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AI-POWERED ESG: OUR CHANCE TO MAKE A REAL DIFFERENCE?

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In this article – originally written as part of the ESCP Business School’s “Better Business: Creating Sustainable Value” series, Professor Terence Tse from ESCP Business School discusses how the power of AI can lead to efficient extraction and interpretation of ESG-related data, and how making such data available in a timely fashion can give more credibility to and empower the various ESG indices to monitor and track companies better.

It is perhaps understandable as to why some people are skeptical about artificial intelligence (AI). First, media and research reports often illustrate how machines will be taking over our jobs, resulting in the elimination of the work positions currently held by many. Second, in many instances, AI remains a “blackbox”. Typically, in machine learning, we can only see the inputs and outputs but are clueless on how those inputs are being combined to reach the results. Put differently, machines turn the input into output in ways that are completely unobservable to us. Applying blackbox algorithms in various aspects of public lives such as justice will have deep social and ethical ramifications. The development of machine learning technologies is charging full steam ahead. Yet, the methods for monitoring and troubleshooting them are lagging behind.

Third, it appears that some companies, especially the technology giants, have doubled down on AI to increase their profitability, often at the expense of public interest. For example, Google is arguably extracting a staggering amount of data on users’ private lives. The company then uses such data to attain accurate predictions of future human behaviour, which can subsequently be sold to markets of business customers. Another (better known) example is how Facebook deployed AI through Cambridge Analytica to influence voters, hence interfering with the democratic processes.

Tech for good

Yet, we should not forget that AI can also create common benefits. There is no shortage of conversations on how companies can use technologies not just to do good but also to do well. For example, there is an increasing number of discussions on using AI to help reach circular economy goals. Yet, the progress for technology-driven pursuit of sustainability remains slow. One reason for such sluggishness is that there remains a lack of economic incentive for companies – and their investors – to make huge investments concerning social and environmental gains and benefits. This also provides an explanation as to why, despite years of discussions on the importance of the so-called “triple bottom line” – the need to care for not just profit but also people and the planet – has hardly become a mainstream practice among today’s businesses. Indeed, at the same time, there is an increasing number of socially and environmentally conscious investors.

Looking at it from this vantage point, two lessons are clear. The first is that unless investors are getting the satisfactory return, it will be difficult to get businesses to orientate themselves towards goals related to people and the planet. The second is that investors need to have timely and accurate information to make informed decisions. In this respect, AI presents a welcome and potentially extremely beneficial tool to help the latest idea in sustainability: environmental, social and governance (ESG).

A socially important asset class

Investments in ESG have fast become an important area of interest. One study points out that sustainable investments amounted to some $30 trillion in 2018, up by 34 percent from 2016. Indeed, investors (and our societies in general) are increasingly keen to understand whether and by what means businesses are being ESG-compliant. Simultaneously, boards and managements have become cognizant that ESG is crucial to the long-term survival of their companies. It is therefore unsurprising that as much as 90 percent of investors globally are estimated already to have in place, or to have plans to develop, specific ESG investment policies. To guide the selection of such investments, several ESG-based rating and index services such as MSCI, Bloomberg and Sustainalytics have proliferated in recent years.

BooHoo and ESG

Unfortunately, ESG investments are often easier said than done. Consider the example of the UK-based company, Boohoo. In June 2020, this pioneer of the ultra-fast-fashion retail phenomenon announced a £150m planned executive bonus. In 2019, the retailer waxed eloquent in its 2019 company report about its “zero-tolerance approach to modern slavery”. Yet, shortly after, the company was discovered to be sourcing from a factory in Leicester in which workers were being paid as little as £3.50 an hour (compared to the National Living Wage of £8.72). Just as bad was the fact that workers were not provided with proper protective equipment against Covid-19.

Yet, despite these malpractices, Boohoo had received a double A ESG rating from MSCI — its second-highest ranking — while being awarded a far-above industry average score on supply-chain labour standards in its ESG ranking. MSCI is not alone in ranking the fashion retailer highly, however. A review of nine other different ratings placed Boohoo in the top 25th percentile of more than 19,000 companies considered worldwide.

