1、KPMG.Make the D 2024ESG in the age of AI2|ESG in the age of AIExecutive summaryAs businesses continue to mull over the best ways of adopting artificial intelligence(AI),one cannot overlook its role in helping streamline key processes across sectors.When applied mindfully,a powerful digital technolog

2、y such as AI can be immensely useful in helping businesses meet their environment,social and governance(ESG)goals for a longer-term impact.Today,business leaders around the world and in India are aware that ESG is extremely important for ensuring business goals and long-term sustainability.Findings

3、of the KPMG 2023 India CEO Outlook show that CEOs increasingly recognise ESG for what it isan integral part of their operations and corporate strategies for building productive sustainable businesses.To this effect,69 per cent of global CEOs have fully embedded ESG into their business to create valu

4、e and 54 per cent of CEOs in India have done the same.Balancing ESG goals with profitability ambitions is a tremendous challenge for companies.Quantifying ESG performance and progress towards the targets through pertinent ESG disclosures are critical at a time when both stakeholders and regulators e

5、xpect relevant and accurate data at par with financial disclosures.Companies in India are making concerted efforts to reveal their ESG performance;however,articulating a convincing ESG story to stakeholders remains a challenge.The rising inquisition into companies ESG commitments and their results h

6、as compelled CEOs to focus on improving transparency and performance in meeting these goals and avoiding greenwashing.There are many ways in which AI tools can help achieve near-term and long-term ESG ambitions.Collating large quantities of data on ESG metrics,forecasting emissions,linking emissions

7、 to growth numbers and undertaking climate risk assessments are just a few of them.However,we must also remember that Generative Artificial Intelligence(GenAI)in itself uses massive amounts of energy and there has to be a way for this to be addressed and ensure there is accountability.What this mean

8、s is that while AI can be a powerful enabler of ESG reporting,guardrails and governance are critical in ensuring positive impact.56%of CEOs in India believe that the general public is looking at businesses to act on societal challenges.2024 KPMG Assurance and Consulting Services LLP,an Indian Limite

9、d Liability Partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited,a private English company limited by guarantee.All rights reserved.While concerns remain,GenAI is recognised as a potent driver of growth,rapidly accelerat

10、ing innovation across various sectors.AI and ESG together top the CEO agenda across countries and form the biggest priority areas for investment.Organisations that fail to embrace this new era of corporate sustainability and AI risk may get left behind.CEOs in India increasingly understand that busi

11、nesses embracing ESG enabled with AI would best be able to drive shareholder returns,form new partnerships and alliances,and drive financial performance.If you are a corporate leader,now is the time to assess how your organisation relates to ESG and AI by answering five questions andrealigning with

12、your leadership teams on a path forward:How does your brand purpose underpin your ESG strategy?How is your ESG strategy driving growth and the performance of your business?What are your governance systems for measuring the effectiveness of your ESG programmes?How can you responsibly build your AI fr

13、amework?How can AI and ESG work together to give you a competitive edge and at the same time impact society and environment in a positive way?AI and ESG are reshaping the world around us.Success will be defined by those who navigate these two trends with intent,scale and speed.3|ESG in the age of AI

14、 2024 KPMG Assurance and Consulting Services LLP,an Indian Limited Liability Partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited,a private English company limited by guarantee.All rights reserved.2024 KPMG Assurance and

15、 Consulting Services LLP,an Indian Limited Liability Partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited,a private English company limited by guarantee.All rights reserved.4|ESG in the age of AIThe focus on business res

16、ponsibility or ESG has been at the forefront of most boardroom discussions.The number of companies that publish a sustainability report has been growing steadily over the past decade.KPMGs 2023 CEO Outlook report shows that 79 per cent of the N100 group(the leading 100 companies in every country sur

17、veyed)report on sustainability.Among the worlds top 250 companies(G250),this figure is 96 per cent.1 At the same time,ESG compliances the world over are now on the rise.In the European Union(EU),starting from 2024,almost 50,000 companies are subject to mandatory sustainability reporting,including no

