SustainAbility: Navigating AI – a governance lens is key

Until recently, sustainability-focused investors analysing AI were primarily focused on environmental issues, with investors rightly focused on the vast energy requirements of data centres, massive cooling-water consumption, and the strain placed on local power grids during the AI build-out.

However, as the technology evolves from build out to deployment into the real world, we are entering a pivotal new phase where social and governance factors are becoming equally critical.

Potential… and risk

To my surprise, for the first time in reading company disclosures, I encountered a startling phrase in an official regulatory filing: ‘catastrophic and existential risk to humanity.’

While company risk filings are typically filled with language around market volatility or supply chain disruptions, seeing leading AI and technology companies explicitly acknowledge existential risks is a sobering moment. These disclosures, accompanied by widespread public commentary from industry leaders, have understandably caused concerns.

It begs the question: How should sustainable investors navigate an opportunity that carries both tremendous potential and unprecedented risk?

A pace and scale unlike anything before

We often hear AI compared to previous technological revolutions – the steam engine, the personal computer, or the internet. However, those comparisons fall short when considering velocity and scale. Previous technology shifts unfolded over decades, giving infrastructure, legislation, and society time to adapt.

In contrast, generative AI tools reached hundreds of millions of users virtually overnight. The pace of change is so rapid that traditional government regulation struggles to keep up. In the immediate term, tech companies themselves may be best placed - and forced – to regulate their own development through internal safety policies and ethical guardrails.

From environmental footprints to social and governance realities

Until recently, sustainability-focused investors analysing AI were primarily focused on environmental issues – investors were rightly focussed on the vast energy requirements of data centres, massive cooling-water consumption, and the strain placed on local power grids during the AI build-out.

However, as the technology evolves from build out to deployment into the real world, we are entering a pivotal new phase where social and governance factors become equally critical.

Given the breakneck speed of AI advancement, we consider governance as becoming the single most powerful lens through which to evaluate these companies.

Given the breakneck speed of AI advancement, we consider governance as becoming the single most powerful lens through which to evaluate these companies. Because external regulation lags, an investor's best defence against downside risk is investing in companies with strong internal oversight. We actively look for businesses that are responsibly managed for the long term, supported by clear frameworks, ethical committee oversight, and rigorous guardrails around executive decision-making..

A consistent framework in an uncertain world

The potential outcomes for AI from both a financial return and a sustainability perspective remain exceptionally wide. Some scenarios promise massive productivity boosts and medical breakthroughs; others carry severe ethical pitfalls and societal disruption.

In times of high market noise and hyper-growth, we believe that sticking to a disciplined, long-term investment framework is vital. Rather than chasing every hype investment theme or cycle, our sustainable investing approach is based around two key pillars:

1. Impactful solutions: Companies that contribute positively to a cleaner, healthier, safer, and more inclusive society through their core products and services.
2. Stakeholder leadership: Companies that excel in managing relationships across all stakeholders and over a multi-year horizon.

Looking ahead

AI presents one of the most complex investment landscapes of our generation. While the technology holds transformative power, the risks from an environmental, social, and governance perspective are real and explicitly acknowledged by the creators themselves.

By prioritising strong corporate governance and holding companies to high ethical and stakeholder standards, we believe our investment process can better navigate the risks of AI while positioning portfolios for sustainable, long-term growth.

For professional investors only.  This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. Reference to any security is for information purposes only and should not be considered a recommendation to buy or sell.

The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change. Forward looking statements are subject to certain risks and uncertainties. Actual outcomes may be materially different from those expressed or implied.