Norway’s oil fund is sending a message to companies on AI

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Artificial intelligence, according to Nicolai Tangen, head of Norway’s huge $1.4tn oil fund, is like being “in a rocket on the way into space . . . It’s hugely exciting, but it’s also scary.”

Stretching the metaphor to its limits, the head of the world’s largest sovereign wealth fund adds: “We hope we’re in Apollo 11, not Challenger. The mission statement is to return safely.”

All this might just seem to be a glib soundbite, but the Norwegian fund is among the most advanced of any of the world’s big traditional investors in publicly articulating its thoughts on AI. This is not just on the balance between risk and opportunity from AI but also what it thinks the companies it invests in should be doing. As the importance of AI only grows, the oil fund’s stance is going to be well worth following.

The fund last month put out its first thoughts on how companies should responsibly use AI. The issue has taken on particular importance for it, and many other investors, owing to an extraordinary run for just a few companies, partly due to AI.

Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla — just seven names out of more than 9,000 companies the fund owns — account for 12 per cent of its portfolio. In the first half of this year, those seven brought it one-third of the fund’s return. That concentration makes the likes of Tangen nervous, even if there is relatively little he can do about it as the fund is all but an index investor.

Instead, the fund is trying to use its heft — it owns on average about 1.5 per cent of every listed company worldwide — to improve all its investments’ use of AI by focusing on three areas.

The first is ensuring boards are accountable for the responsible development and use of AI. Here, Tangen is damning. “Boards are absolutely not on top of this,” he says. Given how many companies have long struggled to get enough expertise on cyber security, AI is likely to be an even tougher ask. The oil fund could vote against those that do nothing, Tangen adds.

The second relates to how transparent companies are on how they use AI and how they explain how those systems have been designed and tested. As well as the tech industry itself, the fund is paying particular attention to those sectors using AI with consumers such as healthcare, financial and consumer goods.

The final element is risk management. The fund argues that companies should be proactive, and ensure outside verification and auditing of their AI systems and risk management processes. Companies are nowhere near being good enough on any of the three points so far, according to Carine Smith Ihenacho, the fund’s chief governance and compliance officer, who says she also worries about AI’s potential wide-reaching effects on democracy and how markets function.

Underpinning it all is a desire for state regulation of the AI sector. Tech companies may be talking about state regulation but Tangen argues they “will not self-regulate away important revenue streams”, making it important for governments to step in.

The fund’s demands may be relatively broad-brush, and, in the demand for global regulation, even utopian. But it is important for investor views to be heard as AI seeps into ever more corners of the economy. By setting out its thoughts clearly, the oil fund can more easily sanction errant companies at annual meetings — as it already does to many of its large holdings on everything from pay to splitting the role of chief executive and chair. It will be interesting to see who it votes against first.

But the fund is not just interested in AI as an owner. Tangen is hoping to use the technology to improve its trading and internal productivity significantly. By using AI to help managers spend less time on “boring things”, he has set a target of boosting internal productivity by 10 per cent (a number plucked from thin air, he blithely admits).

AI is also helping with trading, reducing the cost and frequency of buying and selling. The fund is using it to help decide when to trade and to eliminate practices where it buys and then sells shares quickly owing to portfolio rebalancing requirements.

Tangen is clearly bullish: “If you don’t think there are opportunities with AI, then in my mind you are a complete moron.” But to avoid an AI crash-landing may require Norway’s oil fund and other investors to worry about what could go wrong just as much.

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@rmilneNordic