In the rapidly evolving landscape of artificial intelligence (AI), companies find themselves navigating a transformative wave that poses both opportunities and challenges in its deployment and management. The need for transparency and clarity in how companies are responding to the emergence of AI in their annual reports will be a growing area of interest for investors and wider stakeholders. In our latest review, we examined a diverse sample of 30 annual reports with 2023 year ends, spanning various industries and sizes, including both AIM-listed and FTSE 100 companies.
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Featured spreads
During our review, we identified four companies that prominently featured AI in their key messaging spreads. These reports highlighted the positive impact of AI across customer engagement, operational efficiencies, sustainability, and workflow processes. Notably, easyJet (page 4) presented a case study showcasing the benefits of AI, including improved customer engagement and enhanced operational efficiencies. Ashtead (page 6) emphasised the use of AI to enhance sustainability and efficiency in its operations, particularly in optimising equipment allocation for reduced carbon footprint.
Sage (page 5) dedicated a spread to innovation, focusing on AI within the Sage Network. The report highlighted how Sage facilitates AI through a common network of services, acting as collective data for training machine learning models. It also outlined Sage’s commitment to data security, industry best practices and a global cybersecurity team. Furthermore, Sage expressed its ambition to incorporate AI into key products, enabling humans to contribute to higher-value activities.
Hays (page 7) stood out with its vision to lead in responsible AI adoption. The report highlighted a senior working group identifying positive use cases, incorporating generative AI into key workflows. Emphasis was placed on continuous evaluation, internal governance, and the potential for AI to enhance recruitment processes while prioritising data security and client confidentiality. These reports not only underscored the opportunities presented by AI but also demonstrated a commitment to responsible AI adoption, particularly evident in the cases of Sage and Hays, which integrated AI into crucial activities and workflows while acknowledging associated risks.
Market review
Among the companies reviewed, only Kier, Hargreaves Lansdown and United Utilities mentioned AI in their market reviews, framing discussions as an opportunity. Kier (page 16) highlighted the importance of AI growth for its property services in the context of changing consumer trends, while Hargreaves Lansdown (page 18) highlighted AI as an opportunity to enhance client experiences. Notably, United Utilities (page 17) distinguished itself by linking the opportunity AI presents to its business with principal and material risks, particularly in terms of cybersecurity. This demonstrates a balanced approach, aligning the positive aspects of AI with associated risks for a comprehensive view.
Sustainability and TCFD
Our research found that several companies discussed AI in their sustainability reporting. General findings observed include the utilisation of AI to optimise energy consumption, leading to carbon reduction. Examples include easyJet’s (page 35) investment in AI driving operational efficiencies and contributing to its best-ever carbon intensity performance. BT (page 29) highlights how AI helps its business customers cut carbon by optimising energy use. United Utilities (page 28) adopts a ‘Systems Thinking’ approach, leveraging real-time data and AI for proactive water and wastewater management. Landsec (page 37) tests AI technology for decarbonisation, expecting up to a 10% energy reduction. Britvic (page 38) explores AI to improve operations, partnering for automation and using AI to forecast climate change effects.
These findings align with identified TCFD disclosures, highlighting specific instances where companies implement innovative technologies like AI to reduce operational energy consumption. One retail company, ASOS (page 41) identified AI as a short- and medium-term opportunity, showcasing its potential to respond promptly to demand and reduce waste associated with overstocking. These insights demonstrate the role of AI in advancing sustainability objectives and aligning businesses with global environmental goals.
Risk management
Our research revealed that only 30% of companies in our sample addressed AI in the risk management section. Notably, two companies identified AI as a principal risk, and seven recognised it as an emerging risk.
These companies reported on the multi-faceted implications of AI, recognising both challenges and opportunities within its evolving landscape.
For example, AutoTrader (page 27) sees the recent emergence of generative AI as a significant opportunity to enhance its products, customer experience and operational efficiency while acknowledging the importance of using AI responsibly to avoid excessive security, compliance or reputational risks. ASOS (page 30) flagged potential risks such as intellectual property rights of uploaded or created data, as well as implications for cybersecurity and data privacy.
Close Brothers (page 31) highlighted that strategic disruption may arise from technological change in the medium-term horizon, citing AI as both a threat due to its difficulty to predict and an opportunity to broaden its products and customer base to enter new markets.
Among the sampled companies, Topps Tiles (page 24) and Compass Group (page 26), which identify AI as a principal risk, highlight responding to these challenges by actively developing comprehensive frameworks and policies to ensure ethical and legal use of AI.
Unsurprisingly, few companies in the sample reported specific mitigating actions, and only those identifying AI as a principal risk took such measures. This indicates that many companies are still in the early process of managing with the complexities of addressing AI in their risk management strategies.
Governance
In the Governance section, the overall reporting on AI remains a light touch. We found that some companies, such as Hays (page 46) and Sage (page 48), identified AI as a relevant skill for Board members, demonstrating a proactive stance towards aligning leadership capabilities with the demands of the evolving technological landscape. It was encouraging to observe one company, Impax Asset Management (page 44), that highlighted training initiatives, including AI. Despite these positive indicators, it is clear from our findings that the sample of companies reviewed are still in the early stages of reporting on AI, particularly in the Governance section.
Conclusion
In conclusion, our review sheds light on diverse approaches to reporting on AI. While some companies showcased a nuanced understanding of AI’s potential – notably highlighting its opportunities, including sustainability benefits – overall, the reporting remains cautious. Although encouraging, it’s evident that most companies are still in the early stages of navigating the complexities of AI reporting. The findings underscore the evolving nature of AI discourse within corporate reporting, with room for increased depth and detail in future disclosures.
Best-practice tips:
- Highlight potential risks and opportunities associated with AI implementation. These may include biases, legal compliance issues and operational risks. Develop risk management strategies which either mitigate or gain advantage from the identified risks.
- Detail ethical guidelines that govern how AI should be used within the company. These guidelines should ensure alignment with societal values and ethical norms.
- Detail training programmes for employees. These programmes should enhance awareness of ethical considerations and best practices.
- Highlight data privacy and security protocols to safeguard sensitive information used in AI systems. These protocols should ensure compliance with data protection regulations.
- Detail Board reports and updates regarding AI governance practices, risks, and compliance efforts.
- Demonstrate engagement and communicate AI governance practices and initiatives transparently to stakeholders, including employees, investors, customers and regulatory bodies.
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