Using big data and AI to track SESG criteria: The LatAm experience
Welcome to Panorama
A year ago, the economic situation in LatAm seemed dire. But in the second half of 2021 and well into 2022, the business and economic outlook for Latin America has not only bounced back, but in many areas is surging forward.
The picture, of course, is uneven. Exciting new technologies are being adapted swiftly, while sharp, sudden increases in some consumer prices reflect now-familiar supply chain constraints. Meanwhile, the region’s rich natural resources and the upside ripple effects of high energy prices and commodity exports – thanks to some nearshoring efforts – are enabling continuity and growth, offsetting some of the inflationary pressures we are seeing elsewhere.
Panorama is the result of collaboration among DLA Piper’s teams on the ground across our nine offices in Latin America, as we think about the long-term outlook for the region in light of the impact of COVID-19 as well as the digital transformation of so much of the economy.
In order for the sustainability landscape to be reliable and trustworthy, so that investors may make sound decisions, structure in reporting is essential.
Growing demand from investors, governments and consumers is driving the adoption of sustainability, environmental, social and corporate governance (SESG) practices across Latin America. GRI Hispanic America and AG Sustainable (2021)1 report that 37.5 percent of public corporations in Argentina, Chile, Colombia, Mexico and Peru now prepare annual sustainability reports.
This development arises in part of the regulatory and legislative agendas now being fostered across the Southern Cone which focus on net-zero goals and the fight against climate change. As a result of such agendas, the demand for SESG data is skyrocketing. Today's investors need a comprehensive view of the potential material SESG issues facing their portfolio companies in order to meet regulatory requirements, satisfy targeted client demand, and mitigate their portfolios’ risks.
One illustration: in Chile, the Financial Market Commission, through issuance of General Rule (NCG) No. 461/2021,2 has promoted the inclusion of SESG standards in annual reports to be submitted by public corporations.
Likewise, in Colombia, a national law dictates general rules and establishes objectives and criteria to which the national government must adhere in order to regulate the activities of management, use and investment of resources collected from the public through securities. Notably, this law seeks to protect the rights of investors and preserve the proper functioning, equity, transparency, and integrity of the securities market and, in general, the confidence of the public in it, based on intervention criteria. Among those criteria is “that the stock market is provided with timely, complete and accurate information.”
However, while the demand for SESG data across LatAm has increased by leaps and bounds, the regulatory environment is not necessarily keeping pace. To obtain SESG accreditations, companies must address a multiplicity of criteria and process huge volumes of information. The criteria, meanwhile, are often vague, the legal guidelines are few, and the auditing processes are inconsistent. Most companies resort to a template-filling process as they strive to provide answers.
All of this has resulted in a large-scale shortfall of useful, accurate data and a lack of regulatory certainty, leaving the door open for greenwashing by corporations and investment managers.
But in order for the sustainability landscape to be reliable and trustworthy, so that investors may make sound decisions, structure in reporting is essential. Innovative data tools – big data and artificial intelligence – may well be the most appropriate solution.
Across the world, big data and artificial intelligence are being used to significantly improve the quality and quantity of SESG data and make its analysis more effective. Indeed, big data – which was originally developed to analyze and extract information from data sets that are too large or complex to be dealt with by traditional data-processing software – and artificial intelligence – which enables machines to simulate human intelligence – are ideally suited to this purpose. Indeed, the use of these two complementary approaches is already being applied in such fields as education, government, health, marketing, finance, and sports, helping businesses make better decision through predictive, descriptive, prescriptive and diagnostic analytics.
Consider the nature of SESG’s objectives – take into account that companies should and are aiming to meet both social and environmental governance criteria: in this new business environment, it is possible to conclude that non-traditional data analysis should become the basis for obtaining this essential information, particularly when it comes to measuring social impacts. Indeed, today, the most appropriate and effective way to measure sustainable development, its indicators and its targets is through big data.
Certainly, the use of artificial intelligence and big data can help improve SESG compliance, or even change the way measurement standards are approached and adopted. For instance, trained computer algorithms can process and analyze large amounts of data in a fraction of the time humans would take. Sentiment analysis software can help potential investors verify the extent to which a company is committed to mitigating environmental risks by analyzing the tone of the words used by a company's managers when talking about SESG issues – this AI software serves as a tool for detecting greenwashing practices.
Regulators must, inevitably, play their part by putting in place specific standards as well as sanctioning mechanisms to address fraudulent reporting.
In sum, big data and artificial intelligence have enormous potential to help companies arrive at the heart of SESG compliance: not just reporting their progress in a more coordinated and uniform way, but actually ensuring that such progress is genuine and stable. Across Latin America, as throughout the world, businesses are taking note.
1 Report available at https://www.comunicarseweb.com/sites/default/files/gri_ag_sustentable.pdf, accessed on January 26, 2022.
2 NCG No. 461/2021 available at https://www.cmfchile.cl/normativa/ncg_461_2021.pdf, accessed on January 26, 2022.