Assessing corporate climate transition disclosures with AI
Posted on June, 17 2024
Companies need sound planning to reduce their emissions and deal with the transition to a more sustainable economy. Disclosing such plans is key for effective capital allocation and risk management. Transition and sustainability disclosures are a compass for market participants to guide their actions and strategies toward the net-zero emissions target. If companies plan their transition appropriately, the negative implications of physical and transition risks for micro - and macro-financial stability can be reduced.
Many frameworks have been suggested to assess transition plans’ ambition, credibility, and feasibility. However, the lack of one clear reference framework paves the way for inconsistencies in transition plans and the risk of greenwashing.This working paper, produced and published by the University of Zürich and the Smith School of Enterprise and the Environment, University of Oxford, proposes a set of 64 common ground indicators from 28 different transition plan disclosure frameworks to comprehensively assess transition plans and develop a novel natural language processing (NLP)–based tool to automate the assessment of companies’ disclosures. This can help investors and financial supervisors assess transition risks while supporting companies’ disclosure efforts.
Applying the tool to 143 reports from the carbon-intensive CA100+ companies, it has found that companies tend to disclose more indicators related to target setting (talk) but fewer indicators related to the concrete implementation of strategies (walk).
The results demonstrate that AI machine learning can be used to generate a positive impact on the transition towards a more sustainable economy by identifying the elements of transition plans that require further scrutiny and/or effort.
Based on this working paper, the Universities of Zurich and Oxford are currently developing an online AI based web tool to help financial supervisors, asset managers and financial institutions evaluate the net-zero transition plans of the companies they are investing in. Commissioned and co-produced by WWF´s Greening Financial Regulation Initiative the online tool will help investors assess whether companies’ transition plans are robust with science-based targets and a credible pathway to achieve net zero by 2050.
The online tool is expected to be launched over the coming months and will be the starting point for further leveraging new technologies in sustainable finance. For example, the assessment of transition plans could be used by financial regulators in their supervisory practices or to investigate whether the risk of greenwashing is reflected in stock returns.
The impact of climate change on the Arctic
© WWF / Staffan Widstrand/www.staffanwidstrand.se
The impact of climate change on the Arctic
© WWF / Staffan Widstrand/www.staffanwidstrand.se