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The Role of AI in Sustainable Investing and ESG Integration

The Future of Sustainable Investing: Harnessing AI for ESG Integration and Decision-Making

The role of artificial intelligence (AI) in various industries has grown exponentially in recent years, and the world of sustainable investing is no exception. As the demand for responsible and sustainable investments continues to rise, the integration of environmental, social, and governance (ESG) factors into investment decision-making has become increasingly important. In this context, AI has emerged as a powerful tool to help investors identify and analyze ESG risks and opportunities, ultimately leading to more informed and responsible investment decisions.

One of the main challenges in sustainable investing is the sheer volume of data that needs to be analyzed to make informed decisions. ESG data can be both quantitative and qualitative, and often comes from a wide range of sources, including company reports, government databases, and third-party research. This complexity can make it difficult for investors to identify the most relevant and reliable information, and to assess the potential impact of ESG factors on a company’s financial performance.

This is where AI comes in. By leveraging machine learning algorithms and natural language processing techniques, AI can help investors process vast amounts of data more efficiently and accurately than ever before. This enables them to identify patterns and trends that may not be immediately apparent, and to make more informed decisions about which companies are best positioned to succeed in a rapidly changing world.

One area where AI has proven particularly useful is in the analysis of unstructured data, such as news articles, social media posts, and company reports. By automatically scanning and analyzing this information, AI can help investors identify potential ESG risks and opportunities that may not be captured by traditional financial metrics. For example, AI can help flag potential controversies related to labor practices or environmental issues, allowing investors to take a more proactive approach to managing these risks.

In addition to helping investors make better-informed decisions, AI can also play a role in driving greater transparency and standardization in the ESG space. As more companies recognize the importance of ESG factors to their long-term success, there has been a growing push for greater disclosure and reporting on these issues. However, the lack of standardized reporting frameworks and metrics can make it difficult for investors to compare companies on an apples-to-apples basis.

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Leaders in responsible investment call for clearer standards in Japan

19 June 2023, Tokyo — Today, the Principles for Responsible Investment (PRI), the United Nations Environment Programme Finance Initiative (UNEP FI) and the Generation Foundation released the Japan Legal Framework for Impact Policy report.

The report outlines how Japanese investment law permits—and in many cases requires—investors to pursue sustainability impacts when those impacts are financially material.

However, this is not well understood by investors due, in part, to the lack of clarity in Japanese regulation.

Japanese investors are unclear on the extent to which they are permitted or required to invest for sustainability impact – that is, use the tools and resources at their disposal (such as asset allocation and stewardship) to intentionally pursue sustainability outcomes.

This lack of clarity and understanding in Japan is hindering climate finance, potentially discouraging investors from taking action.

Updating rules, standards and guidance

The report recommends existing rules, standards and guidance in Japan be updated so that investors can better understand their duties in pursuing sustainability impact goals.

“Japan has seen strong support for sustainable finance from the private sector alongside policy makers and regulators, but many investors are still unclear on how best to leverage opportunities,” said David Atkin, CEO at the Principles for Responsible Investment.

“Japan can assume stronger leadership in the area of responsible investment by providing investors with legal clarity and enabling policies. Doing so can also help empower investors to support national sustainability goals as well as the economic transition required across Asia.

“This report provides a roadmap for immediate policy steps to enable Japanese investors to consider sustainability issues, contribute to positive sustainability impacts, and protect long term returns from the threat of system-level risks.”

Grace Eddy, Director of the Generation Foundation, commented: “Analysis in ‘A Legal Framework for Impact’ shows that mainstream investors generally need to consider the impact of sustainability factors on their financial goals and take action as a result.

“Japanese investors have established themselves as global leaders and innovators in sustainable finance, but many are still unaware of the extent of their duties with regard to impact.

“Today’s report describes how regulators and policymakers in Japan can ensure investors have the clarity and guidance needed to take action and manage systemic sustainability risks to their investments and take advantage of opportunities more effectively.”

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‘Unheard of’ marine heatwave off UK and Irish coasts poses serious threat

Sustained high temperatures over summer could trigger mass mortality of fish and oysters, say scientists

An “unheard of” marine heatwave off the coasts of the UK and Ireland poses a serious threat to species, scientists have warned.

Sea temperatures, particularly off the north-east coast of England and the west of Ireland, are several degrees above normal, smashing records for late spring and early summer. The North Sea and north Atlantic are experiencing higher temperatures, data shows.

The Met Office said global sea surface temperatures in April and May reached an all-time high for those months, according to records dating to 1850, with June also on course to hit record heat levels.

The US National Oceanic and Atmospheric Administration has categorised parts of the North Sea as being in a category four marine heatwave, which is considered “extreme”, with areas off the coast of England up to 5C above what is usual.

The Met Office says temperatures are likely to remain high because of the emerging El Niño weather phenomenon.

Daniela Schmidt, a professor of earth sciences at the University of Bristol, said: “The extreme and unprecedented temperatures show the power of the combination of human-induced warming and natural climate variability like El Niño.

“While marine heatwaves are found in warmer seas like the Mediterranean, such anomalous temperatures in this part of the north Atlantic are unheard of. They have been linked to less dust from the Sahara but also the North Atlantic climate variability, which will need further understanding to unravel.

“Heat, like on land, stresses marine organisms. In other parts of the world, we have seen several mass mortalities of marine plants and animals caused by ocean heatwave which have caused hundreds of millions of pounds of losses, in fisheries income, carbon storage, cultural values and habitat loss. As long as we are not dramatically cutting emissions, these heatwaves will continue to destroy our ecosystems. But as this is happening below the surface of the ocean, it will go unnoticed.”

