Empowering sustainable finance with artificial intelligence: a framework for responsible implementation

Abstract

The global economy and societies around the world are facing a once-in-a-lifetime situation, as two major developments are underway and becoming collinear. On the one hand, financial markets are rapidly entering the era of environmental, social, and governance (ESG) investing. Market participants predict that investors’ demand for more diverse instruments, such as green and ESG-linked loans, will increase in the coming years.1 On the other hand, the artificial intelligence (AI) industry is experiencing close to exponential growth, and the impact of this new technology on business and society has already become visible. Indeed, the estimated value of the global AI market was $387.45 billion in 2022, and it is projected to reach $1,394.30 billion in 2029, with a compound annual growth rate of 20.1 per cent in this period.2

The aim of this chapter is to examine how these two processes – the rise of ESG investing (Section II) and the ascendance of AI technological innovation (Section III) – could be aligned and which risks and opportunities would emerge from this alignment. We argue that AI can help markets identify and price climate risks as well as set more ambitious ESG goals, yet there are serious risks in delegating sustainable finance p. 24 decisions to AI. We further argue that developing new principles and rules for AI and ESG investing is necessary but prone to ambiguities and practical obstacles that could undermine norm-setting initiatives (Section IV). We conclude that implementing changes such as the use of AI in non-financial reporting requires a new sense of responsibility and the fine-tuning of the principles of legitimacy, oversight and verification, transparency, and explainability, along with international coordination in the context of AI and ESG investing (Section V).