18、n-EU companies,which have subsidiaries operating within the EU or are listed on EU-regulated markets.In India,Business Responsibility and Sustainability Reporting(BRSR)-introduced in 2021 by the Securities and Exchange Board of India(SEBI)-has become a mandatory requirement for the top 1,000 listed

19、companies.However,companies with global operations are facing multiple regulations in various countries-such as Europes Corporate Sustainability Reporting Directive(CSRD),Carbon Border Adjustment Mechanism(CBAM)and Corporate Sustainability Due Diligence Directive(CSDDD).Further,the United States Sec

20、urity and Exchange Commission(SEC)has implemented climate rules.Existing and evolving ESG-related requirements are as varied as the jurisdictions that are required to follow them.While some focus on climate change,others cover the full set of ESG factors.These could be as varied as the EUs Taxonomy

21、for Sustainable Activities,Germanys Supply ChainAct,the USs Uyghur Forced Labour Prevention Act,Californias new law to reduce single-use plastics,guidance from the Task Force on Climate-Related Financial Disclosures(TCFD)or the newer Taskforce on Nature-related Financial Disclosures(TNFD),infrastruc

22、ture and more.With voices for climate-aware investing and carbon controls increasing globally,reporting on multiple cross-country disclosures has been challenging for many.The reasons include complexities of data collection,the need to establish robust new processes(sometimes involving information p

23、rovided by third-parties in the companys value chain)and the lack of established good reporting practice.ESG reporting is an area that will continue to evolve and will impact various sectors in different ways.However,all of these would require significant planning as well as time and effort for corp

24、orates to be ready.Accuracy and reliability are critical when it comes to ESG reporting,especially with evolving regulations across regions.AI excels in this area by automating data validation processes.AI-powered systems can cross-check information,validate ESG data and identify inconsistencies or

25、anomalies.Automated validation ensures data integrity,reduces errors and enhances credibility of ESG reporting.More importantly it can monitor regulatory changes,helping companies stay updated and adapt their practices accordingly.As a result,investors and stakeholders can confidently disclose ESG i

26、nformation.Gearing up for ESG1.https:/ in the age of AI58%of CEOs are prioritising environmental and social challenges.5|ESG in the age of AI 2024 KPMG Assurance and Consulting Services LLP,an Indian Limited Liability Partnership and a member firm of the KPMG global organization of independent membe

27、r firms affiliated with KPMG International Limited,a private English company limited by guarantee.All rights reserved.Moreover,there is yet another dimension of ESG-related investment that companies must navigate.Indias central bank-the Reserve Bank of India(RBI)-is putting regulations in place to p

28、ush the nations lenders to take steps,including bolstering green lending,to mitigate risks emerging from climate change.New laws such as the US Inflation Reduction Act have created new structures of incentives,including almost USD400 billion of available subsidies over the next decade to spur invest

29、ment into green technology.The EU has reacted with similar pledges with over EUR300 billion of funds in the Green Deal Industrial Plan.2 With over half of the worlds GDP dependent on the environment,according to the World Economic Forum,business as usual is no longer an option.Companies are realisin

30、g that almost all aspects of their financial stability stand endangered if they fail to act.CEOs in India,as well as globally,acknowledge that addressing ESG challenges remains a key component of their business operations and long-term corporate strategy.2.CaixaBank Research, 42%of CEOs in India exp

31、ect ESG investments to yield returns in three to five years.33%of CEOs in India say that the principal downside of failing to meet stakeholder expectations on ESG is higher cost and difficulty in raising finance.The future will not be more of the past!The global economic paradigm is changing as comp

32、anies are under tremendous pressure from people across the world to account for the social impact of their businesses.Moreover,endless growth with profit as the sole metric is no longer considered sustainable.The consequences of social and environmental imbalance are mostly seen in the long term,and

33、 if allowed to go unchecked,the disruption caused may cause a significant dip in growth and corporate valuations.Namrata Rana National Head of ESG,KPMG in India6|ESG in the age of AI 2024 KPMG Assurance and Consulting Services LLP,an Indian Limited Liability Partnership and a member firm of the KPMG

