Artificial intelligence is fast becoming an essential part of our daily lives and often in surprising ways. From the road network we drive on and the healthcare we receive, to the news we read and food we order, AI is transforming the world we live in.
AI will shape the next era of corporate strategy, economic growth and market transformation. Indeed, in the UK alone, 75 percent of financial firms surveyed by the Bank of England last year were already using AI and a further 10 percent were planning to use it in future.
But with such rapid and widespread adoption, AI is fast becoming a core governance and sustainability challenge that presents material risks to companies.
This is a core theme in Scottish Widows’ new report, Governing the Algorithm: Investor Priorities for Responsible AI. In it, we analyse the clear opportunities – and responsibilities – for investors to help shape the governance standards needed to manage the emerging risks of AI. Ultimately, it’s in everyone’s interests to ensure that AI is developed and deployed in a way that supports not only innovation but also inclusion, stability and shared prosperity.
This is exactly why we incorporated AI and ethics into our stewardship priorities in 2023, and have been researching and engaging with asset managers to explore how AI oversight can be more effectively embedded into ESG analysis and investment practice.
Why AI governance must be a board-level priority
While AI offers efficiency and innovation, it also introduces systems that lack transparency, with decision-making logic hard to pinpoint. These so-called ‘black box’ AI models – where even the models’ developer is unable to determine how it makes decisions – raise serious risks related to bias, misinformation, privacy and operational integrity. Businesses could risk legal exposure, reputational damage and eroded stakeholder trust.
Despite the scale of adoption, Stanford’s 2024 AI Index found that fewer than 20 percent of public companies were disclosing details of their AI risk mitigation strategies last year, and only 10 percent were reporting on fairness or bias assessments.
This lack of transparency presents a material blind spot for both investors and regulators. In our report, we found that this transparency gap makes it increasingly difficult for investors to understand how AI is being governed, especially in high-impact sectors such as healthcare, finance and retail.
To tackle this, boards must consider AI as a cross-cutting governance concern – much like cyber-security or climate risk – that requires appropriate oversight and clear risk mitigation processes.
A framework for investor action
While some organisations are beginning to recognise the governance issue, our report highlights analysis by ISS-Corporate showing that only 15 percent of S&P 500 companies disclosed some form of board oversight of AI in their proxy statements – and even fewer, just 1.6 percent, provided explicit disclosure of full board or committee-level responsibility.
To help address this, Scottish Widows is advocating for a three-part approach.
First, we believe AI governance should be integrated into ESG investment analysis, with investors assessing how companies disclose AI use, establish internal safeguards, and assign oversight to executive or board-level leaders.
Second, stewardship and engagement must focus on how companies govern AI day-to-day. This includes engaging on bias assessments and explainability mechanisms, and ensuring human oversight is embedded in high-impact use cases. Where transparency or risk management is lacking, escalation through proxy voting can be an appropriate tool.
And lastly, investors have a crucial role in setting clear expectations. This means aligning stewardship practices with global standards such as the OECD AI principles and EU AI Act. By setting and following clear standards, we can help shape an investment environment where innovation is matched by accountability.
Responsible AI – a critical juncture for investor leadership
With long-term investment horizons and systemic influence, pension schemes are uniquely placed to drive stronger governance standards across the economy. As long-term stewards of capital, we are accountable not only for today’s performance, but for the sustainability and resilience of people’s futures.
By encouraging better governance and disclosure, pension funds can carefully guide the widespread adoption of AI and contribute to more transparent, equitable and future-fit corporate behaviour. This doesn’t mean limiting innovation, but ensuring that it is guided in a way that aligns with societal expectations and legal standards, and supports long-term economic stability, inclusion and accountability.
We’re committed to working alongside companies, policymakers and industry peers to ensure this governance evolves in step with innovation because contributing to a resilient, trustworthy economy in the age of AI is not just good governance, but an essential part of our duty to current and future beneficiaries.
Eva Cairns is head of responsible investment at Scottish Widows
