Investors should take small but actionable steps to navigate AI challenges, LCP has said, suggesting that while AI presents opportunities, it also presents risks that will be difficult to mitigate due to their systemic nature.

In a blog post, LCP investment consultant, Julian Thakar, suggested that AI can present opportunities to improve decision-making, efficiency, and outcomes across industries.

However, he warned that there are also a number of risks where AI could have far-reaching implications for investors and the broader financial system.

In particular, he explained that, as AI systems grow more complex, their decision-making processes may become harder to explain or audit, creating governance challenges.

Herd behaviour is another concern, as Thakar said that widespread reliance on similar AI models could lead to correlated decision-making during periods of stress, especially in market trading.

Adoption of AI could also introduce new cyber vulnerabilities, as well as potentially slowing progress on net-zero goals given its rising energy demands and reliance on data centres.

Climate is not the only wider area of concern, as LCP noted that AI will transform labour markets, offering new opportunities, but also raising concerns about job displacement and deepening global inequality.

However, LCP said that there are "small but actionable" steps investors can take to mitigate these risks.

"AI is rapidly reshaping industries worldwide. While it creates exciting new opportunities, the investment risks are significant and growing," Thakar stated.

"Investors do not need to have all the answers today, but taking small, proactive steps now can help them prepare for what’s ahead.”

In particular, Thakar suggested that one important initial step is to add AI to the investment risk register as an emerging systemic risk, ensuring it receives attention and creating a foundation for future conversations and planning.

Another step, according to Thakar, is to engage with investment managers to understand how they assess and manage AI-related opportunities and risks, at both the company level and the systemic level, and to establish how AI is being used within their investment processes.

Thakar also encouraged trustees to consider adding AI to their list of stewardship priorities, to ensure it gets ongoing attention in manager reviews, documentation and engagement strategies.

This article was originally published on our sister website, Pensions Age.

---