As companies and investors seek to benefit from the significant opportunities AI presents – alongside the rollout of new regulations such as the EU AI Act – this report, Achieving Effective AI Governance, serves as a practical tool for investors to assess companies’ approaches to AI risk management. The report helps investors understand the significance of AI to their portfolios and provides guidance on how to work with portfolio companies to both manage AI risks and harness its benefits.
To help investors assess the materiality of AI risks, Railpen and Chronos Sustainability 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.
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 .
Based on the evidence and case studies presented in the report, Railpen and Chronos are calling on investors to take the following steps to ensure effective governance of AI:
- Conduct a high-level assessment to determine potential portfolio risks from AI using the different criteria presented in the report.
- 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.
- 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 management of long-term risk and opportunity arising from rapid technological development is fundamental to Railpen’s investment approach. Therefore, this 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.
Caroline Escott, Co-Head of Sustainable Ownership and Head of Investment Stewardship at Railpen, says: “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.
“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.
“However, 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.”
Dr Rory Sullivan, CEO at Chronos Sustainability, says: “We are pleased to have partnered with Railpen on this report which makes plain the systemic risk that AI can pose, alongside the significant opportunities it presents. We urge investors not only to take note, but to take action – leveraging this framework to engage proactively with businesses and drive effective AI governance across sectors."
@railpen
/railpen