Investors demand sustainability from IT companies

Investors managing hundreds of billions of dollars are urging Microsoft, Alphabet and others to provide more information about the power required for artificial intelligence and advanced computing to justify why the sector is so heavily represented in sustainable funds.

While those conversations are still early, six European and US fund managers said they are looking closely at the environmental impact of the artificial intelligence boom, which Goldman Sachs estimates will increase data center energy demand by 160% by 2030. Some of the biggest tech companies that manage the construction and power supply of data centers and are leading the artificial intelligence race have already reported increased greenhouse gas emissions, raising questions for asset managers who want to show that their portfolios are performing well not only financially but also environmentally.

The IT industry’s hunger for power is likely to remain unabated, with AI and cloud computing as important drivers of growth, although many expect data center efficiency to increase greatly. Technology stocks have become must-haves for many of these funds because they have delivered outstanding market returns while producing fewer greenhouse gases than stocks in other sectors, such as manufacturing and energy stocks.

But investments made with environmental, social and governance (ESG) concerns in mind have lost some of their popularity since the end of the pandemic and the subsequent recovery. However, there is still about $2.24 trillion of capital in one of the strictest ESG categories, Article 8 and Article 9 funds under the European Union’s financial law, according to data firm Morningstar Direct. The aim of Article 8 funds is to “promote environmental or social characteristics”, while the Article 9 fund’s aim is “sustainable investment”, according to the EU rules. A review of the top holdings of the largest such funds shows that they are now heavily exposed to tech giants, including Apple, Amazon, Alphabet, Microsoft, Meta and Nvidia. Investors and analysts say some of these investments could be affected if the concerns are not addressed.

“What we will do is to make the WE aspect a central part of our climate-related commitment with technology companies,” said Eric Pedersen, head of responsible investments at Nordea Asset Management. Nordea’s 265 billion euros in assets under management include a total of around 17 billion euros in investments in In shares of Microsoft, Amazon, Apple, NVIDIA, and Meta.If the companies were to relax their current commitments to renewable energy sources, managers could choose to exclude them from some strictly defined funds. he said, artificial intelligence is “one of the biggest possible changes” in the standard composition of sustainable funds. it is more difficult for them to do this,” he said.

Jason Qi, senior ESG research analyst at Morgan Stanley Calvert Research and Management, said he asked companies for more information on current energy use. Qi cited Microsoft as a leader in releasing data like power supply agreements (PPAs), but said neither company was sharing as much data as he would like. “We expect more details about their AI-related energy consumption, the amount of PPAs (Power Purchase Agreements), geographical distribution and duration,” said Qi. Investors are also starting to ask more questions about the so-called Scope 3 ( carbon footprint) of emissions originating from the supply chain.

The challenge posed by the increased demand for computing power and data centers is no stranger to technology companies. Microsoft, for example, said supply chain emissions would increase by 30.9%, and Alphabet reported a 13% increase in total emissions, citing data center energy and material needs. Both said they are treating rising emissions as a challenge. Meta said this year that it will fully offset the emissions from its operations from 2020, but the resources required for artificial intelligence will make it much more difficult to achieve the goal of not emitting more greenhouse gases from its value chain by 2030 than it can offset. In their latest environmental reports, Amazon and Apple claimed that their emissions are falling.

According to Jason Qi, energy needs will be concentrated in different parts of the supply chain at different stages of AI development, so while data centers need a lot of energy now, other companies may bear a greater burden in the future. Proponents of artificial intelligence say the technology could eventually increase energy efficiency in other sectors. Companies are trying to feed the boom with low-carbon energy, a sign of this is increased nuclear investment. Amazon said this year that it has begun buying nuclear power to supplement renewables. And Microsoft said last week that it had signed an agreement to restart a shutdown nuclear power plant in Pennsylvania, the first such restart in history.

A spokeswoman for Swedish bank Handelsbanken, which offers two Article 9 funds that track indexes in which Google and Microsoft are among the top five stocks, said the improvement in sustainability data would make it easier to identify where there is a need to adjust portfolios. Article 9 funds are created with the aim of reducing the carbon emissions of the underlying stocks by an average of 7% per year, “which means that over time, companies that increase their carbon emissions are likely to be weighted less in the fund,” said Aurora Samuelsson, head of sustainability at Handelsbanken Asset Management. “During the dialogue with the companies, we raise and will raise the relevant and relevant issues,” said Samuelsson.