34、 global organization of independent member firms affiliated with KPMG International Limited,a private English company limited by guarantee.All rights reserved.Total-100%Total-100%ESG in a connected world|6Q.When do you anticipate you will see a significant rate of return for your ESG investments?Q.W

35、hat is the principal downside of failing to meet the expectations of stakeholders when it comes to ESG?Q.Which aspect of ESG are you prioritising most when it comes to your investment strategy?Q.Are you prepared to withstand the potential scrutiny from these stakeholders or shareholders?2%20%27%50%1

36、%Under one yearIn one to three yearsIn three to five yearsIn five to seven yearsOver seven years6%10%16%20%23%25%Recruitment challenges as a result of failing to meet expectationsCompetitors gaining an edgeThreat to your continued tenureDisengaged employeesLoss of customersBase-1325Base-132513%23%29

37、%35%Addressing environmental challenges such as achieving net zeroGovernance models and transparency protocols such as best practice reportingTotal-100%Base-1325Total-100%Base-21332%NoYesNo68%1.Are the differences between ESG,Corporate Social Responsibility(CSR)and brand promise clearly defined?2.Wh

38、at are the core issues for the company/sector and how will this change in the next 10 years?3.Does the company have a responsible digital strategy to collect ESG data,create sustainability reports across countries and leverage analytical tools to track performance of non-financial reporting?4.How re

39、ady is the company to tackle reputational challenges that can emerge from business practices?5.What are the major opportunities for change and how can they be prioritized?6.How is the management understanding and developing business opportunities around the global momentum on ESG opportunities?7.Doe

40、s the board have the right set of skills to understand the relevant,material,existing and new set of ESG reporting standards?8.Are there policies in place for effective ESG data governance?9.Is the ESG data captured in real time?10.What are the ways in which ESG has been embedded into the business t

41、o create value?For effective corporate governance of ESG,the board should be asking the following 10 questions:The ESG outlook:Indian CEOsWe are prioritising and investing in all aspects equallySocial and community programmes,including diversity,equity and inclusion practicesHigher cost of and/or di

42、fficulty in raising finance 2024 KPMG Assurance and Consulting Services LLP,an Indian Limited Liability Partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited,a private English company limited by guarantee.All rights reser

43、ved.7|ESG in the age of AIAnnual reports,quarterly earnings calls and investor briefings need to take not just financials into consideration but also account for all the non-financial information that till now has been ignored by large parts of the financial community.ESG data can now seriously impa

44、ct corporate risk,investor perceptions and corporate wellbeing.Hence,effective corporate governance of ESG becomes essential.Corporate boards normally have governance expertise on accounting matters.Some of them,after Indias CSR legislation that required board oversight,had started focusing on CSR a

45、s well.However,ESG is not CSR.It is about corporate strategy and management oversight of core business in the context of Environmental,Social and Governance standards.With such standards gaining momentum across institutional investors,it is now expected that it should be a part of the board agenda.I

46、nvestors in India and abroad now look to incorporate ESG factors into the investment process alongside traditional financial analysis.As part of this process,investment firms gather ESG data on companies and use it to make decisions on valuation and the risk that a stock poses.With investors looking

47、 at ESG as a value-based dimension of their portfolio,they increasingly want to understand ESG performance the same way they would any other traditional financial measure.The last two years have been marked by some of the biggest disruptions to both people and the planet,with extreme climate change-

48、related events causing widespread destruction and disruption.Investors now expect that companies have conducted a risk assessment and are taking steps to become resilient and adapt to the emerging challenges.ESG risks include those related to climate change mitigation,environmental management practi

49、ces,good work and safety conditions,respect for human rights,anti-bribery and corruption practices,and compliance with relevant laws and regulations.It is increasingly clear that technology can drive change and accelerate climate action while mitigating risks.From making solar panels work better to

50、more accurately predicting weather,machine learning tools can enable action on everything from reducing fossil fuel emissions to preparing for disaster threats.Machine learning can also help in accurately predicting climate-driven effects like floods and wildfires with powerful computers testing lik

51、ely scenarios at a fine scale.By leveraging AI and data,companies can develop predictive models to anticipate future climate risks and assess the potential impact on their operations.By understanding these risks in advance,businesses can proactively implement measures to mitigate them,minimising dis