Ratings shortcomings

How could the rating companies have got it so wrong? The answer: information asymmetry. It appears that all parties involved face different challenges when obtaining and quality of information. To begin with, rating producers and indices deploy their own proprietary methodologies and data to analyse companies. The result of them using different ESG definitions, measurements and weightings for different indicators often lead to conclusions and verdicts that can be distinctly different from one index to another. Furthermore, they rely heavily on information provided by the companies being rated, essentially allowing the latter to feed only favorable data, potentially creating huge biases.

This, in turn, poses problems for the investors. First, without standardization across ratings, it is difficult for investors to compare across the indices created by different providers. Second, the fact that interpretation of data by rating companies can be vastly different, often leaving investors struggle to determine which rating or score would meet their own investment criteria or goals. Another key problem the investors face is that they rely on the rating and index producers to capture the latest information and news and to incorporate them into their ratings.

For the rated companies, even though they can select the information to be submitted, they often suffer from other problems. For example, as the rating criteria and dimensions are determined by the index producers, the companies that are keen to be seen as ESG-compliant are frequently left wondering how to improve their own ratings. There is also uncertainty over whether investors have enough information to recognize other positive – and negative – factors related to their competitors which are unaccounted for in the ratings.

In short, the problems emerge from a lack of clarity, consistency, and transparency of ESG ratings as well as information asymmetry and shortage.

AI to power ESG

One potential means of mitigating these issues is to consistently collect qualitative information quickly in order to reinforce the quantitative data already in use. Up-to-date qualitative data has the ability to not only help investors and rating producers to be much better informed but also such data can also be used to set up key inputs that could be used as the basis to form common minimum standards.

This is by no means merely a theoretical argument – a new and major initiative is underway in Asia to fashion AI into a tool to collect and process qualitative data. The AI-powered solution seeks to help stakeholders mine the vast amounts of qualitative, unstructured data through automation. Until now, gathering and gleaning insights from social media, daily local news, and freshly available reports has been a slow and labour-intensive activity, fraught with inaccurate results.

AI technology is a potential game-changer as it can act as a scalable solution that allows for speedy unearthing, collection and handling of vital information. Algorithm-driven systems can easily and effectively crawl the worldwide web and scrape unstructured data on companies from a range of sources. Subsequently, they can also swiftly parse and convert the excavated data into usable structured ones. This, in turn, allows for curated output that is valuable for all parties involved, thereby drastically mitigating the information asymmetry problem. In addition, using natural language processing technologies to perform analyses that capture sentimental, contextual and semantic factors embedded in the collected data, it will be possible to discern the tone of the information provided. Such analytical algorithms could be trained to go through a certain type of conversation and identify the tone by comparing the words used to a reference set of existing information.

Something for everyone

The benefits can be huge for all the parties in question. Investors can hence better comply with ESG requirements and make more informed decisions by incorporating ESG data into their investment strategies, for example by implementing negative/positive screening. On the other hand, rating producers are in a better position to identify and control ESG related issues and risks such as improving their company operations and supply chain due diligence. As for the rating and index providers, real-time signals can offer early warnings and timely indicators, enabling them to produce more accurate updates. Furthermore, these providers can expand the scope of analysis using AI-derived information to complement their current quantitative methods.

A chance to make a difference?

While the use of AI to drive ESG is still in its nascent stage and the results of the ongoing efforts in Asia remain to be seen, history is filled with examples of how technologies have helped attain social goals and create a better society. It is very much hoped that by investor empowerment, particularly those who are ESG-orientated, it will be possible for ESG to be a well-respected and common business practice instead of just another fad or slogan advocating sustainability. Just as with fire, AI can be a bad master but a very good servant. Using AI in the right way can no doubt help with our endeavor to raise ethical standards.

 

Business

HOW CAN BUSINESSES BREAK INTO MARKETS BEYOND THE EU?

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HOW CAN BUSINESSES BREAK INTO MARKETS BEYOND THE EU?

Atul Bhakta, CEO of One World Express

 

The build-up and aftermath of Brexit impeded the long-term plans of businesses both in the UK, and of EU businesses trading to the UK. The heavily protracted negotiations induced a culture of uncertainty in business, with few able to adequately prepare for all the future trading landscapes left on the table.

Once a deal was struck, with just one week before the Brexit deadline of 31st January 2020, organisations were then left scrambling to improvise new processes to translate their operations to the new systems and avoid spiralling costs, shipping delays, and various other disruptions.

