DelCreo, Inc.

Developing AI Risk Factors

Weighing the Risks #13

Developing AI Risk Factors

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Hi, enjoy this weeks curated risk and business updates.

Regulating the potential harmful effects of AI continues to be a focus in 2024, with emphasis being placed on accountability, transparency and overall risk management. Countries are developing varying strategies toward managing AI developments, the USand many western nations are focusing on implementing appropriate “guardrails, whereas China is focusing its national strategy on promoting AI research and development related are addressing the myriad challenges.

The BletchleyDeclaration signed by 29 countries in November 2023 recognizes many likely AI risk areas including:

·     Human rights violations

·     Transparency

·     Unfairness

·     Accountability

·     Regulation

·     Safety

·     Appropriate human oversight

·     Ethics

·     Bias mitigation

·     Privacy and data protection

·     Deceptive/ manipulated content

·     Cybersecurity

·     Biotechnology

Despite some level of agreement on the need for international collaboration on managing AI related risks, there is not consensus on how to proceed. “Geopolitically, we’re likely to see growing differences between how democratic and authoritarian countries foster—and weaponize—their AI industries.”  New laws and regulations are quickly being passed and adopted, challenging companies to keep up with a very dynamic and fragmented regulatory framework.

Request more information on DelCreo’s Risk Universe and risk assessment services.

As a reminder, here are our Risk Universe categories that we leverage to tackle and understand risk which include:

  • External Risk

  • Governance Risk

  • Strategic Risk

  • Product Risk

  • Business Operations Risk

  • Legal & Compliance Risk

  • Financial Risk

  • Technology Risk

These high-level risks are fairly consistent between different companies and risk profiles.

We leverage our understanding of risk maps and risk universes to better advise our clients in strategic business decisions and to optimize the management of risk throughout the enterprise.

Weighing the Risks

Weekly Highlights

  • AI Lobbying and Regulatory Developments: Big Tech companies are aggressively lobbying to shape U.S. AI regulations, advocating for lenient policies that might prioritize corporate interests over public safety and broader societal concerns. Concurrently, the urgency in addressing AI risks is gaining political traction, as seen in the U.S. President's AI Executive Order and changes in the E.U.'s AI laws, reflecting a shift in how major risks like AI are perceived similarly to global threats such as pandemics.

  • Global Economic Outlook: The global economic environment is showing signs of improvement with upward revisions in growth forecasts by the OECD, driven by strong performance in the U.S. and fiscal stimuli in China.

  • U.S. Economic Challenges:  High interest rates threaten to precipitate an economic downturn, emphasizing the immediate economic dangers of delayed fiscal adjustments, and showcasing the broader implications of policy decisions on economic stability and industry performance.

Risk Universe Weekly Updates

External Risk

  • There’s an AI Lobbying Frenzy in Washington. Big Tech Is Dominating

    • The intense lobbying efforts on AI legislation highlight significant political and economic risks. As large tech companies dominate these efforts, pushing primarily for lenient regulations, this raises concerns about the effectiveness of potential laws and the influence of corporate interests over public safety and technological governance.

    • The global prioritization of AI risks, as emphasized by AI researchers and industry executives, aligns with political actions such as the U.S. President's AI Executive Order and adjustments in the E.U.'s AI laws. These moves indicate a growing recognition of AI's potential existential threats, paralleling concerns traditionally associated with pandemics and nuclear war, thus reflecting significant demographic and political shifts in risk perception.

  • OECD upgrades global growth outlook as U.S. outperforms

    • The OECD has raised its global economic growth projections due to stronger-than-expected economic activities, particularly in the U.S., and a quicker convergence of inflation rates to central banks' targets. This updated outlook suggests reduced economic and industry risks globally, although disparate recovery speeds across regions like Europe and Japan introduce potential instability.

    • Fiscal stimuli in China and the U.S. are propelling higher growth rates than initially anticipated, with China's growth forecast revised upwards for the next two years. Conversely, the economic outlook for the UK has been downgraded, signaling uneven economic recovery and potential vulnerabilities in certain economies that could affect global economic stability.

  • There's a messy AI battle going on in DC — and there's no end in sight

    • The U.S. struggles to pass federal regulations on artificial intelligence, leading to a reliance on executive orders by Presidents Biden and Trump to address the gap. This regulatory uncertainty poses political and industry risks, potentially affecting the development and management of AI technologies, which could lead to inconsistent standards and enforcement across states.

    • The lack of comprehensive AI legislation at the federal level contributes to a divergent approach to AI governance, with significant reliance on executive decrees that offer limited enforcement capabilities against misconduct in the AI industry. This governance model raises economic and political risks by creating a fragmented regulatory environment that could hinder coordinated national responses to AI-related challenges.