52、ruptions and increasing resilience.There is a lot that companies in India need to do to be truly ready to take sustainability reporting to the next level.With regulators across the world pushing for mandatory assurance of ESG reports,it is imperative for companies to comprehensively assess their lev

53、el of readiness.Further,stakeholders expect more than just disclosuresthey want to see tangible action on the ground and progress year on year.Hence,it is imperative to converge ESG strategy and reporting together with board-led oversight.Sai VenkateshwaranPartner,KPMG in IndiaEffective corporate go

54、vernance of ESG is becoming critical 2024 KPMG Assurance and Consulting Services LLP,an Indian Limited Liability Partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited,a private English company limited by guarantee.All rig

55、hts reserved.8|ESG in the age of AIThe regulatory push,better science and increased scrutiny means that ESG metrics are now growing by leaps and bounds.By some estimates,there are over 1,000 discrete measures in ESG reporting.Environmental,Social and Governance Reporting Standards(ESRS)from the EU a

56、lone encompass over 100 reporting requirements and nearly 700 key performance indicators(KPIs).The sheer scale of the ESG data problem is immense.Given that there is increased pressure on delivering higher frequency of ESG data to investors,consumers and governments,it is critical that the data shou

57、ld be correct,verifiable and available in real time.Moreover,AI-powered recommendation systems and analytics will only provide accurate results if the base data is accurate.Today,most companies work out of Excel sheets when it comes to ESG.This is because Enterprise Resource Planning(ERP)systems tha

58、t most of them function on do not capture ESG data.These ERP systems were designed to measure and manage inputs,suppliers,costs,sales and receivables.Many times,production data may sit in legacy systems that might function independently,making emissions data extraction difficult.Further,new projects

59、 may have Internet of Things(IOT)systems to measure their productivity and efficiency and once again may not be integrated with other systems.Which is why,even for calculating carbon emissions accurately,different systems need to be looked at.Hence,getting an integrated view is difficult.Turning a b

60、lind eye to proper ESG data management comes at a significant cost and could have negative consequences on organisations.Some of these consequences include negative brand perception,regulatory fines and weak social licences to operate and more.Effective ESG data governance requires a coordinated and

61、 centralised approach across multiple stakeholders.This can take place with new data architecture,data collection strategy across multiple locations and enhanced processes.For many organisations,this requires significant changes to the IT infrastructure ranging from applications to data integration,

62、architecture and governance.For instance,banks require not only the management and capture of ESG data but also financed emissions models,climate risk models,ESG scorecards,climate stress tests and climate-adjusted ratings.Some are calling this transition,the SOXification of ESG,alluding to the cont

63、rols and processes that came into place after the introduction of the Sarbanes-Oxley Act(SOX).Accurate ESG data and the use of AI models will eventually encourage stakeholders to adopt sustainable business strategies.By providing insights,suggestions and incentives,companies can empower consumers an

64、d investors to engage in more sustainable choices,leading to collective environmental impact.ESG needs better data and data governanceAdvances in AI offer unprecedented opportunities for companies to advance their ESG agenda through better insights,monitoring and risk mitigation.AI can,therefore,be

65、a transformative force,delivering competitive advantages,including operational efficiency,business resilience and brand reputation.Chaitanya GogineniPartner,Data,Analytics and AI,KPMG in India 2024 KPMG Assurance and Consulting Services LLP,an Indian Limited Liability Partnership and a member firm o

66、f the KPMG global organization of independent member firms affiliated with KPMG International Limited,a private English company limited by guarantee.All rights reserved.9|ESG in the age of AIIn todays world,and increasingly in the future,we are looking at real-time responses to everything.Real-time

67、dashboards can help companies tackle problems when they occur.Corporations tend to use real-time financial information to drive innovation,better decision-making and business transformation.Similarly,the main benefit to gaining access to correct,real-time ESG data is being able to forecast almost an

68、ything and take corrective action(environmental impact:waste,water and energy;social impact:human rights,health,education,safety;and governance)with unbelievable precision.However,unlike financial data,ESG data comes in diverse formats and units.It is sourced from various parts of the organisation a

