Assessing sustainable investments
In September 2015, the General Assembly of UN adopted the Sustainable Development Goals (SDGs), also called as Agenda 2030. The ability to mobilize, sequence and make effective use of a wide variety of both financing sources and financing instruments and strategies is crucial to the success of SDGs. Reporting is an important tool for transparency, but how can one extract useful information about SDG investments from thousands of documents? This project aims to explore how AI can be used to automate analysis of financial and sustainability reports.
Challenge 6: Assessing Sustainable Investments
The Sustainable Development Goals (SDGs) are a road map for a sustainable future and will be a fundamental driver for economic growth. To investors and asset managers, the SDGs represent investment opportunities and a framework for assessing sustainability risks. Through their investments and engagement with companies and NGOs on sustainability issues and by requesting reporting on the SDGs, investors and asset managers can contribute to the achievement of the SDGs.
At the heart of the investment process there is a need to effectively understand the past, current and likely future performance and position of a company or an NGO, as this forms the basis of the investment decision. For institutions and national governments, it is crucial to evaluate their own performence to be able to improve and if needed, redirect their future strategic investments.
This project aims to create a Web Platform through which standardized data sets from financial and sustainability reports can be processed into a database for further analysis and sustainability assessments, by using AI.
My name is Ermine and I'm an undergraduate student at Stockholm University, studying economics and statistics. I believe that both technological advancement and social innovations are crucial for the fulfillment of Agenda 2030.
What is financial reporting?
1. Financial reporting is the financial results of an organization that are released its stakeholders and the public. According to International Accounting Standard Board (IASB), the objective of financial reporting is “to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions.”
What is sustainability reporting?
A sustainability report is a report published by a company or organization about the economic, environmental and social impacts caused by its everyday activities. A sustainability report also presents the organization's values and governance model, and demonstrates the link between its strategy and its commitment to a sustainable global economy. Sustainability reporting can help organizations to measure, understand and communicate their economic, environmental, social and governance performance, and then set goals, and manage change more effectively. A sustainability report is the key platform for communicating sustainability performance and impacts – whether positive or negative.
What is integrated reporting?
The primary purpose of an integrated report is to explain to providers of financial capital how an organization creates value over time. An integrated report benefits all stakeholders interested in an organization’s ability to create value over time, including employees, customers, suppliers, business partners, local communities, legislators, regulators, and policy-makers. Integrated reporting incorporates appropriate material sustainability information equally alongside financial information and provides reporting organizations with a broad perspective on risk.
What is the problem?
AI, and its related technologies, provide opportunities to drive efficiencies and enhance effectiveness in assessing sustainable investments.
The current practice of sustainability reporting developed in the 1990s as civil-society groups, governments, and other constituencies called on companies to account for their impact on nature and on the communities where they operate. A milestone was passed in 2000, when the Global Reporting Initiative (GRI) published its first sustainability-reporting guidelines. The following year, the World Business Council for Sustainable Development and the World Resources Institute released the Greenhouse Gas Protocol. The same period also saw the creation of voluntary initiatives, such as the UN Global Compact and the Carbon Disclosure Project (now CDP), encouraging corporations to disclose information on sustainability.
AI can and is being used in document review to sort through large chunks of data and identify relevant pieces of that data (Sobowale, 2016). Many legal experts feel that document review is one area where cognitive computing technology can be implemented with great benefit. Top e-discovery providers are already using this strategy of AI-augmented, lawyer-supervised document review to provide the most efficient and cost-effective service for their clients. Techniques such as data mining and sentiment analysis can be used to identify key words, phrases or overall tone which might match with a specific characteristic and indicators (Kingsley, 2016).
A recent McKinsey survey shaws that stakeholders asks for increased disclosure about how companies address opportunities and risks related to sustainability trends, such as climate change and water scarcity, which can meaningfully affect a company’s assets, operations, and reputation. By aggregating data from many companies, stakeholders can not only discern patterns and trends in companies’ responses to sustainability issues but compare and rank businesses as well (McKinsey, 2019).
