Environmental, Social, and Governance (ESG) fund managers have turned to big tech as a promising avenue for low-carbon, high-return investments. However, a growing unease is spreading among these managers regarding the sector’s dalliance with artificial intelligence (AI). In this article, we delve into the apprehensions voiced by industry experts, the unique risks faced by ESG investors, and the unfolding dynamics in the AI landscape.
AI: A Short-Term Risk for ESG Investors:
Marcel Stotzel, a portfolio manager at Fidelity International, warns that exposure to AI represents a “short-term risk to investors.” His concerns center around the potential for an “AI blowback,” where an unexpected incident triggers a significant market decline. Stotzel highlights the need for safety features, such as a “kill switch,” especially in AI applications like self-learning systems in fighter jets.
ESG and Tech: A Risky Affair:
ESG funds, with a focus on environmental, social, and governance objectives, have embraced technology disproportionately. Bloomberg Intelligence reports that these funds hold more tech assets than any other sector. The world’s largest ESG exchange-traded fund is dominated by tech giants like Apple, Microsoft, Amazon, and Nvidia, all at the forefront of AI development.
Tech Giants and AI Development:
The concerns are not only about the risks posed by small-scale AI startups but also about the potential dangers lurking within the world’s tech giants. Fidelity’s Stotzel emphasizes that “the biggest companies could do the most damage.” Even as tech leaders like Apple, Microsoft, Amazon, Alphabet, and Meta Platforms commit to voluntary safeguards, questions about the governance and societal impact of AI persist.
Investors’ Call for Transparency:
ESG investors are increasingly demanding transparency from portfolio companies regarding their use of AI. Notable instances include the New York City Employees’ Retirement System actively monitoring AI usage and Generation Investment Management intensifying research into generative AI. Norway’s sovereign wealth fund has urged boards and companies to address the “severe and uncharted” risks posed by AI.
The Regulatory Void:
Despite the rapid growth of AI applications like OpenAI’s ChatGPT, the absence of regulations and historical data on AI asset performance raises concerns. ESG analyst Crystal Geng points out the lack of tools to quantify the risk, making it challenging for investors to assess potential social fallout. The rise in AI incidents and controversies further adds to the urgency for regulatory frameworks.
Governance Risks and Societal Impact:
AI is not only viewed as an investment risk but also as a governance risk. Concerns range from reinforcing discrimination in healthcare to amplifying racial and gender biases and the potential misuse of personal data. Investors are filing resolutions demanding transparency over AI algorithms, with worries extending to areas like disinformation during political elections and mass layoffs due to automation.
As ESG funds continue their foray into big tech, the integration of AI introduces a unique set of challenges. Balancing the pursuit of environmental and social objectives with the risks posed by AI requires careful navigation. The call for transparency, governance, and regulatory frameworks is growing louder as investors grapple with the uncharted path of responsible investment in the age of artificial intelligence.