The Challenge of AI in Sustainability : A board view

In recent years, Artificial Intelligence (AI) has revolutionized various industries, providing innovative solutions to increase efficiency, productivity, and creativity. The hype around AI, which has been going as high as governments, has driven a tremendous amount of resources & investments to fuel the race, from chip making to datacentre capabilities, and the related energy usage.

On the consumer side, the AI market has also grown 3 fold in the past year and is expected to grow at least 4 fold again until 2030.

Said simply, the challenge of AI is only getting started and is here to stay. Challenges span from a business, technical and ethical point of view, with the need to address the issues as thoroughly and early as possible to reach success.

In this article, we will explore how Boards can build the right tools to enable the right level of oversight and decision velocity for the company to mitigate the risks and maximize the opportunities represented by AI.

In this article, we explore the strategic role that Boards play in navigating the complexities of AI, focusing not only on the governance tools they employ but also on the crucial aspects of board composition and governance structures with an approach that enhances decision-making speed and accuracy, thereby effectively mitigating risks and capitalizing on the opportunities that AI presents.

To do so, we will look at the case of Microsoft (MS), the famous leader in Tech and enterprise services which is at the forefront of AI and the challenges and opportunities it represents.

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1.???? The Context of ESG for Microsoft

?Microsoft is a US multinational corporation and a technology company based in Redmond, Washington. The company is one of the leading tech companies in the world with operation in 119 countries and a very strong consumer recognition and brand valuation.

The company operates across several markets & technologies from gaming to cloud and consumer devices, with some iconic and market leading brands like their Windows Operating System (OS), their Azure cloud platform, the MS Suite of productivity tools, the Surface consumer devices or Xbox portfolio in the gaming space.

Microsoft has set up a strong governance with a diverse board of directors (though very US centric) with strong profiles and overall substantial ESG expertise, which highlights the importance and the focus they intend to take on the topic.

Microsoft has indeed been an early trendsetter, advocate and actor in leading the Sustainability topic with early commitments and communications on its ESG plans, i.e. to become carbon negative, water positive, achieve zero waste and protect more land than it uses by 2030, ahead of most companies, which reflects in its sustainability ratings, ahead of most of its peers and competitors.

With the advent and exponential growth of Artificial Intelligence (AI), which is set to increase 4 fold at least in the next few years, Microsoft now sees its current commitments at risk, but also questions on how to build proper governance & safeguards on its usage, which in turn also creates shareholder concern.

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2.???? The challenge of speed to increase AI’s Stakeholder Value and Trust

Microsoft’s positioning as a trendsetter in the ESG space, which is shown in its low-risk rating, builds expectations for it to address with the same rigor & performance the transformation brought by AI, be it on its business portfolio or ESG commitments.

With the AI market having grown 3 fold in the past year and expecting to grow at least 4 fold again until 2030, there is both a business, technical and ethical challenge to address the issue as thoroughly and early as possible.

Microsoft is positioning itself and therefore expected to be a virtuous and responsible trendsetter on this space just like it has been in other ESG related topics – which adds pressure to do so at speed and with quality.

All these elements show that Microsoft and its Stakeholders interests will lie in quickly grasping, defining and delivering its plan on AI, its usage, and on maintaining its targets despite the expected exponential growth of AI in its portfolio.

While there are many aspects and lenses to look into the issue, we will focus here on 2 key topics :

1.????? How can Microsoft anticipate AI risks & opportunities & what mechanisms can allow so?

2.????? Board & Operational governance to maximize risk mitigation and opportunities of AI.

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3.???? Board Challenge #1 : Adapting anticipation & compliance mechanisms to AI

?Anticipating the impact and ensuring Microsoft mitigates potential risks to its reputation comes with a multi-factor approach.

a.????? Structure & Policies : Ensuring ESG responsibilities are distributed among different board members, including non-ESG committee members, and have them reconciled into an ESG oversight committee, with a dedicated focus on AI, to formalize accountability, with periodic review of standards & policies, including from non-Microsoft stakeholders.

b.????? Accountability: Using its Audit Committees to take oversight on AI, it’s impact on Microsoft’s ESG targets but also with regards to its usage and ethics and any related topic that could put its reputation at risk.

c.????? Audit Mechanisms: to embed these in the processes and culture of Microsoft , organizing regular reviews of the different issues, with the development of relevant methodologies and tools so that Board Members, and by extension executives, can understand, review and evaluate progress. 3rd Party audits would also be recommended to complement the above.

When looking into AI specifically, 2 elements need to be taken into account given the nature and the exponential growth of the topic :

a.????? Education: Ensuring even non-specialized Board-Members, and by extension executives, understand the underlying dynamics, usages, risks and potential opportunities of AI so that all the above mechanisms deliver maximum value.

b.????? Adaptability: The exponential nature of AI as a transversal technology and as such the diversity of its use-cases would require the Board to go beyond some regular cadence but also take an ad-hoc approach to stay up to date to any major development or discovery so that reactions time is optimized.

For example : Implementing a 'Future Panel' within the Board, comprised of futurists and technologists, can provide early insights into emerging AI trends and potential disruptions. Working alongside the AI oversight committee ensures that governance evolves proactively rather than reactively.

With Ethics (as the ethical development and usage of AI) being an increasing concern, it should be integrally part of the board’s oversight missions and mechanisms explained above. Monitoring the relevant initiatives (i.e. FATE, AI for Good, RAISE,…) and educating the board and the relevant executives on these would be key in ensuring success.

