Renovation in environmental, social and governance (ESG) research: the application of machine learning

Abstract

Purpose

Environmental, social and governance (ESG) factors have become increasingly important in investment decisions, leading to a surge in ESG investing and the rise of sustainable investment assets. Nevertheless, challenges in ESG disclosure, such as quantifying unstructured data, lack of guidelines and comparability, rampantly exist. ESG rating agencies play a crucial role in assessing corporate ESG performance, but concerns over their credibility and reliability persist. To address these issues, researchers are increasingly utilizing machine learning (ML) tools to enhance ESG reporting and evaluation. By leveraging ML, accounting practitioners and researchers gain deeper insights into the relationship between ESG practices and financial performance, offering a more data-driven understanding of ESG impacts on business communities.

Design/methodology/approach

The authors review the current research on ESG disclosure and ESG performance disagreement, followed by the review of current ESG research with ML tools in three areas: connecting ML with ESG disclosures, integrating ML with ESG rating disagreement and employing ML with ESG in other settings. By comparing different research's ML applications in ESG research, the authors conclude the positive and negative sides of those research studies.

Findings

The practice of ESG reporting and assurance is on the rise, but still in its technical infancy. ML methods offer advantages over traditional approaches in accounting, efficiently handling large, unstructured data and capturing complex patterns, contributing to their superiority. ML methods excel in prediction accuracy, making them ideal for tasks like fraud detection and financial forecasting. Their adaptability and feature interaction capabilities make them well-suited for addressing diverse and evolving accounting problems, surpassing traditional methods in accuracy and insight.

Originality/value

The authors broadly review the accounting research with the ML method in ESG-related issues. By emphasizing the advantages of ML compared to traditional methods, the authors offer suggestions for future research in ML applications in ESG-related fields.

Citation

Zhang, A.Y. and Zhang, J.H. (2024), "Renovation in environmental, social and governance (ESG) research: the application of machine learning", Asian Review of Accounting, Vol. 32 No. 4, pp. 554-572. https://doi.org/10.1108/ARA-07-2023-0201