  • The Fed will spark an economic crash by delaying rate cuts, State Street equity research chief says

    • Marija Veitmane warns that delaying interest rate cuts by the Federal Reserve could lead to an economic downturn, emphasizing the immediate economic risks of sustained high interest rates. This scenario suggests potential economic and industry risks as businesses face increasing debt refinancing costs and consumers endure rising borrowing rates, which could stifle economic growth and consumer spending.

    • The persistent high interest rates are already impacting the U.S. economy by elevating corporate bond yields and credit card rates, leading to cautious consumer behavior and disappointing corporate earnings. These factors contribute to a precarious economic environment that could rapidly transition from stability to a significant downturn, highlighting the vulnerability of the economy to monetary policy decisions.

Governance Risk

  • Next-Gen Governance: AI’s Role in Shareholder Proposals

    • Shareholder proposals demanding greater transparency on AI deployment and ethical guidelines are gaining traction among institutional investors, urging companies to disclose AI-related risks and mitigation efforts, as evidenced by proposals at major companies like Apple, Amazon, and Alphabet.

    • Proxy advisors like Glass Lewis and ISS are increasingly supporting such proposals, emphasizing the importance of improved transparency for shareholders to evaluate AI-related risks, even though some proposals, like Arjuna Capital's at Microsoft, may face opposition due to perceived adequate disclosure by the company.

Legal & Compliance Risk

  • Google class action claims company trained AI tool with copyrighted work

    • Alphabet Inc. and Google face legal and compliance risks due to allegations of copyright infringement in the training of their AI software, Imagen, with datasets containing copyrighted images, potentially leading to significant legal proceedings, inquiries, and damages.

    • Plaintiffs in the class action lawsuit claim that Google violated copyright laws by making its AI model, Imagen, publicly available without authorization, potentially exposing the company to liability for direct and vicarious copyright infringement, necessitating a jury trial and potentially injunctive relief and damages.

  • Judge grills Apple exec about whether company is defying order to enable more iPhone payment options

    • Apple faces legal and compliance risks stemming from allegations of steering consumers towards its exclusive app payment system, potentially violating an injunction aimed at promoting alternative payment options and lowering prices, while facing ongoing scrutiny from a federal judge regarding compliance with antitrust orders and concerns over the company's profit motives.

    • Despite implementing a new commission structure for alternative payment options, Apple's compliance efforts are under question, with the judge expressing skepticism about the company's motivations and the effectiveness of its measures in fostering competition, indicating ongoing legal battles and inquiries into Apple's business practices.

Financial Risk

  • Reddit Shares Soar On First Post-IPO Q1 Results, Strong Q2 Guidance

    • Reddit, Inc. (NYSE: RDDT) reported higher-than-expected quarterly sales but missed analyst estimates for losses per share, indicating potential financial performance volatility and discrepancies between revenue growth and profitability.

    • Despite strong user traffic growth, with record Daily and Weekly Active Uniques, Reddit forecasts second-quarter revenue surpassing analyst expectations, suggesting ongoing capital and liquidity stability, but uncertainty remains regarding achieving profitability targets indicated by adjusted EBITDA projections.

  • AI to Transform Financial Reporting and Auditing, Report Claims

    • Australian companies are increasingly adopting AI in financial reporting, with a notable emphasis on Generative AI (GenAI), expected to be the top technology priority for over half of the companies by 2027, indicating potential fluctuations in financial performance due to increased investment and reliance on AI technologies.

    • While AI adoption offers benefits such as improved productivity and cost reduction, concerns regarding copyright issues, data management, sovereignty, bias, hallucinations, and cybersecurity risks accompany the implementation of AI, necessitating proactive risk management strategies to mitigate potential financial and reputational damages.

Technology Risk

  • Harnessing AI-Powered Sustainability Risk Management: What To Do And What To Avoid

    • Businesses are increasingly recognizing the importance of integrating sustainability into their risk management strategies to enhance competitiveness and resilience, with sustainability serving as a key pillar that significantly amplifies innovation, agility, velocity, and ultimately, resilience, indicating a shift towards a "max-max" principle where maximum effort in risk management drives sustainability and business outcomes.

    • Emerging technologies, particularly AI, are pivotal in managing complexities in sustainability risk management by enabling the concatenation of unstructured data to create actionable insights, providing transparency for various stakeholders in the value chain, and facilitating proactive risk mitigation strategies, highlighting the importance of embracing technology to enhance sustainability risk management practices.