As a result, businesses both here and in the EU saw a substantial trading slowdown in the months following Brexit, with new rules on customs checks, lengthy tailbacks at ports, denser and knottier administrative rules and new limitations on visas for the workforce all contributing to a tense trading relationship.

Indeed, the Office of National Statistics (ONS) figures revealed a precipitous drop in trading immediately after Brexit, with UK exports to the continent plummeting 40.7% year on year to January 2021.

This is a striking decline, given the historically close economic and cultural ties between the UK and EU. Inevitably, this caused a lull in long-term confidence amongst UK businesses. Indeed, a previous study conducted by One World Express in January 2021 found that 25% of UK companies doubted that they would last until the end of the year.

Atul Bhakta

Of course, Brexit is even now not a finalised issue – it will shift and evolve in significance and relevance as time passes and economies reshape; but the loss of confidence for businesses in UK-EU trade has been a tangible impact within the first year.

Accordingly, some organisations have begun exploring the scope for expansion into territories beyond the EU.

 

New opportunities attracting attention

As noted, the UK’s trade with the EU saw a sharp decline immediately following the formalisation of Brexit. While this decline has recovered steadily over the year, there has been an equally impressive parallel forming, as non-EU trade has remained mostly stable throughout.

Of course, UK imports from global markets have always remained at high levels, and when considering business growth and the economy as a whole, outward trade holds a heightened significance. On the export side of matters, ONS figures suggest that UK exports outside of the EU increased by 1.7% year-on-year to January 2021.

While a very modest increase, such figures indicate that international expansion could carry promise for business leaders, and hint at potentially lucrative opportunities within non-EU markets.

As 2021 progressed, it became evident that UK businesses’ appetite to explore opportunities further afield had grown. To take in the views of decision-makers, One World Express commissioned an independent survey of 752 business leaders in the UK, finding that 61% were either already operating abroad in some capacity, or had plans to expand into new territories over the coming year. More than six in ten (62%) reported Brexit as a key motivator in their decision to diversify beyond trading with the EU.

There was also some evidence that these plans were not solely in pursuit of the gains of modest uplifts in trade with non-EU countries. The survey found that more than two thirds (68%) of exporters had observed increased overseas demand for their products in the previous year, while 63% felt that markets outside of the EU were more willing to pay a premium for British-made goods.

The role of ‘Brand UK’ is significant here. For many years, products made in the UK have benefitted from the country’s reputation for high quality production and excellent service, which has driven a consistent rise in demand as emerging markets with high levels of consumer spending, such as India or China. In turn, UK businesses have found it easier than most to gain a foothold in new markets. Indeed, the majority (67%) of exporters reported their British brand had enhanced the reputation and demand for their goods and services when targeting international consumers.

Despite this innate – and highly welcome – competitive advantage, there are a number of factors UK firms must consider before diving in to unfamiliar markets.

 

The importance of planning

Many would be surprised to learn that a large number of businesses look to enter new markets with minimal planning in place. Notably, almost one third (32%) of exporters do not have such a strategy in place, which is likely to hamper the growth of British businesses abroad if left unaddressed. A crucial starting point for any international expansion plan lies in the research and relationship building.

Ascertaining the consumer preferences and audience behaviours in target markets, and forging appropriate connections with distributors, vendors, and ecommerce platforms, will allow firms to access consumers more easily, and in greater numbers, than marketing from scratch in unfamiliar territory. Encouragingly, according to One World Express’ research, 72% of exporters already include this in their plans.

UK organisations must also recognise the value of a robust and flexible logistics strategy. When products are being shipped to the furthest corners of the globe, there is a degree of risk if the finer details are not handled correctly. Delayed, missing, or damaged deliveries will erode consumer trust, and diminish the prospects of companies before they get off the ground. Accordingly, companies should ensure they have a transparent tracking system and efficient and user-friendly returns process. Investment in adopting the right software solutions to manage the shipping will create a streamlined and cost-effective process, affording firms the best chance at success.

Naturally, the EU will always be one of the UK’s most critical trading partners. However, as the dust settles on Brexit and the pandemic recedes into memory, the next few years present an interesting crossroads for the international prospects of UK businesses. With a tranche of new free trade agreements arriving in the near future, and international demand for Brand UK going from strength to strength, the scope for expansion into unfamiliar markets is growing apace. Provided business leaders get the finer details right, the rewards for bold investment in expansion could help charge a boom in the UK exports sector.

