A new AI tool co-developed by Chiara Colesanti Senni, was launched at the Global Ethical Finance Conference 2023 in Edinburgh. The tool helps financial supervisors, asset managers, and financial institutions evaluate the net-zero transition plans of the companies they are investing in.
As pointed out in the joint press release published on September 20th, 2023, corporate greenwashing poses a serious threat to financial stability and the transition resilience of companies, investors, and the financial system in the transition to a net zero, nature positive economy. Greenwashing leads to capital misallocation, financially riskier and costlier decarbonization pathways, undermining the ability of markets to price risks correctly and reward resilience to deal with uncertainties. This in turn, can negatively affect the global economy and private households, and even lead to increasing unemployment risks, such as the recently published climate stress test from the Bank of England (BoE) highlights.
For financial regulation, the credibility of climate transition plans is of particular concern because it directly affects consumer protection (consumers are misguided by false claims). It also has direct implications on micro- and macro-financial stability as greenwashing could undermine the effectiveness of prudential policies. On one side, it enables financial institutions to circumvent regulations, and on the other side, it prevents financial supervisors from identifying vulnerabilities in the financial system.
Despite an increasing awareness of capital misallocation risks there is no common understanding nor is there a comprehensive methodology to assess and measure whether a company's transition plan can be considered “credible”. So far, regulatory action undertaken by financial regulators to counter greenwashing and transition plan inconsistencies has been to ask for comparable and transparency disclosure such as product transparency (in prospectus, contracts, half yearly reporting, etc.) and a requirement that the sustainability of a financial product is discussed at the point of sale and thereby customers are sufficiently aware of what they buy.
The new tool precisely addresses those gaps. It is designed to be applicable at scale by aid of Artificial Intelligence (AI) tools to help identify transition plan inconsistencies and possible greenwashing. They are considered a first screening tool to “red flag” companies whose transition plans lack ambition, feasibility, and credibility. For central banks, investors, policy makers and regulators it offers a data-driven tool to carefully assess the companies’ environmental and climate-related claims and select those companies suspected of greenwashing for more in-depth assessments, analyses, and direct engagement.
For DBF Post-Doc Dr. Chiara Colesanti Senni, who is also Visiting Fellow at the Granthan Research Institute (LSE) and Affiliated Researcher at the NLP4SF Programme“the red flag indicator framework, using Artificial Intelligence tools, provides a data-driven tool to carefully assess companies' environmental and climate-related claims, particularly identifying those suspected of greenwashing for more in-depth assessments and direct engagement. It is a vital screening tool to automate the process of identifying potential misleading claims and statements”.
The red flag indicators framework will be pilot tested with a number of companies between September and December 2023. The results will be visualized and published in December 2023 to help financial regulators and financial institutions get a better understanding and overview of the grade of ambition of companies.
See the whole report “Net Zero Transition Plans: Red Flag Indicators to Assess Inconsistencies and Greenwashing” for detailed information.