David Buik examines a fascinating new tool that provides detailed data on financial issues using Artificial Intelligence

28 April 2023, 06:25 | Updated: 25 July 2023, 11:51

David Buik examines a fascinating new tool that provides detailed data on financial issues using Artificial Intelligence
David Buik examines a fascinating new tool that provides detailed data on financial issues using Artificial Intelligence. Picture: LBC
David Buik

By David Buik

David Buik looks at a new tool that can provide detailed data on an array of financial issues using Artificial Intelligence.

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Last Wednesday, Nick Ferrari very kindly indulged me on his ‘Breakfast Show’, by allowing me to talk about ESG investing and the extraordinarily innovative analysis provided by Louise Nicolson and Dr Lucy Walton on the performance of FTSE 100 companies in their ‘Transparency Index’, which they have developed through their company ‘Connected Impact.’

Their company provides detailed data on any array of financial issues, using ‘Artificial Intelligence’ as its main tool.

Sadly, through no fault of Nick’s, there was insufficient time to do justice to this quite complex, though very important subject.

So, I thought it might be worth explaining the basics of ESG and the importance of the ‘Transparency Index’ to investors – the great will know about it, but the small may not!

Anyone involved in investing or having a pension should find the content of the ‘Transparency Index’ both interesting and informative.

David Buik & Michael Wilson, two of the most respected commentators in the world of Money and Business come together for a weekly Global Player original podcast – Money!

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Money with David Buik and Michael Wilson, a Global Player original podcast. Picture: LBC

Fund managers and investors may well consider the profits of a company and their outlook as the most important criteria to invest.

However, investment culture has changed irrevocably. People want big businesses to care about more than just profits.

Investors have noticed that there is a link between companies that can identify and manage non-financial risks and those that outperform as investments. In other words, better-run companies, run better!

Hence, the development of ESG – ‘ENVIRONMENTAL SOCIAL AND GOVERNANCE’ - in recent years.

Fund managers, encouraged by regulators are insistent that ethical investing should play a greater role in their decision-making process. Investors insist that credence and importance are attached to climate-change, diversity, impact on the workforce and living standards.

They are of paramount importance when making decisions on the value of a company.

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To those who are not familiar with these preferred practices, may think that these ideas are just an extension of ‘woke’ culture. Not so.

The support for a change in investment culture is gathering momentum all the time - and so, the evolution of the ‘Transparency Index.’ Louise’s and Lucy’s timing seems perfectly pitched.

This index uses ‘Artificial Intelligence’ to crunch tens of thousands of data points to derive totally scientific and objective analysis. “TI” has analysed how well or otherwise Britain’s biggest quoted companies talk about their non-financial performance. The report is the first of its kind.

Analysis of this complexity reveals that FTSE100 companies increasingly do take such factors as the environment, social impact, and governance very seriously.

However, there is often a significant gap between what companies say they are doing and what they are disclosing. It is becoming clearer that companies need to improve the quality of their communications if they want to match the standards that are now expected.

These companies must be true to the word. To give an example many companies dramatically underreport their Scope 3 emissions.

To the average person, those are the carbon emissions that the companies’ suppliers are generating. These emissions account for more than 70% of a business’ carbon footprint – so if we don’t reduce Scope 3 emissions, we will never meet net zero.

This report exposes that companies declare a net zero ambition without plotting a way to meet it. Many companies talk about their ethnic diversity at board level but a huge number – 64% - don’t; then drill down to show the ethnic mix of their workforce.

Over 87% of companies don’t disclose the age of their workforce – and we all know that ageism is a growing problem. For real change, diversity targets need to apply to the whole workforce, not just the handful of executives at the top.

Overall, the report shows that whilst Britain’s biggest businesses are making a measurable effort to communicate their environmental, social and governance performance, they could do significantly better.

The index illustrates such companies as Centrica or Pearson put in excellent performances, whereas the likes of Frasers Group or Kingfisher have work to do to satisfy the required criteria.

If you want to see a copy of the ‘Transparency Index’ report, it’s been produced by a company called ‘Connected Impact’ and you can find them at connectedimpact.com – it makes a fascinating read!

It is interesting to note that fund managers have already downgraded tens of billions of so-called ESG assets, with more likely to follow in 2023.

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