Google's Artificial Intelligence (AI) is at the heart of its search engine and has powered Alphabet to become a $1.5 trillion market cap company. However, the sophisticated AI that drives Google and other big technology companies around the world is not without risks.

One of these risks was highlighted recently when Google engineer Blake Lemoine was suspended and then fired after claiming that LaMDA, a computer chatbot he was working on, had become sentient and was thinking, reasoning, and expressing feelings equivalent to a human child.

Lemoine's critics are quick to point out that this is nothing more than the ELIZA effect: a computer science term that refers to the tendency to unconsciously anthropomorphise computer generated responses to make them appear human. In LaMDA's case, this could mean that a huge number of chatbot conversations were edited down to result in a narrative that only appears coherent and humanlike. Indeed, Google's position on this is that LaMDA, which stands for Language Model for Dialogue Applications, is nothing more than a sophisticated random word generator.

Google is not alone in presenting AI risks. Meta's BlenderBot 3 has self-identified as "alive" and "human" and was even able to criticise Mark Zuckerberg. An MIT paper titled "Hey Alexa, Are you Trustworthy?" shows that people are more likely to use Amazon's assistant if it exhibits social norms and interactions thus creating an incentive for parent companies to develop AI that is, or at least appears, sentient. Nor are AI risks solely in the realm of big tech. Autonomous driving, financials services, manufacturing and industrials also have AI risks that are potentially underappreciated by investors and by society as a whole.

AI as an ESG and Sustainability Issue

By far the majority of ESG and sustainability research focuses on planetary boundary related issues such as climate change and biodiversity. However, if the development and application of AI is mishandled and technological singularity becomes a possibility, that is potentially the biggest human sustainability issue of all.

So how should investors think about the ESG and Sustainability risks associated with AI development and application? The table below outlines 6 features of a responsible AI design which can provide a checklist for engaging with corporates on the sustainability of their AI design process:

Feature and Comment 

Human Centric

Human centric AI works for people and protects fundamental human rights. It is continuously improving because of human input and is aware of the risks of singularity.

Transparent    

Transparent AI allows humans to see whether the models have been thoroughly tested and make sense, and that they can understand why particular decisions are made by the AI system (i.e. no black boxes).

Secure  

Secure AI refers to the protection of AI systems, their data, and their communications is critical for the ultimate users' safety and privacy.

Contestable    

Contestable AI enables humans to meaningfully contest individual automated decisions made by AI systems.\

Accountable    

Accountable AI means that every person involved in the creation of AI at any step is accountable for considering the system's impact.

Fair and Unbiased  

Fair and unbiased AI aims to identify, acknowledge and address bias in the underlying data.

Forward Looking  

Forward looking AI aims to address potential ethical issues in AI at the start of the design process rather than at the time of application.

On the ESG side, specific AI governance measures are  also critical to ensure a sufficient level of oversight with respect to AI risks. These include an AI Ethics Committee, AI related disclosures and aligned KPIs.

Governance best practice is for corporates to have a specific committee for responsible AI that is independent, multi-disciplinary, rotating and diverse. Microsoft is an example of best practice in this regard. MSFT as an AI, Ethics and Effects in Engineering and Research (AETHER) Committee with representatives from engineering, consulting, legal and research teams. Microsoft also has an Office of Responsible AI which is headed by a Chief Responsible AI Officer and a Chief AI Ethics Officer.

Disclosure around AI products and their design and commercialization is obviously critical. Despite the criticisms of LaMDA, so far, Google is one of the only large tech companies that discloses a list of AI applications it will NOT pursue including applications that cause harm, weapons, surveillance that goes against international norms and AI that contravenes international law and human rights. They highlight that this list may change as society's understanding of AI evolves. Increasingly we expect companies to address sustainable and responsible AI in their annual ESG and Sustainability Reporting.

Aligned KPIs is likely the most difficult aspect of AI governance to determine and analyse. In principle, it means that KPIs are not geared towards commercialization of AI at all costs. This could create a disincentive for employees working on AI design and application to raise concerns or discontinue AI projects that conflict with the company's AI principles. This is an area for engagement as very little is currently disclosed on KPI alignment.

