Railpen, the £34bn railways pension scheme, has published a new report exploring how artificial intelligence (AI) systems are classified and the risks they pose to portfolio companies without an effective system of governance.
As investors seek to benefit from the opportunities AI presents – alongside the rollout of new regulations such as the European Union AI Act – the report, Achieving Effective AI Governance, aims to serve as tool for investors to assess how companies approach AI risk management.
AI is becoming increasingly common in business practices.
In 2024, 72% of companies had adopted AI in at least one business function, and over 60% of S&P companies believe they face material risks related to AI.
To help investors assess the materiality of AI risks, Railpen and Chronos Sustainability, a sustainability consultancy, have developed an AI Governance Framework (AIGF) that translates responsible AI principles into actionable practices based on four key pillars: governance, strategy, risk management and performance reporting.
Based on the evidence and case studies presented in the report, Railpen and Chronos are calling on investors to take steps to ensure effective governance of AI.
The first is conduct a high-level assessment to determine potential portfolio risks from AI using the different criteria presented in the report.
Second, engage with priority companies using Railpen’s AIGF as a basis for assessing how companies are managing AI risks, and Railpen’s guidance on good practice disclosure and potential engagement questions to support meaningful dialogue.
Third, consider engaging in policy advocacy around the responsible use of AI to close the gap between regulation and the rapid evolution of AI and ensure the unique and useful investor perspective is heard by policymakers.
The report also addresses how Railpen is acting upon the strategic benefits of AI across its investment portfolio, complementing Railpen’s and Royal London Asset Management’s earlier publication of guidance for investors on how to take a more proactive approach to cybersecurity risk and resilience.
“As a long-term investor and a universal owner of assets, we have a duty to members to understand and act upon evolving risks and opportunities that could affect our portfolio companies as well as the wider health of the economy and financial markets,” said Caroline Escott, co-head of sustainable ownership and head of investment stewardship at Railpen.
“We recognise the significant long-term opportunities presented by AI and this is reflected in the investments that we have made across our real assets and equity strategies,” she added.
However, she noted: “As AI adoption becomes mainstream in business practices, we are seeing AI-related incidents and controversies steadily increase. It is therefore critical for us to continue engaging with our portfolio companies on AI risks and we are calling on other investors to do the same.”
Comments