Navigating Global ESG Investment Regulations Using AI

Irena Vodenska, Risto Trajanov, Gorgi Lazarev, Lou Chitkushev and Dimitar Trajanov

Chapter 6 in Sustainable Investing:Problems and Solutions, 2024, pp 153-194 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Global initiatives such as the Principles for Responsible Investment (PRI) or the UN Sustainable Development Goals (SDGs) are well poised to catalyze the transition toward climate justice, food security, and agricultural resilience. These initiatives motivate countries to develop frameworks for sustainability reporting to facilitate the transition economy. Globally, policymakers and regulators have proposed regulations to increase the transparency and uniformity of reporting surrounding climate change and corporate social responsibility. We investigate over 100 global documents related to regulatory developments in sustainable taxonomies, climate disclosures, and Environmental, Social, and Governance (ESG) fund requirements reported in the 2023 Sustainable Fitch Tracker of ESG Regulations and Reporting Standards. We propose a model utilizing the power of Artificial Intelligence and Large Language Models to analyze global regulatory documents to capture sustainability-related risks and opportunities defined by the Sustainable Accounting Standard Board (SASB). We compare the performance of keyword-based and ChatGPT-based models and find that the ChatGPT model successfully detects a greater number of global regulatory documents containing the SASB topics. Our results show that the European Union is the leader in having the largest amount of effective and mandatory regulatory coverage of SASB categories, followed by Nigeria and Saudi Arabia. The United States is the leader in effective and non-mandatory regulatory coverage, followed by Malaysia and Mexico.

Keywords: Sustainable Investing; Impact Investing; Corporate Social Responsibility; Materiality; Externalities; Sustainability; ESG; ESG Funds; ESG Factors; ESG Scores; SASB; SDG; DEI; Private Equity; General Partners; Active Ownership; Investment Stewardship; Machine Learning; Natural Language Processing; Large Language Models; Transition Economy; Climate Risk; Net-zero Investing; Divestment; Greenhouse Gas Emissions; Scope 3 Emissions; Modern Portfolio Theory; Venture Investments; Carbon Dioxide Removal; Carbon Credits; Fuel Production; Portfolio Management; Market Sentiment; Factor Investing; Portfolio Optimization; Post-investment Management; Digital Transformation; Fixed Income; Portfolio Performance Measures (search for similar items in EconPapers)
Date: 2024
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