Good Governance, ESG Disclosures, and “AI Washing”

The increasing emphasis on environmental, social, and governance (ESG) has elevated the importance of governance within companies, and the integration of artificial intelligence (AI) into practically every industry has prompted companies to consider its impact on corporate governance, according to an article by Pillsbury Law. 

As AI continues its expansive reach, companies will need to navigate the intersection of AI and good governance standards. While AI offers transformative benefits, it also introduces risks that require careful attention. The SEC, led by Chair Gary Gensler, has emphasized the significance of ESG-related disclosures and internal controls, cautioning against “AI washing” or overstating AI capabilities.

The broad implications of AI on governance — encompassing ethical business practices, stakeholder treatment, risk management, transparency, and profitability — necessitate a thoughtful and responsible integration strategy.

Management and boards of directors play crucial roles in this process. Boards must oversee AI implementation, asking pertinent questions and scrutinizing management’s plans. As AI introduces unique challenges, boards should adapt to the changing landscape, staying informed about their company’s AI use and ensuring adequate disclosure.

To promote good governance and adherence to ESG principles while using AI, companies should implement strong internal controls, foster transparent communication, and consider AI’s contribution to ESG goals. Additionally, compliance with ongoing regulatory requirements, preparation for adverse AI events, and a proactive approach to risk mitigation are essential.

Disclosure obligations become crucial as companies face increasing regulatory scrutiny. The SEC’s interest in ESG-related disclosures extends to AI, requiring companies to provide accurate and complete information. As the SEC intensifies its scrutiny of AI-related issues, companies must balance the benefits of AI with the imperative to uphold governance standards and fulfill disclosure obligations.