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Is governance keeping up with the AI explosion?   By Michael Chou Investment Manager

Artificial intelligence (AI) is becoming ingrained in corporate practices, helping organisations to automate repetitive jobs, save time, improve services and make better decisions. However, it is also creating significant new risks and governance challenges for companies and the investors who fund them.     Where traditional software follows fixed rules, AI learns from data by identifying patterns and, as a result, it can produce outputs that seem plausible but, sometimes could be incorrect or biased. Some incidents may be minor, such as a chatbot producing the wrong answer, while others can be life-changing, such as AI tools incorrectly determining someone’s eligibility for life insurance or even employment.     From an operational perspective, the failure of a large language model (LLM) could result in significant downtime, loss of important data and strain on IT infrastructure.     As the use of AI escalates, it is also creating additional security risks, which include potential data leaks and misuse of personal or sensitive information. Because AI tools use large amounts of data, when something goes wrong the impact can grow quickly, affecting hundreds of customers and, in turn, damaging a company’s reputation and eroding client and investor trust.    There is also the matter of a company’s environmental impact when using AI. Data centres use millions of litres of water each year to cool electrical components. That is a problem when a quarter of humanity already lacks access to clean water and sanitation. To power these complex electronics, a huge amount of power is required, with the International Energy Agency reporting that a request made through AI uses 10 times the amount of energy as a Google search, which has implications for companies’ emission targets.    Further risks include the raft of legal and compliance issues for companies to consider before implementing an AI tool, including those under consumer, employment, privacy and copyright laws.    Therefore, it is no surprise that many large investors and shareholders are now focusing their attention on AI governance and asking for greater disclosure around companies’ use of AI.    Shareholders demand details A recent report by our engagement and ESG consultant ISS Corporate1, found 58% of institutional investors and corporate issuers believe companies that significantly use AI should apply a global framework to evaluate risk. Over half (54%) believe that companies should also publicly disclose how their boards are overseeing AI-related initiatives to manage risk.    A data-driven screening tool, the ISS Governance QualityScore, which is used to assess governance and corporate risk, recently added three new factors related to AI and board oversight. Its findings, collected in the latter part of 2025, show a gap between shareholder expectations and corporate disclosure.    ISS found that 22% of S&P 500 companies are adequately disclosing board oversight of AI, with the Utilities and Information Technology sectors leading the way and Financials and Healthcare at the lowest end, with 5% each.    The report also found that the lion’s share (69%) of S&P 500 companies have no directors with AI expertise. Further, three-quarters (76%) do not publicly disclose their policies related to AI development, deployment and monitoring.    What is clear from these findings is that while AI is now everywhere, AI governance has not caught up.   The way forward for risk mitigation The pace of change is a major issue in the AI sector. While technological innovations such as machine learning, generative AI and automation tools can be introduced in a matter of months, corporate policies and government regulations can take much longer to catch up. Often, by the time a governance framework has been created, the technology has already moved on.    These rapid changes mean investors need to undertake thoughtful research and fully understand all the risks before investing. When engaging with investee companies, investors should seek clarity on which AI applications or systems companies are deploying, clarify board oversight and assess enterprise-wide risk management, including regulatory preparedness.    According to the Responsible Investment Association of Australia2, some of the questions fund managers and asset owners should be asking include:    Where are you using AI and why?  How is AI being used in your supply chain?  What human oversight do you have?  How are you ensuring the security of data?  Have you considered and managed the potential and actual human rights impacts of the product?  What is your transparent remediation process should your company’s development or use of AI lead to unintended consequences for customers or employees?  Is your net zero strategy still fit-for-purpose?  Delving deeper into companies’ use of AI is not about stopping innovation. It’s about conducting the right amount of due diligence to provide investors with the information they need to manage portfolio risks and make informed decisions.   1. Artificial Intelligence and Governance, ISS Corporate, 2025  2. Investor Responsibility in the Age of AI, RIAA, 2026      Important information: The Uniting Financial Services (UFS) unregistered managed investment schemes are available for investment only to wholesale investors. Prospective wholesale investors who wish to invest via our unregistered managed investment schemes can access the Information Memoranda for these any of these funds on the UFS website. While the information in this email has been prepared with all reasonable care, UFS accepts no responsibility or liability for any errors, omissions or misstatements however caused. No action has been taken to register or qualify these products or otherwise permit a public offering of these products in any jurisdiction outside Australia. Past performance is not indicative of future performance.    

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