Whilst artificial intelligence (AI) is creating “significant” opportunities for investment portfolios, it could also present material risks, Railpen has warned, as it unveiled a new framework designed to help investors assess companies’ approaches to AI risk management.

The AI Governance Framework (AIGF), developed in partnership with Chronos Sustainability, translates principles of responsible AI into practical governance measures, structured around four pillars: governance, strategy, risk management, and performance reporting.

It builds on Railpen's research, which highlighted AI’s dual impact - promising substantial long-term gains, but accompanied by a rise in AI-related incidents and controversies.

Indeed, it noted that in 2024, 72 per cent of companies adopted AI in at least one business function, while more than 60 per cent of S&P-listed companies identified material AI-related risks.

Meanwhile, the pace and scale of adoption, the report warned, continued to "outstrip" the development of regulatory frameworks.

Therefore, Railpen and Chronos have called on investors to take serious steps to ensure effective governance of AI.

This includes conducting a high-level assessment of potential AI risks across portfolios using the AIGF criteria.

They also recommended engaging with priority companies by drawing on Railpen’s guidance on good practice disclosure and suggested engagement questions to support meaningful dialogue.

In addition, the report urged investors to consider participating in policy advocacy on responsible AI, to help close the gap between regulation and the rapid evolution of the technology, and to ensure policymakers hear the "investor voice."

“Investors have a critical role to play in addressing the risks we outline in this report - particularly where portfolio companies are deeply embedded in the AI value chain, reliant on AI systems, or operating in sectors where AI use is rapidly evolving,” the report stated.

“Managing these risks effectively requires collective action,” it added.

Echoing this, Railpen co-head of sustainable ownership and head of investment stewardship, Caroline Escott, said the organisation had a duty as a long-term investor to both harness AI’s potential and guard against its systemic risks, and urged others to engage with their portfolios on AI governance.

Chronos Sustainability CEO, Dr Rory Sullivan, described the framework as one that “makes plain the systemic risk that AI can pose, alongside the significant opportunities it presents,” encouraging investors to take action by leveraging the framework to engage proactively with businesses and drive effective AI governance across sectors.

The initiative follows Railpen’s earlier work with Royal London Asset Management on cybersecurity risk and resilience.

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