Abstract
This chapter analyses the potential impact of Artificial Intelligence on the opportunities to measure ESG, and the climate in which regulations of ESG disclosures are being set. To date, while many ratings agencies provide estimates of overall corporate ESG scores, the scoring systems lack accuracy. Several problems with the current ESG rating approach are identified and the prospect of using Artificial Intelligence to resolve them is discussed. In concluding the chapter, the use of Artificial Intelligence to predict deficient sustainability reporting practices caused by behavioral issues relating to incentives to improper sustainability reporting is identified.
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Notes
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While there is no requirement, the SEC has issued guidance on climate change related disclosures. https://www.sec.gov/rules/interp/2010/33-9106.pdf; additionally, IFRS established the International Sustainability Standards Board ‘ISSB’ in November 2021, to promulgate ESG disclosure requirements with the same governance authority as IASB.
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If investors favor sustainable firms over less-sustainable firms, firms that are perceived to be sustainable will have lower costs of capital and greater access to liquid capital markets. These capital accessibility gains would in-turn lead to increased sustainable investing—improving social welfare and, in theory, further increasing their access to lower cost capital. Furthermore, as the costs of capital decline, these firms become more profitable on a risk-adjusted basis.
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Econometricians would refer to this as the problems of endogeneity or multicollinearity.
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Fluharty-Jaidee, J., Neidermeyer, P. (2023). Artificial Intelligence and Environmental, Social and Governmental Issues: A Current Perspective. In: Rana, T., Svanberg, J., Öhman, P., Lowe, A. (eds) Handbook of Big Data and Analytics in Accounting and Auditing. Springer, Singapore. https://doi.org/10.1007/978-981-19-4460-4_5
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