Dr Dan Smale from the Marine Biological Association has been working on marine heatwaves for more than a decade and was surprised by the temperatures.

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Aavishkaar ESG first fund invests in Hela Apparel Holdings PLC with $5mln loan to support African operations

This is the second investment from Aavishkaar Capital’s $250mln “ESG First Fund”

Nairobi: Aavishkaar Capital (Aavishkaar), an Aavishkaar Group company and a global pioneer in taking an entrepreneurship-based approach to scaling businesses for impact, in partnership with KfW, a German state-owned investment and development bank, announced their second investment from the ESG First Fund in the form of a USD 5Mn loan to Hela Apparel Holdings PLC to fund their Africa growth strategy. The investment is a part of Hela’s larger debt funding round involving a leading development financial institution and signals the company’s long-term commitment to manufacturing in Africa.

The ESG First Fund is a USD 250 Mn fund focused on investing in Africa and Asia with a mandate to generate superior Environmental and Social Governance (ESG) outcomes, with commercial and financial returns alongside positive social impact. The fund's first investment was in INI Farms, a leading exporter of fruits and vegetables with large-scale pan-India operations spanning contract farming, aggregation, supply chain management and retail.

Hela Apparel Holdings PLC provides sustainability-focused apparel supply chain solutions to some of the world’s leading apparel brands. The company works closely with global retailers, from design to delivery in the intimate wear, active wear and kids wear product categories. With 10 manufacturing facilities across Sri Lanka, Kenya, Ethiopia and Egypt, and a workforce of 20,000 across the globe, Hela leads the industry in ethical and sustainable working environments.

"Hela was one the first major multinational apparel manufacturers to enter the African region in 2016, starting with just 250 employees in Kenya. We have since rapidly expanded our footprint and today employ approximately 10,000 people on the continent. This investment by ESG First Fund will help us to continue this fruitful journey, particularly by supporting the expansion of our Egyptian manufacturing facility to its full scale. It is also another important example of the strategic partnerships we are forging with stakeholders who share our vision for Africa as a global manufacturing hub and we look forward to strengthening the relationship with Aavishkaar over the years to come.” said, A R Rasiah, Chairman of Hela Apparel Holdings PLC.

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Australia’s transition away from fossil fuels ‘not fast enough’ as wind and solar investment lags

Australian Energy Market Operator head Daniel Westerman says two-thirds of electricity capacity could leave grid by 2030

Australia’s transition away from fossil fuels is not proceeding fast enough with too few investments in wind and solar farms, according to the head of the Australian Energy Market Operator.

Daniel Westerman, in a speech on Tuesday, will also argue that delays in transmission construction have left the grid vulnerable to the sudden exit of coal-fired power stations.

Westerman says coal plants supply about 60% of the country’s electricity needs but as much as two-thirds of the capacity could leave the grid by 2030.

Renewable energy backed by storage was the cheapest form of new capacity, and there was “a strong pipeline” of proposed new wind and solar plants totalling more than 200 gigawatts of capacity, the Aemo boss will tell the Australian Energy Week 2023 conference. However, whether they would actually be built remained uncertain.

“This investment is not happening fast enough” for what was “the biggest energy system transformation since the introduction of electricity itself”, Westerman says in his written speech.

“Bringing these new projects to market and connecting them into the grid urgently is critical to ensure consumers continue to have reliable power when they need it.”

Westerman’s comments echo those of industry groups, such as the Clean Energy Council, which have warned that the influx of new renewables is faltering and could fall far short of the speed required to meet energy demand and the need to reduce emissions from the power sector. Electricity generation is the country’s largest source of carbon pollution.

States such as New South Wales have recently announced that their plans to accelerate away from fossil fuels are running behind schedule. Snowy Hydro’s giant 2.0 pumped hydro project, the largest energy project in the country, is also years late and facing much higher costs than originally predicted.

Westerman noted that were no new financial commitments on large-scale renewable energy generation signed in the first quarter of 2023. Only a single storage plant secured investment support.

“One quarter doesn’t make a trend, but investment decisions are an important leading indicator for our energy transition,” he said.

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Anti-ESG Might be Over Before it Even Got Going

So-called 'anti-ESG' fund flows peaked in Q3 2022 in the US, and one strategy even filed to liquidate. Does that mean anti-ESG is unsustainable?

Criticism of sustainable investing has become very politicised over the past year. To understand the timeline and its magnitude, in a recent study we took a look at the funds (Morningstar counts 26) that have picked up the anti-ESG banner. Although there’s been a lot of talk about anti-ESG funds, it’s not clear that they have staying power.

What’s an 'Anti-ESG' Fund?

Generally, 'anti-ESG' funds take an opposite tack to sustainable investing and its sibling, environmental, social, and governance (ESG) investing. We took a broad approach to defining the group of funds included in this report, but some of the fund companies included may not think they are opponents of ESG. Some anti-ESG advocates were likely excluded.

We grouped these funds into five mutually exclusive categories, primarily by referencing prospectus language, which mirrors the process we follow to establish Morningstar’s sustainable funds universe. For the occasional borderline case, we consulted proxy-voting policies and marketing materials. The categories are "Anti-ESG", "Political", "Renouncer", "Vice", and "Voter".

Anti-ESG investments differ, so the lines between the five anti-ESG categories can be blurred. In many cases, it is unclear whether a fund qualifies as a plain-vanilla index fund, a niche thematic offering, an anti-ESG fund, or something else entirely.

Short-Term Track Record, Long-Term Sentiment

With the exception of two 'vice funds' – VanEck Gaming ETF BJK and USA Mutuals Vice Fund VICEX – anti-ESG funds have short track records. The chart below shows that the vast majority of these funds have cropped up within the past two years.

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