Räikönen, M., 2016, A framework for assessing the social and economic impact of sustainable investments, Vol. 7 pp. 79-86.
Burckart, W., 2018, Measuring effectiveness: Roadmap to Assessing System-level and SDG investing, The Investor Responsibility Research Center Institute (IRRC).
ITU, 2019, SDG Digital Investment Framework.
Financial Reporting Council (FRC), 2019, Artificial Intelligence and corporate reporting.
Dubos J. M., 2018, 6 Steps to an Effective Financial Statement Analysis, Association for Financial Professionals.
Sobowale J., 2016, How artificial intelligence is transforming the legal profession, https://www.abajournal.com/magazine/article/how_artificial_intelligence_is_transforming_the_legal_profession.
McKinsey, 2019, More than values: The value-based sustainability reporting that investors want, https://www.mckinsey.com/business-functions/sustainability/our-insights/more-than-values-the-value-based-sustainability-reporting-that-investors-want#
My ambition is to create a platform where investment data, initially from various companies and NGOs, can be collected and analysed by AI in order to create an overview of current sustainable investments, to assess these investments and through an well designed application, where these data can be illustrated, facilitate for investors to choose future investment targets, for governments and institutions to evaluate their performence and for companies and NGOs to improve their businesses.
By building IFRS and GRI standards into a dataprogram, we will be able to extract the structured data sets from financial and sustainability reports and process them into a database. This will not include all companies, but a big majority of them. It is important to integrate the data from financial reports and sustainability reports. Otherwise this concept will be useless for investors.
Every year billions of dollars are being invested in sustainable development. According to the 2016 Global Sustainable Investment Review, the total assets directed towards sustainable and responsible investment strategies globally amounted to $22.89 trillion in 2016, growing at a remarkable rate of 25% from 2014. More statistics can be finded in this article.
However, the data that describes the impact of these investments are very fragmented. There are different tools today for assessing single investments, but it is difficult to make any kind of comparisons and make conclusions without big data. The interest in sustainable development is fast growing both among individuals, organisations and companies. If we success to creat a tool that facilitates the assessment and comparision of different investments, we will be able to promote future investments with a potential to creat sustainable impact and contribute to effective resource use.
UN: because the challenge is provided by them.
GRI and IFRS: because I will promote their standards.
Investors: because the tool will facilitates for them to choose investment targets.
Companies: because the tool will help them to promote their business.
Governments: because they have committed to SDGs.
NGOs: because this tool will help them to allocate funding for the work they do.
People and our societies: because well invested resources will make our world a better place for everyone.
It is important to integrate financial and sustainability data to make the tool useful for investors. This tool will increase the overall transparency because the data in corporate reporting will be easily accessible and interpreted for everyone. But my ambition is not only to create a good statistics, but also make this statistics useful. In this project I will focus on IFRS and GRI Standards. If the tool successfully establishes, it will be possible to have dialogue with different stakeholders and to develop the tool to better meet their needs. It will also be possible to add other standards as well to make the tool more robust.
The tool will have 2 or 3 parts: a mobile application (and/or a Web Platform) connected to a database.
You start by creating a profile and choosing either company, investor, civil society organization or general user (eg. public, authorities that want have access to the statistics etc.). In your profile you choose your industry and describe basic information about your company, your organization or the kind of investment targets you are looking for.
If you are a company:
How will AI work?
If you are an investor:
If you are a civil society organization:
If you are a general user:
You will be able to see a general statistics over sustainability investments, the progress within a specific country or industry, you will be able to export this statistics if you need it.
In this application their will also be a guidline on how to use GRI Standards and Indicators. GRI has developed Integrating the SDGs into Corporate Reporting: A Practical Guide. This guide will be visualized in the application to help companies to create their reports and include relevant metrics.
(It would be a good idea to enable companies to report their data directly in this common platform instead of making a report, but I don't think that it would be possible to make it happen without international agreements to replace traditional reporting by digital reporting in a common platform).