 

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WHAT FIREFIGHTERS CAN TEACH FINANCIAL INSTITUTIONS ABOUT DATA COLLABORATION

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Gabriele Albarosa, CEO, LiveDataset

 

Digital transformation can be difficult for any business, but in the financial services industry it can prove especially tricky. Replacing manual data processes is a big step, but in an industry so heavily regulated and audited, cohesive and comprehensive transformation is crucial.

Today, the challenge is no longer in convincing financial services organisations that they need to transform their processes and tasks; the vast majority understand the benefits of automating and streamlining their financial processes.

Instead, it’s about instilling the message that there is more to transformation than ripping out and replacing outdated technologies. A good financial transformation strategy must also take into account how these technologies are implemented, ensuring they integrate into an organisation’s culture, connect data and guarantee compliance, without completely demolishing the custom processes that employees want to use.

 

Little Fires Everywhere

While business transformation offers long-term benefits throughout an organisation, individual departments are often loathe to abandon the bespoke processes that facilitate day-to-day operations. Many organisations feel under pressure to transform quickly, and subsequently focus on how to get their employees onboard with a new solution rather than integrating every minute component of the old.

As a result, digital transformation efforts tend to bypass these disparate components, leaving small, potentially non-compliant hazards smouldering like little fires across an organisation.

These “little fires” don’t immediately represent a threat to business operations, but the lack of quality control, integration, and visibility of these manual workflows, means they’re inherently high-risk.

When a pressure situation hits the organisation, like a surprise audit, legal proceedings or new reporting demands, these processes become a highly combustible cocktail for non-compliance, lost data and human error.

 

Tackling the flames

Organisations need to tackle these little fires early on, rather than sitting back and hoping they will burn themselves out. But how can they be dealt with?

If you think of these small, unregistered processes as little fires, then your team needs to think like a firefighter — being fast, agile, flexible, and well-prepared for potential risks.

So how can CFOs, CXOs and Chief Transformation Officers bring this strategy to life?

 

  1. Be fast — don’t wait around for largescale digital transformation

There’s a common misconception amongst financial service organisations that before facing the issue, you need to wait until an overhaul of department processes or an in-depth audit. This could leave you waiting years for a solution that needs to be implemented in weeks, putting your department at risk.

Organisations must act with speed and address the issue head-on as soon as it has been spotted. Businesses don’t need to wait for largescale transformation; temporary or even permanent solutions do exist and can be tailored and installed immediately — targeting the issue before it becomes a bigger problem.

In my own business, we recommend a three 3-step approach to tackle these issue quickly: First, listening to an organisation’s business challenges to locate the most pressing fire. Second, build a working example for business leaders and decision-makers to evaluate. Finally, follow up with real-time collaboration to ensure that wider company processes don’t cause similar problems in future.

 

  1. Be agile and flexible — look for customisable solution that evolve over time

Organisations are ever-evolving, and so are the problems they face. However, some financial services organisations see the answer to these problems as a one-time, short-term fix. Working to put out these fires at speed shouldn’t stop organisations from considering how to prevent and deal with future ones. That’s why businesses run fire drills!

Financial organisations need forward-thinking systems that will work now and in the future, whenever they face their next data collaboration crisis. The ability to act in an agile way is fundamental to this sort of futureproofing.

Agile, flexible solutions will enable organisations to fight multiple fires, with the same systems, as time goes on. A one-size-fits-all approach won’t work here. Putting one fire to rest won’t prevent more from happening, and not all fires are the same (just try throwing water on a chip pan fire!) Every organisation has distinct needs and that means customised solutions.

 

  1. Be prepared — implement solutions before disruption occurs

To understand their weakness and subsequently prevent fires, financial service organisations must encourage employees across departments to hold an ethos of self-improvement. Preparation is key to success.

That means establishing a comprehensive understanding of the day-to-day routines of employees at all levels. It’s in habit and routine (one-off processes, keeping data on email, spreadsheets as systems, etc) where financial fire hazards thrive.

If new, more compliant technologies are to be installed, they cannot dismantle these existing routines. Flexible data collaboration solutions are needed that perfectly match the existing way of working. Achieving the goals of transformation without any of the disruption.

 

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