Stuart Cullinan, CTO

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As financial institutions and ESG and Sustainability ratings providers navigate mounting regulatory and data requirements, artificial intelligence (AI) is emerging as both a powerful enabler and a potential risk.

From boosting efficiency in sustainability reporting to raising new ethical dilemmas and governance concerns, AI is reshaping how ESG and Sustainability are implemented, monitored, and governed.

For sustainable investors and investment companies, AI needs to be a real area of interest and intrigue over the next few years.

Efficiency: Scaling ESG Without Compromising Standards

AI is becoming increasingly instrumental in helping financial firms meet the complexity of ESG and Sustainability reporting. With regulations like the European Union’s Corporate Sustainability Reporting Directive (CSRD) set to apply to nearly 50,000 companies by 2026, firms must gather, validate, and disclose far more granular data, often across thousands of suppliers.

AI-driven tools can automate the heavy lifting, facilitating faster and more cost-effective compliance with evolving disclosure regimes.

AI is already enhancing ESG and Sustainability data collection, enabling scale without sacrificing quality. Automation supports the timely extraction, classification, and validation of information across asset classes and geographies, helping clients keep pace with an expanding regulatory perimeter.

However, these gains come with a climate cost. Training large AI models and running data centres does consume vast amounts of energy and water, adding to emissions and resource stress.

As a result, regulators are paying close attention.

The European Commission, for instance, is considering specific requirements for companies to report on the environmental footprint of their AI use.

Ethics: Aligning Intelligence with Impact

AI is opening new possibilities for ethical and impact investing. Advanced algorithms can continuously monitor portfolios for alignment with ESG preferences, adapt to new controversies, and adjust exposures dynamically—bringing greater personalisation and responsiveness to sustainable investment strategies.

Yet, AI also introduces ethical risks. Without robust governance, models can entrench systemic bias, perpetuate exclusion, or generate opaque outcomes that undermine trust.

The EU’s Artificial Intelligence Act, adopted in 2024, now classifies many financial AI applications—such as credit scoring or automated portfolio construction—as “high-risk,” requiring rigorous transparency, data governance, and human oversight.

Meanwhile, the UK’s Financial Conduct Authority (FCA) has identified algorithmic bias as a direct risk to consumer protection and market integrity.

Governance: Building Trust in AI-Driven Finance

Governance sits at the heart of Europe’s approach to AI regulation. The EU AI Act mandates that financial services tools using AI must meet strict standards around data quality, explainability, and risk management. This includes ESG-focused tools—such as AI-driven ratings and analytics platforms—that will need clear documentation of how AI is applied, verified, and supervised.

From 2026, ESG and Sustainability ratings providers in the EU will also be subject to the Regulation on the Transparency and Integrity of ESG Rating Activities (EU 2024/3005). This regulation introduces mandatory disclosure of AI-based methodologies, the traceability of data sources, and conflict-of-interest mitigation requirements—further reinforcing the link between technological integrity and sustainability credibility.

UK regulators are aligned in principle. The FCA now expects firms to implement board-level accountability for AI systems, with a clear understanding of model outputs and risks. Firms unable to explain or monitor the functioning of their AI tools may fall foul of regulatory expectations and face sanctions.

Conclusion: A Dual Transformation

The intersection of AI and ESG is driving a twin transformation—expanding what’s possible in sustainable finance while simultaneously demanding greater care in how technology is deployed. For financial institutions, the message is clear: governance of ESG and governance of AI can no longer be treated in isolation.

To succeed, firms must embed AI within sustainability frameworks—not only to enhance ESG and Sustainability reporting and investment outcomes, but to ensure that the means used to achieve these goals are as responsible as the ends.

Simone Borsetti, Research Associate

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As private markets continue their rapid expansion, the pressure to align them with Sustainability goals is intensifying.

By the end of 2024, global private capital assets under management reached approximately $19 trillion, with projections from PitchBook estimating $24.1 trillion by 2029. Longer-term forecasts by Bain & Company suggest private markets could surpass $60 trillion by 2032—more than double the expected growth rate of public assets.

This exponential growth in capital has sharpened the focus of institutional investors on ESG and Sustainability integration. A recent EY survey found that 88% of institutions have either somewhat or substantially increased their use of ESG information in the past year.

However, despite the growing emphasis on sustainability, private markets remain less transparent, less standardised, and less regulated than their public counterparts.

This duality has created a paradox: private markets are viewed both as powerful engines for transformation, thanks to their influence and agility, and as potential “blind spots” where sustainability risks may go unchecked.

Sustainability Leverage in Private Markets

Private markets offer several structural advantages when it comes to sustainability implementation.

General Partners often hold board seats and wield significant influence over portfolio companies, allowing them to shape strategy, governance, and operations in ways public investors rarely can.

Furthermore, the long investment horizons typical of private equity and infrastructure funds align naturally with sustainability objectives, from climate resilience to inclusive growth. Asset owners such as pension funds and insurers are increasingly using their leverage to demand greater transparency, stronger frameworks, and demonstrable ESG progress from General Partners.

The Blind Spots

Despite these advantages, major obstacles remain. ESG and Sustainability data from private markets is still patchy, inconsistent, and largely reliant on voluntary disclosure. Without the mandatory disclosure requirements that apply to listed companies, investors can rely on voluntary reporting, self-assessments, or fragmented third-party data. This makes it difficult to compare funds, evaluate sustainability risks, or identify instances of greenwashing—an especially acute risk in a lightly regulated environment, which can erode investor trust and mask long-term vulnerabilities.

Another growing concern is the risk of “ESG arbitrage.” Companies with poor ESG credentials may increasingly seek capital from private sources to avoid the scrutiny they would face in public markets. This trend threatens to undermine broader sustainability efforts and casts doubt on the credibility of ESG strategies in the private space.

Emerging Solutions

Despite these challenges, efforts to bridge the gap are gaining momentum.

New ESG assessment tools tailored to alternative assets are emerging, alongside standardisation initiatives from bodies such as the Institutional Limited Partners Association (ILPA), GRESB (formerly known as the Global Real Estate Sustainability Benchmark), and the European Union’s SFDR framework.

At the same time, asset owners are playing a more active role, pressing General Partners for clearer disclosures, impact measurement, and integration of sustainability into core investment processes.

Laboratory or Liability?

Private markets are uniquely positioned to become a proving ground, acting as a laboratory for sustainability innovation, where investor influence, capital flexibility, and longer horizons converge to deliver measurable impact.

But this potential will remain untapped unless asset managers seize this opportunity to go beyond declarations and embed sustainability into every layer of the investment decision-making process.

Aligning private markets with ESG principles presents both tremendous opportunity and meaningful challenges. But it is not enough to simply adopt new reporting tools or frameworks. What’s required is a fundamental shift in governance, incentive structures, and investment culture – one that prioritises long-term value creation over short-term gains.

Whether private markets evolve into ESG and Sustainability leaders or remain regulatory blind spots will depend on the choices made today. For General Partners or Limited Partners, and their advisers, the question is no longer whether sustainability matters in private markets, but: Are we setting the bar high enough?