On top of the above, it is important to note that maintaining Microsoft as a thought & practice leader in the industry would required it to be pro-active on the disclosure of the impact (including double materiality), and even setting new standards in the industry.

To further enhance this approach, Microsoft should consider integrating AI-specific expertise directly into the boardroom by appointing advisors or directors with a strong AI and technology ethics background. This addition would enhance the board’s capabilities in overseeing AI initiatives and serve as a direct link between technological innovation and corporate governance, bridging the gap between rapid technological advancements and structured corporate oversight.

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4.???? Board Challenge #2 : Help in balancing ESG & financial performance

With AI’s massive growth rate and the reputational risk to Microsoft with regards to its ESG commitments, we believe efficient strategic portfolio management (looking both at financial and ESG performance) will be a key success factors in helping it navigate the next growth cycle safely and as much as possible in line with its commitments.

As AI and its development puts at risks most of Microsoft’s ESG targets (be it carbon, water consumption, ecosystems or even customer sustainability), the challenge will also require a step-wise and integrated approach, adapted to AI and its own particularities, within the organization and its Board, including:

1.????? Educate on the challenge: Starting to train relevant Board Members, executives but also employees and stakeholders in understanding what is at stake with AI, and how this can be efficiently measured and reported.

2.????? Develop adapted KPIs & frameworks to allow decision making and guidance with regards to strategic portfolio decisions within the firm, cascading those at the relevant levels.

3.????? Adapt and update regularly the above mechanisms as the pioneering and exponential nature of AI might put those very same frameworks at risk in a question of months.

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Indeed, what we believe to be a key success factor is in extending the oversight and governance across not only the board & Executive Committee but also across the different business lines or Microsoft and doing so with a multi-level approach to allow faster and more efficient decision making, with the intent to help the Board support Microsoft by answering the following questions :

-??????? How to ensure every new product development or portfolio decision aligns with group commitments in term of footprint & external impact?

-??????? How to help with decision making at the right level ? i.e. business line level

-??????? How to help prioritize and drive action at the right level?

-??????? How to ensure all new developments are in line with group & business group targets?

Embedding proper oversight and performance at all relevant key decision levels through a multi-level governance (Figure 2) is the be best way to ensure the portfolio of Microsoft evolves organically and non-organically in line with the targets set by the group, by:

a.????? Embedding the realization of ESG objective within the existing processes of the product and portfolio management of Microsoft.

b.????? Fostering bottom-up innovation and use-case development to enable the realization of the targets

c.????? Enable granular, quick and adapted decision making from executives and managers

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Developing a dual-lens decision-making framework that evaluates both financial returns and ESG impact in a unified manner is critical to achieving this balance. By adopting a holistic approach, Microsoft can ensure that its investment in AI technologies boosts financial performance and aligns with broader sustainability targets. This integrated decision-making process should be reflected through enhanced disclosures in annual reports, and ESG updates to shareholders, providing AI's clear and measurable impact on Microsoft's sustainability commitments.

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5.???? Navigating the change with speed, precision and adaptability

All in all, the challenges that AI poses are disrupting but not all of them are new. We believe the key is in understanding the fast pace of evolution, the large possibilities in use cases and the consequences such tools give by the capabilities they can enable as much as the resources they consume.?

Enabling the Board into making an oversight and governance structure that embeds itself as much as possible into the life beat of this new technology is the best way to ensure not only better execution, but also a better understanding of the topic at the right time and better decisions.

To further strengthen its ESG narrative, boosting global stakeholder engagement and trust, Microsoft could also benefit from a more global perspective in its board composition, reflecting its worldwide operations and diverse market challenges. Incorporating directors from varied geographical backgrounds could enhance decision-making processes, particularly in tailoring ESG strategies that are culturally and regionally appropriate.

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What should you remember from this paper?:

AI is a fast-paced technology that is requiring Boards and their companies to adapt their governance to stay on top of things.

1.?????? Integrate agile governance:? To keep up with the speed of AI developments and adapt to rapid technological changes without compromising oversight quality. i.e. shorter review cycles and iterative policy updates to address emergent AI challenges and opportunities.

2.?????? Emphasize subject matter expertise & foresight: we shed light on the need for specific roles and oversight mechanisms that directly address the challenges and opportunities presented by AI. One way could be by implementing a 'Future Panel' within the Board to provide early insights, working alongside the AI oversight committee to ensures proactivity vs reactivity.

3.?????? Focusing on data metrics is crucial as it equips boards with the tools to make informed, data-driven decisions. This could involve the development of a digital dashboard with live information on AI performance metrics, risks, and compliance status, enhancing board effectiveness.

4.?????? Continuous learning: Board members and senior executives participate in continuous education on AI technologies and their implications--not just given in-house but with participation in tech conferences and strategic partnerships with AI research institutions.

5.?????? Maintaining stakeholder trust is key, including how AI is governed at Microsoft, including clear, transparent disclosures about AI strategies, outcomes, and the company's adherence to ethical standards, maintaining its best-in-class reputation.

6.?????? Future-proofing the organization by enabling the right culture, skills and governance at key decision levels is vital for sustaining corporate agility and resilience in a rapidly evolving technological landscape & integrating strategy with sustainability are pivotal for long term success.

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Contact the authors :

Mary Francia?: [email protected]

Sorouch KHERADMAND : [email protected]