New legislation comes with often stringent compliance and reporting requirements. But it offers opportunities for investment and differentiation.
Investors are at different stages of their AI journey. Some are just getting started, perhaps experimenting with personalized communication with their customers. Others have well-structured in-house AI teams, with experts for data cleaning, hypothesis formulation, backtesting and model deployment.
What all of these institutions have in common is that they will be affected by the Artificial Intelligence Regulation (EU AI Act).
Investors need to understand the opportunities and risks posed by this regulatory change.
Understanding AI Risk Categories
The law classifies AI systems into four categories based on risk: prohibited, high-risk, limited-risk and minimal-risk systems.
This classification is critical for investors because high-risk AI systems, such as those used in healthcare (diagnostics), financial services (credit scoring), and infrastructure (network management electrical), will be subject to strict regulatory supervision. Companies using these systems will face higher compliance costs, which could affect their profitability and investment attractiveness.
Institutional investors should carefully evaluate the companies in their portfolios to determine whether they are exposed to high-risk AI applications.
Additionally, banned AI applications, such as biometric surveillance used for mass control, will be banned altogether.
Failure to comply with the law can result in significant fines and reputational damage. Fines can reach €30 million or 6% of the company’s global annual turnover, whichever is greater.
Governance and ethical considerations
One of the main pillars of EU AI law is ensuring the governance and ethical use of AI. Companies using AI will have to comply with requirements for transparency, explainability and accountability.
For institutional investors, this means that due diligence should include an assessment of the company’s AI governance framework. Here, investors can leverage their cross-functional perspective to help their portfolio companies comply with evolving regulatory requirements.
Risk management and ESG integration
AI can play a role in sustainable finance, helping investors and businesses navigate the complexities of climate risk and ESG integration. AI algorithms can process large amounts of data from various sources (e.g. satellite imagery and social media) to predict risks to assets and supply chains. This ability to assess non-linear relationships provides a competitive advantage in identifying companies with strong ESG compliance and good resilience to climate risks.
But ESG assessment is a very complex area, and the integration of AI can make it even more complex. Investors are advised to explore areas where AI is gaining ground, for example in the insurance sector, and to maintain a healthy dose of skepticism.
AI compliance, an investment opportunity
With the evolving regulatory landscape, Swiss institutional investors should consider the growing market for AI compliance technologies. These technologies, such as explainer tools, fairness audits and transparency solutions, are essential for companies wishing to meet the requirements of the new law. This is particularly true in sectors like financial services and healthcare, where regulatory pressures are greatest. Investing in companies that provide these compliance solutions offers significant growth potential.
Future outlook
The new law comes with often stringent compliance and reporting requirements. The good news is that it also offers opportunities for investment, differentiation and improvement of operations.
The legislation is currently going through its crucial standardization phase, during which the often vague text of the law will be translated into real regulations. The voice of investors is often sorely lacking in this process.
So the final tip is this: get involved.
This is what Executive AI does. She is deeply involved in the standardization process and will, for example, represent the industry at the Digital Trust Convention organized by the OECD in November.
