The desire to eliminate investment based on environmental, social, and governance (ESG) principles exists at one end of the spectrum, while urgent calls for the sustainability movement to speed up are at the other end. However, there is a consensus that current methods of measuring the effectiveness of ESG efforts are often inconsistent and unreliable. The transition towards a net-zero future is imminent, with hundreds of firms representing $130 trillion of assets under management now part of the Glasgow Financial Alliance for Net Zero (GFANZ), committed to accelerating the decarbonization of the economy. As the financial services industry plays a significant role in driving efforts towards the energy transition, there is a need to rethink how to build trust by addressing ESG measurement challenges swiftly. At present, multiple third-party ESG data and ratings providers, such as ESG Book, Moody's, S&P, Bloomberg, MSCI, Refinitiv, and Sustainalytics, offer dozens of data points that are categorized into weighted environmental, social, and governance dimensions to determine a rating. However, this abundance of data makes it difficult to differentiate between fact and fiction, leading to different ratings for the same company from different providers. The financial services industry is well-positioned to bring clarity to this scenario. A 2022 Dow Jones survey of financial leaders revealed that two-thirds of respondents considered ESG investing a top driver of sustained, long-term growth. However, 52% expressed dissatisfaction with the quality of today's ESG data in supporting investment decisions, and 58% highlighted the need for greater transparency in the development of ESG ratings. The litigation related to climate change poses significant risks, including lawsuits, administrative fines, and reputational damage. The number of litigation cases in this regard has exceeded 2, 000, with a quarter of them being filed between 2020 and 2022. Fitch Ratings has warned that climate-related lawsuits targeting banks could set precedents and accelerate their carbon-neutrality strategies and fossil fuel financing phase-outs. The importance of bolstering ESG ratings across all sectors has never been higher.

Ambiguity surrounding ESG ratings arises from factors such as siloed and overlapping data, incomplete and exaggerated self-reporting, lack of measurement standards, and greenwashing practices. ESG scores are aggregated, making it crucial for decision-makers to have access to granular data and transparent information to assess the reliability and validity of business decisions, especially when outliers exist. For instance, earlier this year, a tobacco company was reported to have a higher ESG score than an electric vehicle manufacturer like Tesla, highlighting the need for more accurate assessments. Financial institutions can play a crucial role in bringing about clarity by developing deeper and more reliable insights into ESG performance to combat greenwashing. This will enable them to take a more predictive approach to assess risks and opportunities. The use of artificial intelligence (AI) can be instrumental in analyzing unstructured data, such as online chatter, sentiments, and news reports, to validate and supplement ESG claims, uncover discrepancies, and provide real-time information to support investment and underwriting decisions at scale. Machine learning (ML) and natural language processing (NLP) can analyze and measure the emotional value or sentiment of communications, aiding in the evaluation of ESG activities. Advanced filtering and generative AI can further enhance the accuracy and precision of sentiment analysis, reducing bias and unwanted noise. Unstructured data can also help fill gaps in structured data provided by third-party raters. Financial institutions can analyze unstructured information to create proxy data that contributes to a comprehensive understanding of ESG activities. This information can be used to benchmark reports against accepted industry frameworks, exposing inconsistencies and exaggerations in ESG data. In summary, the financial services sector must strive to gain deeper insights into ESG performance to combat greenwashing effectively. This will not only enable institutions to capitalize on the transition towards a low-carbon economy but also instill confidence that the $130 trillion required to finance this transition is allocated responsibly.