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The days of greenwashing are numbered as AI seeks out carbon emitters with accuracy
“The days of greenwashing are over,” declares Andy Moniz, director of responsible investing at Acadian Asset Management. “We have developed an artificial intelligence tool that accurately identifies corporate green-washers and uncovers the truth to their climate action claims. It’s the beginning of the end for green sheen.”
A recent report by Greenpeace Australia Pacific found that most of the highest-emitting carbon green-washers in the S&P/ASX200 that announced net-zero targets had no firm plans to end their use of coal to meet their target. High emitters such as Woodside, Qantas and AGL Energy were named in the report as having no concrete plans to meet their emission-reduction claims.
While the Greenpeace report is useful, Moniz says the inconvenient truth is that readily available ESG data is unlikely to be of value for investors seeking to maximize risk-adjusted returns. ESG data is highly misleading. Elon Musk was the latest prominent figure to push back on ESG data, labelling ESG a “scam” after S&P Global ranked Exxon Mobil, one of the world’s biggest carbon emitters, above Tesla, which didn’t even make the list.
The report highlights the fact that greenwashing is delaying genuine emissions reduction progress. With only 16 ASX listed companies committing to a 100 per cent switch to renewables, there is urgent need for greater emissions reduction. And with the use of Acadian’s greenwashing-catching tool ‘Engager’, businesses that don’t follow through with their ESG commitments will be revealed.
Quant analyst Moniz says he is using sophisticated tools such as natural language processing and machine learning to figure out what companies are really doing.
“Historically those companies that disclosed information were rewarded with higher ESG ratings simply for being transparent. Like Elon Musk pointed out, this creates a perverse situation where fossil fuel companies can receive a higher ESG rating than a net electrics vehicles company associated with the energy transition,” Moniz claims. “Consequently, Acadian doesn’t find any value in using ESG ratings. It’s very easy for companies to talk up aspirational ESG commitments, but it takes someone with investigative analyst skills to follow up on its commitments.”
Moniz explains that around 71 per cent of S&P/ASX 300 companies have announced decarbonisation targets but only 11 per cent of companies have announced real science-based commitments to achieving net zero emissions. He agrees there are many ways for a company to achieve net zero. What is more important, is seeing the concrete plans the company plans to undertake to achieve net zero.
“One example to illustrate the point is taken from a utilities company that talks about achieving climate neutrality 20 years ahead of schedule using flashy charts and slides. However, nowhere does it disclose how it is going to get there,” Moniz says. “The traditional approach is to visit a company to meet and question management on their statements. The problem is, it’s simply not feasible or scalable.”
Moniz says the AI platform mines information to identify greenwashing in company communication. It works by processing company documents, announcements, press releases or sustainability reports and compares what they say with what they actually do. At scale, this was done using 40,000 securities. By processing this information, a word cloud or ESG thesaurus was created to show the connections between words. The algorithm was then trained to analyse characteristics so that it could differentiate a green leader from a greenwasher. It identified linguistic cues of bad management behaviour. Companies that failed to answer questions on an earnings calls or made evasive caveats for their answers were easily picked up by the system.
Part of the growing backlash against ESG is because the rating system isn’t well-defined which has led to misleading data. It’s clear there are many shortfalls of the ESG ratings system. But for those companies that have flown under the radar by failing to live up to their claims, Moniz has a warning.
“Talk is cheap,” he says. “It’s the beginning of the end for greenwashers.”
