April 22 is Earth Day, a day to reflect on how well individuals, organizations, and countries are protecting the Earth’s finite resources. In the world of business, where customers are demanding organizations minimize their carbon footprint and environmental impact, Earth Day has taken on new significance. According to a recent KPMG survey, 90% of organizations will increase their ESG investment in the next three years. This investment will be used for dedicated ESG personnel, ESG-specific software, and ESG-related employee training and education.
The increased investment will be necessary to meet new regulatory and disclosure requirements. In March 2024, the Securities and Exchange Commission mandated all public companies include climate-related disclosures in their annual reports and registration statements. The rule has been welcomed by investors. According to a 2024 Workiva survey, “more than 80% of North American investors say that they have not changed how they make investment decisions, and an even larger majority appear to be in favor of new and emerging ESG disclosure regulations. Approximately 9 out of 10 investors believe that new sustainability reporting regulations will help them make more informed investment decisions.”
However, business leaders express concern around their ability to provide the data necessary to meet the new requirements. A challenge these leaders cite is technology, specifically whether or not the technology they are using today is up to the job of complex data collection. Workforce skills also loom large in these leaders’ misgivings. Forty-three percent of the Workiva survey respondents cited “challenges due to limited sustainability expertise among their staff.”
Solutions, including upskilling staff, hold out hope. In addition to understanding ESG metrics, terminology, and compliance, workers who understand generative AI, data analytics, and data science may be in a unique position to help their organization with ESG reporting. According to IMA’s recent report, “The Impact of Artificial Intelligence on Accounting and Finance,” the human challenges associated with AI implementation (which include upskilling staff and overcoming fear of change) far outweigh the other challenges associated with AI.
To combat these challenges, IMA offers a collaborative framework to show the interdependencies of machines and humans in performing activities like ESG reporting. For instance, humans must train machines to perform tasks, explain the outcomes of tasks, and sustain responsible use of machines; in turn, machines can amplify human cognitive strengths, interact with humans, and embody human skills. Both human and machine are necessary.
In the context of the new ESG reporting requirements, humans will have to teach machines nuances in climate disclosures, such as the difference between an acute risk (risks that are event-driven and may relate to shorter term severe weather events, such as hurricanes, floods, tornadoes, and wildfires, among other events) and chronic risks (risks related to longer term weather patterns, such as sustained higher temperatures, sea level rise, and drought, as well as related effects such as decreased arability of farmland, decreased habitability of land, and decreased availability of fresh water). This example shows why humans are necessary parts of the ESG reporting equation, even when generative AI models are used.
Ultimately it will also be humans who decide whether new ESG data is “consistent, comparable, and decision useful.” Some investors may ask organizations to provide more than the mandatory data such as information on Scope 3 emissions.
On this Earth Day, we are moving one step closer to full transparency for investors on an organization’s environmental, social, and governance (ESG) performance. The SEC’s recent ruling helps position organizations and the Earth for long-term sustainability.
WHAT YOU CAN DO
Progress in sustainability is often accomplished through small changes. Learn more about ways you can positively impact sustainability in your organization by completing our eCourse, IMA Sustainability Business Practices Certificate.