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AI in legal services as a catalyst for sustainable finance

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Ioannis Sidiropoulos of Elias Neocleous & Co LLC and Nicole Phinopoulou of Phinopoulou Legal Practice explain why artificial intelligence’s potential to increase the utilisation of sustainable finance depends on its adoption in the legal world

The legal profession has historically shown an immunity to change, displaying a more traditional character identified with classical court practice and heavy volumes of legal publications. The penetration of IT in the provision of legal services, while it did help to upgrade the quality and speed of the provision of these services and the administration of justice (especially in modern and advanced jurisdictions), has not provoked significant reform of the legal profession. However, this is now a realistic possibility, with the introduction of artificial intelligence (AI) promising to be an essential factor of reform in the world of law firms and beyond.

In this emerging framework, however, another parameter of change related to the provision of services in the field of financial law can be distinguished: so-called sustainable finance, or the adaptation of the legal and economic-technical options of the contracting parties to socially and environmentally responsible and sustainable standards, is gaining increasing regulatory importance and commercial popularity.

This act of incorporating environmental, social, and governance (ESG) data into investment management has become known as sustainable finance or investing (Berg, Fabisik, and Sautner 2020). In other words, giving access to a wider range of financing options, provided that sustainable development goals are achieved. The sustainability of funding must be assessed broadly, without barriers and prejudice regarding the means and tools with which it can be achieved.

Linking technology and sustainable strategies

Sustainability can, and should, include the adaptation of the current business models to the dynamic nature of the various digitalised contexts and frameworks. That is, companies must ensure that resources, and especially technology, are used responsibly and efficiently to improve the lives of not only current but also future generations, as well as to strengthen their relationship with the environment (Musleh Al-Sartawi, 2022).

It is, therefore, perceived that the meeting point of the above innovations can light the fuse of revolutionary change in the way of providing legal services to businesses today, and in their type, for the benefit of the economy, society, and the environment.

Recently, technological research has highlighted the concept of neural networks that simulate human behaviour, in areas such as cognitive processing, problem solving, and computational intelligence. There are already applications of AI that assist lawyers in tasks such as:

  • Due diligence procedures;

  • Automating the preparation of legal documents based on the input of simple variables/terms; or

  • Offering predictions of legal case outcomes with the use of advanced research and statistical analysis tools.

The obvious advantages of the use of these applications by a law firm are the rapid analysis of results of similar cases, the upgrading of legal research findings, their more appropriate matching with the issues/problems, and the suggestion of more effective and, probably, more profitable solutions/options.

Breaking the barrier of inertia

Of course, the intended change is not immediate, nor can it be taken for granted. Any change in business and professional practices (especially long-term ones) is expected to involve some resistance. Relevant historical examples are the upheaval in labour relations caused by the Industrial Revolution in the middle of the 19th century, and the fierce reactions caused by the ruling class of the USSR to the attempt of certain officials to introduce IT and computers in the management of the centrally controlled planning of the Soviet economy in the 1970s.

In the legal profession, it is understandable that there can be a suspicion of, and a possible reluctance to, the wider adoption of such revolutionary technologies. Indeed, we are still a long way from the point where AI will be able to produce human-level ‘mental’ work. However, this is not the point of innovation. Rather, the goal is to free lawyers from more standardised procedures and minimise/eliminate errors in them, saving time and effort so they can focus on producing substantive legal thinking, which, again through technology, will be easier to focus on and should allow for the identification of more appropriate solutions, contributing to the creation of a virtuous professional cycle.

The mechanisms of change

AI can, therefore, be an ally of the lawyer and a factor in the utilisation of sustainable financing options, first by suggesting these solutions, effectively contributing to the training and informing of professionals about the options that exist. At a later stage, the merging of legal thinking and analysis with the parameterisation required by the ESG framework – through the systematisation of legal advice, which is a central feature of law firms – can be significantly accelerated, with the obvious help of the computing power that technology ensures.

Arranging for the systems to promote solutions compatible with sustainability/eco-friendly policies will give these options an edge and increase their popularity. Of course, this change will also mean more opportunities for law firms to adopt ESG policies in their internal processes.

The potential for AI – combining algorithms, predictive models, and data analysis – to support sustainable finance appears ripe. Moreover, progressively more investors consider, in the management of their options, whether, and to what extent, the products and services provided incorporate the adoption of sustainable standards. It is fortunate that profit appears here to push towards the adoption of solutions that help to improve the protection of social and environmental indicators. Thus, investors demand more comprehensive and detailed financial reporting from companies and accountants with an emphasis on those standards, also fulfilling, in a way, a duty of corporate social responsibility.

Of course, lawyers will not need to deal with the specifics of these calculations in practice, but the challenge (and opportunity) lies elsewhere. The legal relationships of their customers will be affected, as non-compliance with sustainability policies will begin to incur increased transaction costs/penalties/damages. Lawyers will begin to find themselves increasingly in situations where certain options will not be available not necessarily due to strict legal/tax prohibitions or obstacles, but due to clauses and complex transactional hedges that will shape a business environment of increased risk.

It therefore appears that AI has the potential to contribute to addressing critical problems such as climate change and the degradation of the natural environment. It should prove capable of facilitating and promoting ESG, and of reducing business/investment risk. However, key to the establishment of this technology in transactions and its connection with business life is its acceptance by the legal world and its adoption by law firms.