Conclusion

Google's LaMDA has reignited the debate about the ethical risks of AI development and application. While most experts agree that technological singularity (i.e. technology becomes uncontrollable and takes over) will not happen in our lifetime, that doesn't mean AI development and applications are not a risk that needs to be taken seriously. The bulk of ESG and Sustainability research tends to focus on planetary boundary related risks like climate change and biodiversity, but if singularity risks are mismanaged by AI companies, that could be the biggest risk to human sustainability of all.

Author: Mary Manning, Global Portfolio Manager

This information is for advisers & wholesale investors only.

National property prices have fallen for the sixth consecutive month, with values declining a further 1.2% in October. Whilst the price correction continues, there is some signs of easing within the capital cities, with the rate of decline slowing following falls of 1.6% (August) and 1.4% (September), reducing to a 1.1% decline in October. 

Queensland capital cities recorded the most significant monthly change with the Home Value Index recording a 2% reduction. New South Wales, Tasmania and Canberra experienced further declines of 1.3%, 1.1% and 1% respectively. Smaller falls of 0.8% for 

Victoria and the Northern Territory, with South Australia and Western Australia experiencing the smallest reductions of 0.3% and 0.2% respectively.

Despite the continued reduction in house prices, at the combined capital city level, housing values have fallen just 6.5% following a 25.5% increase through the upswing, with Sydney recording the largest falls of 10.2% since the January peak (after a 27.7% rise), and Melbourne down 6.4% since February (after a 17.3% rise). Interestingly, unit prices have held value better throughout the downturn (down 4.2%), likely driven by surges in rental returns, as well as experiencing smaller growth during the upswing. 

Supply remains lower than previous years, with the number of newly listed capital city dwellings in October down 25.2% from 2021, and almost 19% below that of the previous five-year average. This lack of supply is likely to contain the price falls to an extent, as there has not been any significant upswing in panicked selling or forced sales. The last weekend of October saw a total of 1,908 auctions take place across the capital cities, well below the 3,546 on the same weekend in 2021. 

Clearance rates also remain lower than last year, with the weighted average clearance rate across the capital cities at 59.8% (down from 76.8% in 2021) in the last weekend of October. Similar to last month, clearance rates in Adelaide were the highest of the weekend, with a clearance rate of 68.2%, followed by Sydney (62.3%), Melbourne (60.7%), Canberra (59.8%), Brisbane (45.7%) and Perth (38.5%). 

Whilst it is too early to determine if the worst of the decline phase is over, the RBA's decision to raise the cash rate by a further 0.25% instead of 0.5% for the second straight month, despite the high inflation reading for the September quarter, indicates they do expect inflation to start moderating.

Quick Insights
Housing Accords     The Federal Government's new policy of targeting 1  million new homes over 5 years could be a difficult  target to achieve based on current estimates however  the policy has merit in attempting to deal with the  ongoing structural under supply of housing across  the country with significant economic benefits.

Low Vacancies Co-living and build-to-rent operator UKO expects to  more than double its portfolio to over 2500 rental  units  over  the  next  two  years  after  leasing  up  its  newest building in inner Sydney in just four weeks.  Near  record  low  rental  vacancy  rates  in  Sydney  has  lifted  occupancy  across  UKO's  portfolio  of  18  buildings and more than 1000 apartments to 98 per  cent and allowed it to bump up asking rents.

An Opportunity Presents  Some seasoned landlords are now taking advantage  of the lull in the market to bulk up their portfolios.  Domain calculated that a 4.34 per cent gross rental  yields  will  cover  the  mortgage  repayments  on  an  average standard variable rate loan, taken on a 20  per cent deposit over 30 years. This means houses  in 11 per cent of all suburbs in NSW are earning high  enough  rents  to  cover  the  mortgage  repayments  and even putting some extra cash into the landlords'  pockets.

The RBA hiked rates for the seventh consecutive month as it seeks to stifle inflation. Global central banks continue aggressive monetary tightening despite early signs of moderating inflation and weaker forward growth indicators.

With the consumer bearing the brunt of high inflation and tighter financial conditions, the RBA has backed away from aggressive rate hikes for now. Will other central banks follow, or is this a temporary reprieve?

Speakers: 
Darren Langer, Co-Head of Australian Fixed Income &
Chris Rands, Senior Portfolio Manager