69、nd is often recorded and stored in different systems,spreadsheets and documents.To leverage sustainability data effectively for decision-making,it must be collected,transformed and reported with greater speed,frequency and scalability.Achieving this typically necessitates substantial technological s

70、olutions,new processes and business transformation at scale.Real-time ESG9|ESG in the age of AIAccuracyCostSpeedInsightsESG data accuracy helps to manage,plan and execute low-carbon strategies.Less effort on lengthy manual reporting and data collection can free up resources.Early visibility can enab

71、le quicker decision-making before problems escalate.Gain additional insights into drivers of ESG metrics and link them to financial returns.Intelligent ESG can drive real business valueUsing AI to scale ESGAI can extract insights from data and improve automation of ESG processes and reporting.AI can

72、 use third-party ESG data to build product-level emissions profiles.AI can be usedto manage and verify supplier emissions across disparate data sets.AI can be used to ensure compliances across boundaries.2024 KPMG Assurance and Consulting Services LLP,an Indian Limited Liability Partnership and a me

73、mber firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited,a private English company limited by guarantee.All rights reserved.10|ESG in the age of AIMost companies have a robust control framework in relation to financial reporting.However,ESG rep

74、orting is constantly changing with new requirements being mandated across the globe.Further,the standards that are being set are also evolving.Hence,most companies do not have set processes and controls around ESG reporting.For organisations that operate in different countries,adhering to different

75、ESG reporting requirements and standards requires robust systems and processes so that information is accurate and reliable.These controls and processes also need to be extended to the value chain partners because regulators across the world are now asking for data and reporting on Scope-3 emissions

76、.Reducing supply chain emissions will have a big role to play in reducing carbon emissions as they can account for a major portion of an organisations total emissions.While measuring,calculating and disclosing Scope-3 emissions can be challenging,applying AI and data analytics enable companies to ga

77、in visibility into their supply chains,identifying areas of high-carbon intensity and social or environmental risks.By leveraging this information,businesses can make informed decisions about supplier selection,optimise logistics routes to reduce emissions and ensure adherence to sustainable practic

78、es throughout the value chain.Complexity of decarbonising supply chains emerged as the greatest barrier to achieving net zero or similar climate ambitions for Indian CEOs.ESG processes need to be built up internally and for value chainsWhat do you believe is the greatest barrier to achieving net zer

79、o or similar climate ambitions for your organisation?The cost of decarbonisationLack of appropriate technology solutionsLack of internal governance/controls to operationalise itLack of skills and expertise to implement solutionsComplexity of decarbonising supply chains10%18%20%23%30%Total-100%Base-1

80、325AI and climate are rewriting the rules of business!India is on a growth trajectory.Historically,growth has always had a direct correlation with emissions.If Indias growth were to continue,emissions too will rise.The question we need to answer is how can we enable green/low carbon growth?Build the

81、 India of tomorrow,reduce poverty and yet be a low carbon economy.AI adoption and its rapid scale-up is already redefining business boundaries and challenging traditional norms.The climate change crisis is expected to disrupt operations and policies of companies and organisations this year.With thes

82、e two megatrends at play,how should companies adapt?What should they prioritise and what can be left behind?For Indian companies that are leading the agenda on a global stage,growth strategies based on ESG and AI can lead the way.11|ESG in the age of AI 2024 KPMG Assurance and Consulting Services LL

83、P,an Indian Limited Liability Partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited,a private English company limited by guarantee.All rights reserved.How should you be thinking about this?More than reportingMore than bus

84、iness as usualMore than resilient supply chainsMore than profitMore than technologyMore than reportingAs risks rise,so do investor expectations on mitigating these.ESG now consists of everything that doesnt sit in financial reporting with a thousand metrics and multiplicity of compliances.Moreover,s

85、ocial responsibility sits in the AI agenda as the escalating risks and implications become clearer.Investors want ESG intent and action such that ESG metrics become part of everyday operations.Once a year,reporting on ESG is not enough anymore as investors dig deeper into social impacts and environm

