Analysis: Power Thirst Complicates ESG Investors’ Affection for Tech Stocks – Reuters

By Isla Binnie

NEW YORK – Investors managing vast sums of capital are pressing major tech firms, including Microsoft and Alphabet, for greater transparency regarding the energy requirements for artificial intelligence (AI) and advanced computing. This information is crucial for determining the future representation of such companies in sustainable investment funds.

Although these discussions are still in their initial phases, several executives from the fund industry in both Europe and the United States are increasingly scrutinizing the environmental implications of the growing AI sector. Analysts at Goldman Sachs project that demand for power in data centers will rise by 160% by 2030 due to the AI boom.

Investors have indicated they are not considering divestments at this time. However, leading tech companies involved in the AI race that necessitates substantial infrastructure and energy are beginning to report higher greenhouse gas emissions. This trend is raising concerns among asset managers, who aim to ensure that their portfolios perform well both financially and environmentally. The demand for energy from the tech sector is unlikely to diminish, as AI and cloud computing are integral elements of growth, although many anticipate significant improvements in data center efficiency.

Tech stocks have been favored by many sustainable funds, as they have outperformed the market while contributing fewer greenhouse gas emissions compared to sectors like manufacturing and energy. Although investments with environmental, social, and governance (ESG) considerations have waned since their pandemic boom, there remains about $2.24 trillion in equity within the strictest ESG category, according to data from a financial information firm. This contrasts with nearly $30 trillion in global equity funds reported last year.

A review of the top holdings in major ESG funds shows significant investments in tech giants such as Microsoft, Alphabet, Apple, Amazon, Meta, and Nvidia. Any unresolved concerns regarding these companies could potentially impact those investments.

Eric Pedersen, head of responsible investments at Nordea Asset Management, emphasized the need to make AI a central theme in their climate-related engagement with tech companies. If these firms relax their commitments to sourcing renewable energy now and in the future, managers might exclude them from certain strictly-defined funds, hindering their ability to achieve “sustainable investment” status.

An Article 8 fund is designed to “promote environmental or social characteristics,” whereas an Article 9 fund has sustainable investment as a primary objective, according to EU regulations.

Pedersen noted that AI represents one of the most significant shifts potentially affecting the composition of sustainable funds. He expressed concerns that rising commitments to sustainable investments might become more challenging for certain companies.

Nordea manages approximately €265 billion, with about €17 billion invested in shares of Microsoft, Amazon, Alphabet, Apple, Nvidia, and Meta. Jason Qi, a senior ESG research analyst at Morgan Stanley’s Calvert Research and Management, indicated that he is seeking increased transparency about the current energy usage of these firms. While he acknowledged Microsoft as a leader in disclosing power supply agreements, he stated that no company is providing as much detail as he desires.

Investors are also inquiring more about Scope 3 emissions, which originate from the supply chain. Companies such as Microsoft, Amazon, and Nvidia have not commented on these inquiries, while Meta, Alphabet, Apple, and Tesla did not respond.

The tech industry recognizes the challenges posed by the surging demand for computing power. For instance, Microsoft reported a 30.9% increase in supply chain emissions in 2023, and Alphabet noted a 13% rise in its total emissions, citing energy and material needs for data centers. Both companies are framing rising emissions as a challenge.

Meanwhile, Meta announced it has been fully offsetting its operational emissions since 2020, but the energy demands of AI make it increasingly difficult to meet its goal of no net greenhouse gas emissions from its entire value chain by 2030. In their latest environmental disclosures, Amazon and Apple reported declines in their emissions. Qi from Calvert pointed out that power demands will fluctuate across the supply chain at different AI development stages, suggesting that while data centers may require substantial energy now, other companies might shoulder a greater burden in the future. Proponents of AI assert that the technology could ultimately lead to increased energy efficiency in other sectors.

Some companies are investing in nuclear power as part of their strategy to meet demand with low-carbon energy. Amazon has begun purchasing nuclear energy to complement its renewable sources, while Microsoft recently announced an agreement to revitalize a decommissioned nuclear plant in Pennsylvania.

A representative from Handelsbanken, which manages two Article 9 funds with Google and Microsoft among their top holdings, noted that enhanced sustainability data is helping to pinpoint areas where portfolio adjustments may be necessary. The Article 9 funds aim for an average 7% annual reduction in carbon emissions across their constituent stocks, indicating that companies increasing their carbon footprints may face reduced allocation in these funds.

The representative added, “We raise and will raise the relevant and material issues in our dialogue with the companies.”