Empowering Sustainable Finance with Artificial Intelligence: A Framework for Responsible Implementation

TL;DR

This paper discusses how AI can enhance sustainable finance by improving ESG risk assessment and decision-making, while emphasizing the importance of responsible implementation and regulatory principles to mitigate associated risks.

Contribution

It proposes a framework for integrating AI into ESG investing with a focus on responsible use, transparency, and establishing guiding principles for ethical AI deployment in finance.

Findings

AI can improve climate risk identification and pricing.

Responsible AI use requires new principles and oversight.

Integration of AI into ESG reporting demands ethical guidelines.

Abstract

This chapter explores the convergence of two major developments: the rise of environmental, social, and governance (ESG) investing and the exponential growth of artificial intelligence (AI) technology. The increased demand for diverse ESG instruments, such as green and ESG-linked loans, will be aligned with the rapid growth of the global AI market, which is expected to be worth $1,394.30 billion by 2029. AI can assist in identifying and pricing climate risks, setting more ambitious ESG goals, and advancing sustainable finance decisions. However, delegating sustainable finance decisions to AI poses serious risks, and new principles and rules for AI and ESG investing are necessary to mitigate these risks. This chapter highlights the challenges associated with norm-setting initiatives and stresses the need for the fine-tuning of the principles of legitimacy, oversight and verification, transparency, and explainability. Finally, the chapter contends that integrating AI into ESG non-financial reporting necessitates a heightened sense of responsibility and the establishment of fundamental guiding principles within the spheres of AI and ESG investing.