It is possible to make this idea happen globally if we get support from GRI, IFRS, IIRC and UN Global Compact. These organizations can create a database together and automate the reporting process. It has not been done maybe because GRI's new standards that are measurable have been developed recently, maybe the knowledge about the potential of AI is still limited, maybe because they have not seen the value of integrating financial and sustainable performance of companies and facilitating for investors (especially GRI), or mayby they just have not thought the idea. This can also be developed together with the University of Geneva and promoted by these organizations. There is another tool, the link: SDG-tracker, developed together with Oxford University and the Global Change Data Lab. They do similar statistics that I want to do, but they collect their data from published research articles and official UN documents and make these data easily accessible and interpreted for everyone (the work they do is not automated). Maybe it is possible to collaborate with them and develop a common tool?
I believe that it would be easy to establish this tool in Sweden and then try to expand. I can do that as an individual (it would take longer time and require more efforts), or I can get in contact with our authorities. If we have a clear and feasible concept, then The Swedish Agency for Economic and Regional Growth can be interested in implementing the tool and making it accessible for everyone in Sweden. It should also be possible to collaborate with a swedish organization called SweSif that is our forum for sustainable investments. Today, they collect sustainability data manually to be able to turn it into statistics.
I bealive also that there should be companies willing to invest in this idea.
The international organizations such as UN, OECD, GRI, IFRS etc. But they have no common automated system for reporting. They have standards, guidlines and frameworks that the companies follow, but they have no tool to collect all data in one place and make it useful.
In Sweden we have The Swedish Agency for Economic and Regional Growth and Swedish International Development Cooperation Agency (SIDA). Since 2018, it is law in Sweden to follow IFRS Standards, all public companies and the majority of private companies follow the GRI Standards, but there is no platform where all this data can be collected.
SweSif is a forum for sustainable investments and they do a lot of statistics but manually.
PositionGreen is a company in Sweden that has built sustainability standards such as GRI into a dataprogram and enables companies to create their sustainability reports through this platform, by reporting their data directly in the platform. This is a good idea, but they don't have a tool for comparisions between companies and they don't integrate the financial reports. This platform is not useful for investors and they don't work with statistics and analysis, they just help companies to create their reports (today they have 100+ customers).
I provide the idea, but I'm not an expert.
To make this happen:
It would be great if someone from GRI and/or PRI could evaluate the potential of this approach.
Step 1: I will make a short film (2-3 min) where I describe my idea. This film together with a short survey will be sent to several companies and investor organizations to ask their opinion. My ambition is to understand what different stakeholders think about the idea before investing money in this project.
Step 2: I will apply for grants to be able to finance the entire development of the tool.
Step 3: When the tool is developed, I will send a formal invitation to companies, investor organizations, civil society organizations to create a profile and I will ask them to promote the tool. I will also get in contact with relevant agencies in Sweden and even SwiSef organization and ask them to promote the tool.
Step 4: I will apply for an internship at UN Global Compact and if successfuly admitted I will tell them about the tool and I will ask them to promote the tool among companies they are collaborating with.
The main cost of this tool is its development and it will be very expensive. I have already called a company that develops this kind of applications and can even design the database, just to understand how much it could cost. I described the features of the tool for them and this company estimated that the cost could be about 60.000 euro. But once the tool is developed, the only cost that will remain will be for maintaining the database and it can be about 100-200 euro per month in the begining, but when the database grows even the costs will increase a bit.
I will start an organization and then I will apply for technology and innovations grants. There are a lot of grants apportunities (eg https://www.techfunding.eu/). My ambition is to make this tool as accessible as possible for as many people as possible. Therefore it will be free of charge if you are a non for profit organization, if you are just interested in general statistics or maybe you just want to see the data for a specific company. But if you want to make analysis and comparisons, or if you are a company and you want to upload your reports for further analysis, then you will have to pay a little fee. Maybe 50 euro per year for those who want to subscribe to be able to make analysis and comparisons and 20 euro for each uploaded document for companies. These fees will cover the ongoing costs of the tool, the further development of the tool and the eventual profit will be invested in a fund to suport social entrepreneurship.
