By Isla Binnie
NEW YORK (Reuters) – Investors managing hundreds of billions of dollars are pressing Microsoft (NASDAQ:), Alphabet (NASDAQ:) and others for more information about the power needed for artificial intelligence and advanced computing, to help decide whether the sector remains strongly represented in sustainable funds, investors said.
While these talks are still in their early stages, six fund industry executives in Europe and the United States said they will further examine the environmental impact of the AI boom. According to Goldman Sachs estimates, energy demand in data centers will increase by 160% by 2030.
None of the investors contacted by Reuters said they were considering a divestment.
Some of the biggest tech companies leading the AI race that requires building and powering data centers have started reporting increased greenhouse gas emissions, raising questions among asset managers looking to show their portfolios are doing well beyond just financial , but also in the field of the environment. Technology’s thirst for power is likely to continue unabated as AI and cloud computing are key growth drivers, although many expect data center efficiency to increase dramatically.
Technology stocks became the go-to choice for many such funds because they posted outsized market gains while producing fewer greenhouse gases than stocks in other sectors, such as manufacturing and energy.
Investments marketed with environmental, social and governance considerations have lost some popularity since the pandemic-era boom. But according to data firm Morningstar Direct, there is still about $2.24 trillion worth of stocks in one of the strictest ESG categories: funds that fall under Articles 8 and 9 of the European Union’s financial law. Last year, nearly $30 trillion in global stock funds were held.
A look at the top holdings of the largest such funds shows that they are now heavily invested in tech giants including Apple (NASDAQ:), Amazon (NASDAQ:), Alphabet, Microsoft, Meta (NASDAQ:) and Nvidia (NASDAQ:).
Some of these investments could be hit if the concerns are not addressed, the investors and analysts said.
“What we will do is make the AI angle a central part of our climate-related engagement with technology companies,” said Eric Pedersen, head of responsible investing at Nordea Asset Management.
If companies were to relax current obligations to source renewable energy now and in the future, managers could choose to exclude them from some of the more narrowly defined funds.
This would not lead to them achieving ‘sustainable investment’ status, he said.
An Article 8 fund is intended to “promote environmental or social features,” while an Article 9 fund “aims at sustainable investment,” EU rules say.
BIG SHIFT
Pedersen called AI “one of the biggest potential shifts in the default composition” of a sustainable fund.
“Where we have committed some to sustainable investments in our internal ESG score, you could see it becoming more difficult for those companies to meet that,” he said.
Nordea’s 265 billion euros ($291.7 billion) under management includes a total investment of around 17 billion euros in shares of Microsoft, Amazon, Alphabet, Apple, NVIDIA and Meta.
Jason Qi, senior ESG research analyst at Morgan Stanley’s Calvert Research and Management, said he had asked the companies for more information on current energy consumption. Qi called Microsoft a leader in disclosing data such as power supply deals (PPAs), but said no company shares as much as it wants.
“We are waiting for more details about their AI-related energy consumption, the volume of their PPAs, the geographical distribution and the duration,” Qi said.
Investors are also starting to ask more questions about so-called Scope 3 emissions coming from the supply chain.
Microsoft, Amazon and Nvidia declined to comment. Meta, Alphabet, Apple and Tesla (NASDAQ:) did not respond to requests for comment.
A CHALLENGE
The challenge of increased demand for computing power and data centers is not lost on technology companies.
For example, Microsoft said its supply chain emissions will increase 30.9% by 2023, and Alphabet reported a 13% increase in total emissions, citing power and material needs for data centers. Both said they saw rising emissions as a challenge.
Meta said this year that it has fully offset emissions from its operations since 2020, but that the resources required for AI will make it much more difficult to achieve the goal of emitting no more greenhouse gases from its value chain than it can by 2030 be compensated.
In their most recent environmental reports, Amazon and Apple said their emissions were falling. Calvert’s Qi said power needs would be concentrated in different parts of the supply chain at different stages of AI development. So while data centers need a lot of power now, other companies could shoulder a larger share of the burden in the future. AI proponents say the technology could ultimately make other sectors more energy efficient.
One sign that companies are trying to fuel the boom with low-carbon energy is increasing investment in nuclear energy.
Amazon said this year it began purchasing nuclear power to complement renewable energy sources. And Microsoft said last week it had signed a deal to revive a mothballed nuclear power plant in Pennsylvania, in the first restart of its kind in history.
A spokesperson for Swedish bank Handelsbanken, which offers two Article 9 funds that track indexes from Google and Microsoft in their top five investments, said improving sustainability data makes it easier to identify where portfolios need to be adjusted.
The Article 9 funds are set up with the aim of showing an average 7% reduction in carbon emissions from all constituent stocks each year, “meaning that companies that increase their carbon emissions are likely to have a will have a lower weight in the fund, says Aurora Samuelsson, head of sustainability at Handelsbanken Asset Management.
“We raise and will raise the relevant and material issues in our dialogue with the companies,” Samuelsson said.
