Finance Leaders Turn to AI to Strengthen ESG Reporting

Finance leaders globally are turning to artificial intelligence (AI) to manage growing challenges in ESG reporting, according to EY’s 2024 Global Corporate Reporting Survey.

The survey results reveal serious reservations around the integrity of environmental reporting, with 96% of CFOs doubting the reliability of their companies’ sustainability data.

With investor scrutiny intensifying, the pressure to resolve these data issues is mounting, especially as regulations around non-financial reporting tighten.

The survey, drawing on insights from more than 2,000 finance executives and 815 institutional investors, highlights the critical gaps in current reporting, particularly in tracking Scope 3 emissions, indirect greenhouse gas emissions that often require data from across an organisation’s supply chain.

These gaps raise questions about the credibility of sustainability commitments made by companies in recent years, a credibility AI might help reinforce.

Scope 3 emissions: Data hurdles and AI’s role

At the heart of these ESG data concerns lies the complexity of Scope 3 emissions reporting. Scope 3 emissions include emissions from purchased goods, transportation and the usage of sold products, making it one of the hardest emission types to track accurately.

Nearly all CFOs surveyed report concerns about the accuracy of their non-financial data, with 39% struggling with inconsistent data formats and 35% noting problems with data integrity.

AI emerges as a potential ally in these challenges, offering capabilities to automate data collection across complex supply chains, flag data discrepancies and improve the accuracy of emissions estimates.

Around 57% of investors believe AI could significantly enhance the credibility of corporate sustainability reports. In comparison, 51% think it could help identify inconsistencies, boosting the accuracy of information that feeds into Scope 3 reporting.

For instance, AI could help businesses gather data from multiple suppliers by automating the collection process, ensuring more accurate tracking of carbon outputs across various stages of production and distribution.

However, implementing AI into reporting has its hurdles. Only 43% of finance leaders are enthusiastic about introducing AI into corporate reporting, with concerns around cost (39%) and regulatory compliance (36%) slowing adoption.

Nicolas Lecoq, EY’s Global Financial Accounting Advisory Services Leader, explains, "Finance leaders' apprehension around businesses' ability to meet crucial goals underscores the growing importance of building confidence in reporting on sustainability efforts."

Mounting investor pressure and greenwashing concerns

Investors are increasingly concerned with ESG data, making it a central part of their decision-making process.

EY’s survey reveals that 68% of finance leaders report receiving more frequent inquiries from investors on non-financial metrics, compared to two years ago.

This trend signals a heightened interest in how companies handle sustainability, particularly amid fears of “greenwashing” – the practice of overstating or misrepresenting environmental achievements.

About 55% of CFOs worry about potential accusations of greenwashing, particularly given the stringent regulations now mandating sustainability disclosures. Regulatory bodies require companies to meet specific data standards, adding a level of complexity and accountability.

New reporting standards offer some hope, as 78% of investors think they’ll improve sustainability disclosures. Yet, more than half of CFOs believe these requirements will bring substantial costs and added regulatory hurdles.

Dylan Siegler, Head of Sustainability at Universal Music Group, echoes this sentiment, suggesting that stringent regulations may “act as a throttling mechanism” for organisations attempting to lead in sustainability.

For many finance leaders, meeting these standards is a delicate balance of transparency, cost management and managing the risk of potential legal exposure if ambitious targets are missed.

A growing need for sophisticated data systems

While AI could be transformative for corporate reporting, only about a third of organisations currently have advanced data management systems needed to integrate this technology.

Limited infrastructure creates a barrier, further complicated by a lack of enthusiasm for AI adoption among finance leaders, with 29% saying they prefer to delay AI integration until its risks are better understood.

However, Nicolas believes that AI’s potential to streamline ESG data reporting and increase transparency is undeniable, particularly for Scope 3 emissions: “Although AI is still in the early stages of adoption and while it’s clear that many finance leaders are nervous about potential costs, compliance and wider possible risks, there’s no doubting its immense potential to transform data analytics and corporate reporting for the benefit of all.”

The value AI offers to ESG reporting lies in its ability to break down large datasets and identify trends, enabling companies to provide accurate, real-time environmental reporting.

This, in turn, would help organisations respond more confidently to regulatory demands and investor expectations while offering a clearer picture of their environmental impact.

As new technology standards and reporting regulations become increasingly stringent, the push for AI adoption in finance may be inevitable.

With stakeholders, investors and regulators calling for rigorous reporting and verified sustainability metrics, finance leaders face the choice of embracing AI or risking scepticism about their ESG commitments.

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