Investors weary of AI blowback

ESG fund managers, once drawn to big tech for its low-carbon, high-return potential, are growing increasingly uneasy about the sector’s dalliance with artificial intelligence (AI).

According to Marcel Stotzel, a London-based portfolio manager at Fidelity International, exposure to AI now poses a “short-term risk to investors.” Stotzel expressed concern over a potential “AI blowback,” envisioning an unexpected incident leading to a significant market downturn. He emphasized the significance of just one mishap having a substantial impact.

Stotzel cited examples like fighter jets equipped with self-learning AI systems, prompting Fidelity and other fund managers to engage with companies developing such technologies to discuss safety features like a “kill switch” in case “AI systems go rogue in a dramatic way.”

The ESG investing industry, heavily invested in tech, faces heightened exposure to such risks. ESG funds with an environmental, social, and governance objective have more tech assets than any other sector. The leading ESG exchange-traded fund is tech-dominated, led by companies such as Apple Inc., Microsoft Corp., Inc., and Nvidia Corp.

These tech giants are at the forefront of AI development. Recent tensions regarding the industry’s direction and pace surfaced publicly, particularly with OpenAI’s CEO dismissal and subsequent rehiring, signaling debates about growth plans and societal risks associated with ambitious AI developments.

While Apple and other tech companies have pledged cautious approaches to AI, concerns persist. Stotzel expressed more concern about risks from tech giants than small-scale AI startups, emphasizing that “the biggest companies could do the most damage.”

Other investors echo these apprehensions. Entities like the New York City Employees’ Retirement System and Generation Investment Management are intensifying research into AI, emphasizing both its risks and opportunities. Norway’s sovereign wealth fund has warned companies to take AI risks seriously.

Despite AI’s rapid growth and the success of initiatives like OpenAI’s ChatGPT, the absence of regulations and historical data on AI asset performance raises concerns. Crystal Geng, an ESG analyst at BNP Paribas Asset Management, highlighted the lack of tools to quantify AI risks and the challenge of estimating social impacts.

Jonas Kron from Trillium Asset Management has advocated for tech companies to clarify their AI work, citing AI as a governance risk. He and others worry that unchecked AI could perpetuate discrimination, amplify biases, and enable misuse of personal data.

Incidents and controversies involving AI have multiplied significantly since 2012. Investors are demanding transparency from tech giants like Microsoft, Apple, and Alphabet’s Google regarding their AI algorithms. Concerns range from discrimination and disinformation to mass layoffs due to automation.

Carin Zelenko from AFL-CIO Equity Index Fund emphasized concerns about discrimination, disinformation, and automation-induced layoffs. Hollywood’s industry concerns and high-profile strikes this year have heightened awareness of AI’s impact across businesses.

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