It would be a geate risk for me to take loan from a bank. Therefore I will apply for grants instead of taking loan. The only risk is that you invest a lot of money in this project and no one wants to use the tool. But I believe that this risk is minimal. Companies make reports to be able to present their businesses for different stakeholders. This will be a very easy and cool way to bring all stakeholders together and promote sustainable investing.
It is highely relevant to assess not only companies' financial and sustaiability performance but also those of NGOs, governments and institutions. But because I have limited time to develop this project, I will mainly focus on analysis of corporate reporting. However, even civil society organizations will be taken into consideration.
To be able to automate analysis of financial and sustainability reports we will either need to extract already structured data from these documents or to structure the unstructured data. Traditional financial reports are highely structured but there are different formats for reporting which complicates the task a bit. This project will therefore limit to IFRS Standards for financial reporting that are used by the majority of companies. In Sweden, all companies have to follow IFRS Standards according to our law. For sustainability reporting, GRI Standards are the ones best established and widely used by companies and organizations. In Sweden, all public companies and the majority of private companies who report on sustainability use GRI Standards.
If successfully established, it will be possible to add other standards as well to this tool.
International Financial Reporting Standards, commonly called IFRS, are accounting standards issued by the IFRS Foundation and the Intenational Accounting Standards Board (IASB). They constitute a standardised way of describing the company’s financial performance so that company financial statements are understandable and comparable across international boundaries. More information: https://www.ifrs.org/about-us/
The GRI Standards are the first global standards for sustainability reporting. They feature a modular, interrelated structure, and represent the global best practice for reporting on a range of economic, environmental and social impacts. More information: https://www.globalreporting.org/information/about-gri/Pages/default.aspx
GRI-data, reported by companies, has usually not been useful for investment decision making. Investors are typically interested in the disclosure of information that is currently financially material. 2017 GRI and UN Global Compact had a meeting with investors in Stockholm. The discussion highlighted bottlenecks in sustainable investment and what should be done to resolve them. The outcomes of this discussion have been formalized in the Stockholm Declaration. One of the prime outcomes of the meeting was that corporate reporting on SDGs needs to be current, comparable, coherent, and concise. Since investors often rely on data analysis in their decision making, it is vital that companies provide information on environmental, social, and governance (ESG) factors in a uniform manner. That was a bottleneck restricting sustainable investment strategies.
The UN Global Compact and GRI have, in accordance with Stockholm declaration, formed the new "Business Reporting on the SDGs" that will complement the GRI Standards and enable measuring and reporting on the SDGs. They have developed a list of indicators to make reporting on the SDGs straightforward and simple to execute.
These indicators can be build in my proposed database and automate the analysis. Farthermore, by visualizing the implementation guide: Integrating the SDGs into Corporate Reporting: A Practical Guide in the application we will help companies to create their reports in a proper manner. It is much more difficult to read and understand a document than to see the visualization of that document in a simple and practical way. Please, see this short film: Corporate reporting on the SDG:s
IFRS and financial reports
The concept of financial analysis is based on two types of analysis: Ratio Financial Analysis and Quantitative Analysis. Analysis generally means diagnosing a situation and highlighting weaknesses or strengths. The concept of analysis using ratios is based on the definition of the ratio, where (%) means "the relationship between two variables or two items that share common characteristics or a similar situation". If the analysis is based on ratios, it is intended to establish relationships between two accounting variables that have common relationships or characteristics to study a particular case.
Quantitative analysis is the process of collecting and evaluating measurable and verifiable data such as revenues, market share, and wages in order to understand the behavior and performance of a business. A quantitative analyst’s main task is to present a given hypothetical situation in terms of numerical values. Quantitative analysis helps in evaluating performance, assessing financial instruments, and making predictions. It encompasses three main techniques of measuring data: regression analysis, linear programming, and data mining.
All these calculations can be automated. Please, see here