorithms can sift through social media, news articles, annual reports and other unstructured data to identify relevant ESG information.

AI technologies are also very useful in assessing risks in real-time thereby allowing investors to identify potential ESG-related risks promptly. Specifically, AI algorithms can pinpoint factors such as environmental disasters, social controversies or governance issues that may impact a company’s financial performance. This proactive risk assessment empowers investors to manage their portfolios more effectively, ensuring they are well-prepared for potential consequences.

AI-driven tools are also revolutionising portfolio construction. By considering specific ESG criteria, these tools, if designed well, should be able to optimise investment portfolios to align with ethical and sustainability goals. AI’s ability to balance ESG objectives, risk and return allows for the creation of portfolios that are both socially responsible and financially sound.

So what about quality and reliability? Well, any analyst will tell you that one of the fundamental aspects of investment analysis, including an ESG assessment, lies in the quality of data. It is therefore advisable to stick to tools that source data from reputable and credible outlets. Understanding the origins of the data helps in evaluating its reliability, ensuring a solid foundation for any analysis. Analysts should also select tools that have been rigorously tested and validated. Continuous validation processes and feedback mechanisms enhance the accuracy of the analysis over time, providing reliable insights into companies’ ESG performance. A third factor that contributes to quality and reliability is the scope of ESG factors covered by the tool. Generally, the more factors covered, the more comprehensive the assessment process becomes. Adherence to regulatory guidelines is also crucial. Analysts should ensure that the selected tools comply with relevant ESG reporting standards.

What about selecting the best tool? Well, my advice here is simple. If you don’t understand it, don’t use it. Transparent methodologies are essential when selecting AI and online tools. Analysts should choose tools that provide clear explanations of their algorithms, allowing for a comprehensive understanding of how ESG ratings and scores are generated. This transparency enables analysts not only to interpret results accurately but also communicate the findings effectively to their clients. The ability to have some degree of customisation is also a plus. Remember that every investor will have unique ESG priorities. Analysts should opt for tools that allow them to align ESG assessments with specific investment goals and values as far as possible. Flexibility in adjusting criteria and weightings ensures that the analysis reflects the individual preferences of the clients.

But be warned. The assumption that AI systems are infallible coupled with an overreliance on AI technology without human oversight can lead to complacency. Instead, tools that combine AI-driven insights with human oversight provide a balanced and nuanced assessment. Analysts can leverage their expertise to contextualise findings, add depth to the analysis and enrich their client communication. So, while AI offers advanced analysis, human expertise is not yet redundant. Good news…for now.