86、ental challenges around business operations.What is needed is focus on low carbon operations,green supply chains,recycling materials and a long-term growth strategy that will protect and grow value through challenging times.For companies looking to raise capital in the domestic and international mar

87、kets,ESG will be a critical element in their valuation.More than business as usualGiven the vast spectrum of operations of Indias large companies,creating a net-zero roadmap can look like an insurmountable task.Reducing emissions and creating a positive social impact require multiple projects that n

88、eed to be designed and then implemented.Using technology such as AI to improve forecasts of energy supply and demand to reduce the price of power at off-peak times and cut demand during peaks can reduce significant costs and emissions for organisations across regions.Implementation of such projects

89、involves people,changes in processes,new technology and,often,capital investments.Moreover,sustainable products and services need to be at the core of long-term transformation.This is because if customers support you and buy your newer,greener products,the cost of the transition can be underwritten.

90、Looking at new materials,new sources of value and circular supply chains can help organisations in entering new markets and score over global rivals.Indian companies can either target these new areas internally or buy out emerging organisations in the sustainability space.A focus on global and India

91、n customers that prioritise sustainability will bring benefits in the long run.12|ESG in the age of AI 2024 KPMG Assurance and Consulting Services LLP,an Indian Limited Liability Partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG Internatio

92、nal Limited,a private English company limited by guarantee.All rights reserved.More than resilient supply chainsMore than profitAs businesses look at creating new sources of value,new models will emerge that straddle the trifecta of technology,social responsibility and positive environmental impact.

93、Reverse supply chains and on-demand manufacturing will drive growth in existing and adjacent areas for large businesses.Business operations will change too as AI and machine learning will be able to anticipate,produce and deliver products based on demand.This transition will be enabled by a new gene

94、ration of customers who will demand corporate action against waste and brands that care not just for their profits but causes that create a better world.More than technologyAI-led automation opens up new possibilities as it builds productivity-led tangible gains.Chief economists are almost unanimous

95、(94 per cent)in expecting productivity improvements to become economically significant in high-income economies within the next five years,including 57 per cent expecting the benefits to emerge within the next three years.3 The potential gains from productivity benefits are in sharp contrast with co

96、ncerns about the risks of automation,job displacement and degradation.Companies will soon need to balance technology-driven models with social responsibilities so that they do not lose their social licence to operate.This is particularly important for a large developing economy like India,with signi

97、ficant differences across regions.The future is not going to be more of the past.Multiple futures are possible,depending upon the choices we make.Can Indian companies make the right ones?3.WEF Chief Economists Outlook,https:/www.weforum.org/publications/chief-economists-outlook-january-2024/Advanced

98、 technologies are shaking up the world of supply chains.With quickly evolving capabilities across generative AI,data analytics,automation,machine learning,IoT,blockchain and more,the smart supply chain is well on its way to becoming the new normal.But is this enough?Generative AI should be used to b

99、uild more sustainable practices in procurement,ensure global compliances and provide transparency.13|ESG in the age of AI 2024 KPMG Assurance and Consulting Services LLP,an Indian Limited Liability Partnership and a member firm of the KPMG global organization of independent member firms affiliated w

100、ith KPMG International Limited,a private English company limited by guarantee.All rights reserved.KPMG in India contacts: Akhilesh TutejaHead Clients&Markets E: Namrata Rana Partner and National Head of ESGE: Sai VenkateshwaranPartnerE:Chaitanya GogineniPartnerE: Access our latest insights on KPMG I

101、nsights E The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity.Although we endeavor to provide accurate and timely information,there can be no guarantee that such information is accurate as of the date it is r

102、eceived or that it will continue to be accurate in the future.No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.KPMG Assurance and Consulting Services LLP,Lodha Excelus,Apollo Mills Compound,NM Joshi Marg,Mahalaxmi,

103、Mumbai-400 011 Phone:+91 22 3989 6000,Fax:+91 22 3983 6000.2024 KPMG Assurance and Consulting Services LLP,an Indian Limited Liability Partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited,a private English company limited by guarantee.All rights reserved.The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation.This document is for e-communication only.Follow us on: