Anxiety Over 'AI Blowback' Grips Tech-focused Esg Fund Managers

ESG fund managers who had turned to major technology companies as a low-carbon, high-return investment are becoming increasingly apprehensive about the sector's foray into artificial intelligence (AI). The exposure to AI is now considered a "short-term risk to investors," according to Marcel Stotzel, a portfolio manager at Fidelity International based in London.

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Stotzel expressed concern over a potential "AI blowback," where an unexpected event could trigger a substantial market decline. He emphasized that it only takes one incident for something to go wrong, and the repercussions could be significant. Stotzel cited examples such as fighter jets equipped with self-learning AI systems, prompting fund managers, including Fidelity, to engage with companies developing such technologies. Discussions are underway to address safety features, including the implementation of a "kill switch" to activate if AI systems were to go awry in a dramatic manner.

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The ESG (Environmental, Social, and Governance) investing industry, having embraced technology extensively, may be particularly vulnerable to such risks. Funds with explicit ESG objectives hold more tech assets than any other sector, and the largest ESG exchange-traded fund is heavily dominated by tech giants like Apple Inc., Microsoft Corp., Amazon.com Inc., and Nvidia Corp.

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The companies leading in technology are also at the forefront of AI development. Recent tensions within the industry regarding the pace and direction of AI development have come to light, with notable events such as the firing and rapid rehiring of the CEO of OpenAI, the organization behind ChatGPT.

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Concerns extend to potential societal risks associated with the ambitious expansion of AI. While some tech companies, including Apple, Microsoft, Amazon, Alphabet Inc., and Meta Platforms Inc., have committed to voluntary safeguards to minimize AI abuse and bias, apprehensions persist among investors.

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Stotzel expressed greater concern about risks emanating from tech giants rather than smaller AI startups, emphasizing that the largest companies have the potential to inflict the most damage.

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Other investors and institutions are sharing similar concerns. The New York City Employees' Retirement System, one of the largest U.S. public pension plans, is actively monitoring how portfolio companies utilize AI. Generation Investment Management, co-founded by former U.S. Vice President Al Gore, is intensifying research into generative AI and engaging with invested companies to assess risks and opportunities associated with the technology.

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Norway's $1.4 trillion sovereign wealth fund has also urged boards and companies to address the "severe and uncharted" risks posed by AI.

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Despite the rapid growth and popularity of AI applications such as ChatGPT, the absence of regulations and historical data on the performance of AI assets over time is a source of concern. ESG analyst Crystal Geng at BNP Paribas Asset Management in Hong Kong emphasized the lack of tools and methodologies to quantify the risks associated with AI.

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Jonas Kron, Chief Advocacy Officer at Trillium Asset Management, highlighted AI as a governance risk for investors. Concerns range from the reinforcement of discrimination in areas like healthcare to the potential misuse of personal data, raising questions about transparency and accountability in AI algorithms.

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Incidents and controversies related to AI have increased significantly since 2012, according to a database tracking the misuse of the technology. Investors in major tech companies have filed resolutions demanding greater transparency over AI algorithms, while concerns about AI's impact on various aspects, including worker protection, have prompted calls for increased corporate responsibility.

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The heightened awareness of the significant issues surrounding AI is reflected in the actions taken by investors, regulatory bodies, and advocacy groups to address the risks associated with the technology.

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