AI as a Tool for Transparency in Internal ESG Reporting

22 November 2021 | Luke Taylor, Subject Matter Expert at Luminance

The 26th Conference of Parties (COP26) led over 100 world leaders, approximately 25,000 accredited delegates and over 100,000 climate protestors to converge in Glasgow earlier this month. The summit, the purpose of which was to unite the world to tackle climate change, is a testament to the growing social consciousness regarding the environment: the need for businesses and the general public to adapt their behaviour and consider the sustainability of their actions. Further proof of this forward-thinking mindset can be seen in the increasing popularity of ESG investing, with many companies adapting themselves to be more in accordance with specific ESG standards. Indeed, Bloomberg Intelligence predict that Global ESG assets are on track to exceed $53 trillion by 2025.

Environmental, social and governance factors are used to evaluate companies in their approach to sustainability. These can be quantified in a sustainability report and ranking, allowing potential investors to better understand the unique risks and opportunities facing the company. While ESG investing may have begun as a value-driven movement, which led sceptics to label it a fad or a feel-good exercise, the trend has gained momentum as a result of heightened social, governmental and consumer attention on the broader impact of corporations in recent years.

The Practicalities: Gaining Insight into your Company’s ESG Standing

The first step for a company that wants to demonstrate their ESG credentials, whether for internal reporting purposes or prior to fundraising exercises, is understanding all details relating to their operations and obligations, which can be found in their company contracts. However, in today’s data-driven world, where corporations must manage swelling volumes of documents, trawling through all contracts in order to root out an unsustainable partnership or investment, for example, is a mammoth task. Corporate data is typically siloed across different folder structures within various computers, cloud storage environments or personal devices, making the process of reviewing all documents to understand a company’s standing extremely time-consuming and labour-intensive.

With such barriers to thorough and rapid review, many companies are turning to Luminance’s AI technology. Luminance can operate as a smart index for the entirety of a company’s contracts. ESG reviews are essentially wide-scoping compliance exercises, so having one tool that comes out-of-the-box with a conceptual understanding of over 1000 clauses and can learn anything from the user’s interaction with their documents, is invaluable for expediting a thorough review of compliance to ESG standards.

The artificial intelligence reads and instantly forms an understanding of documents upon upload and presents a visual overview of the information back to the user, broken down across a series of interactive widgets. In the context of an ESG review, this gives the reviewer all of the information that they need at their fingertips. For example, the complex task of calculating Scope 2 & 3 emissions, that involves delving into all indirect emissions in a company’s value chain, becomes infinitely more feasible when all contracts with suppliers can be accessed in a matter of seconds, with the AI highlighting these key touchpoints to focus the review from day one. Furthermore, Luminance’s unique ability to conceptually understand data means that if the reviewer wants to find any mention of ‘fossil fuels’, for example, in the entirety of their body of contracts, the AI will also flag any mention of conceptually similar terms such as ‘gas’, ‘coal’, ‘bitumen’ or ‘hydrocarbon’, ensuring no stone is left unturned. Luminance can also instantly highlight all geographies present within contracts, allowing users to instantly see their exposure to certain countries that have not signed up to the agreements at COP26, for example. This allows the company’s in-house or external counsel to identify any pain-points that require re-negotiating or divestment.

Indeed, an increasing number of in-house legal teams are also using Luminance’s AI to complete quick and thorough contract harmonisation exercises to establish a set of standards across their contractual landscape, ensuring company-wide compliance. Award-winning Australian law firm, Lander & Rogers, managed to consolidate 70 different types of contract templates down to just six models, saving 30 hours of review time in the process. Joel Kennedy, Transformation & Process Improvement Consultant at the firm, noted: “AI is providing a real solution to the problem of contract consolidation, allowing lawyers to quickly understand the intricacies of their contracts but in a way that is easy to digest, efficient and extremely insightful.”

Luminance can instantly identify all examples and variations of a given clause, with its powerful analytical tools indicating the level of similarity and picking out any anomalies with ease. This is crucial in the context of internal ESG reporting, enabling organisations to identify issues such as wage gaps or insufficient employee safety standards in the entirety of their contracts, and ensure any unsustainable practices are phased out.

Transparency is at the very heart of ESG reporting, so the rapid, in-depth insight provided by AI means that companies can quickly and effectively identify the areas of their operations that are not compliant with ESG standards and act accordingly. With a true overview of their contractual landscape, legal teams and business leaders can confidently put in place strategies to make their organisations more sustainable, therefore behaving responsibly, benefitting the environment and investing in their own long-term growth and development.