How AI will affect sustainability and ESG integration

The technology can contribute to higher energy efficiency in manufacturing, MUFG says

ChatGPT, the generative AI platform from OpenAI, has become popular because of its advanced conversational capabilities. Reuters

The rapid progress in artificial intelligence could help solve many of the world’s long-term sustainable challenges, while promoting environmental, social and governance integration.

AI can aid in circumventing the shortcomings with traditional ESG ratings, strengthening climate change modelling, and promoting social responsibility by fostering inclusiveness and fairness, Japan’s largest lender MUFG said in a new report.

ESG integration is where investors assess environmental, social and governance risks in addition to traditional financial metrics such as revenue and cost estimates to improve return on investment.

“We are witnessing the dawn of a new digital transformation dimension. We already see the concept of “prompt engineering” that provides AI with a baseline of well-thought-out precepts to direct it down a path to useful results,” said Hironori Kamezawa, president, and group chief executive of MUFG.

“The next step would be outsourcing a part of one’s cogitation processes to machines, which might lead in turn to even deeper human cogitation,” he added.

Globally, AI investments are projected to hit $200 billion by 2025 and could possibly have a bigger impact on gross domestic product, according to Goldman Sachs.

Generative AI has “enormous” economic potential and could boost global labour productivity by more than 1 percentage point annually during the decade following widespread usage, the investment bank has said.

MUFG said that AI capabilities can “optimise” the usage of energy storage and forecast fluctuations in renewable energy output.

The technology can also contribute to higher energy efficiency in manufacturing by providing greater visibility into supply chains while improving the management of inventory, the bank said.

However, the rapid adoption of AI has also raised concerns about its impact on certain jobs, and higher emissions.

“AI needs large computation power, which can lead to high energy consumption. While AI improves efficiencies, there is risk that the resulting demand growth could mean an increase in emissions,” the bank said.

AI can also create governance challenges, as the technology can either violate copyrights when it sources content or expose confidential information into the algorithm, MUFG added.

In a report on Wednesday, US research firm Gartner termed generative AI as overhyped and positioned it at the peak of “inflated expectations” for emerging technology in 2023, close behind AI-augmented software engineering and cloud-native technology.

The sensational technology is leading a trend centred around creating new opportunities for innovation, potentially delivering transformational benefits within the next two to 10 years, Gartner said in its latest Hype Cycle For Emerging Technologies report.

Most of the money invested in passively managed mutual funds that track ESG indexes fail to help fight climate change, according to a study by Germany’s Bundesbank and Geothe University.

“While ESG indices could potentially have a sustainability impact, most currently don’t meaningfully facilitate sustainability,” Bloomberg quoted the report as saying in June.

The world will remain in the “measurement phase” of the ESG journey over the next two to three years, marked by greater penetration, rising focus on product impact and increasing regulatory scrutiny, MUFG said.

“Yet, the explosive growth of AI tools will offer the space to pivot to the “refinement phase” of the ESG journey marked by a broad adoption of sustainable strategies,” the bank added.

The report references a 2020 study published in the journal 'Nature Communications' that found that AI can enable the accomplishment of 134 targets across the 17 UN Sustainable Development Goals (SDGs), while inhibiting 59 targets.

The report said that the lack of appropriate legislation for AI and other emerging technologies shows that neither governments nor individuals are able to follow the pace of advancements.

"We argue that it is essential to reverse this trend. A first step in this direction is to establish adequate policy and legislation frameworks, to help direct the vast potential of AI towards the highest benefit for individuals and the environment, as well as towards the achievement of the SDGs," the study said.

"Regulatory oversight should be preceded by regulatory insight, where policymakers have sufficient understanding of AI challenges to be able to formulate sound policy."

In 2015, all 193 member countries of the UN unanimously adopted a landmark set of development goals intended to galvanise and guide the world’s efforts to eradicate poverty, end hunger and address climate change by 2030.

The 17 sustainable development goals – also known as the Global Goals – are broken down into 169 specific targets that each country has committed to try to achieve voluntarily over the next 15 years.

The first goal is to end poverty – defined as living on less than US$1.25 (Dh4.60) per day.

Others include ensuring gender equality and quality education, access to clean water and sanitation, affordable clean energy, urgent steps to combat climate change, building new infrastructure and ensuring sustainable economic development.