Analysis-The thirst for power complicates ESG investors’ love affair with tech stocks By Reuters

By Isla Binnie

NEW YORK (Reuters) – Investors managing hundreds of billions of dollars are looking to Microsoft (NASDAQ: ), Alphabet (NASDAQ: ) and others for more information on the power needed for artificial intelligence and advanced computing to help decide whether the sector would should remain heavily represented in sustainable funds, investors said.

While those conversations are at an early stage, six fund industry executives in Europe and the United States said they are looking more closely at the environmental impact of the AI ​​boom, which Goldman Sachs predicts will increase demand for power of data centers by 160% by 2030.

None of the investors contacted by Reuters said they were considering divestment.

Some of the biggest tech companies leading the AI ​​race that requires building and powering data centers have begun reporting increased greenhouse gas emissions, raising questions for asset managers who want to show their portfolios are doing well beyond just financials , but also from an environmental point of view. Technology’s thirst for power is likely to remain unquenched, with AI and cloud computing being major growth drivers, although many expect data center efficiency to increase greatly.

Technology stocks have become the go-to for many such funds because they have generated huge market gains while producing fewer greenhouse gases than stocks in other sectors such as manufacturing and energy.

Investments marketed with environmental, social and governance concerns in mind have fallen out of favor since the pandemic-era boom. But there is still about $2.24 trillion in equity in one of the strictest ESG categories: funds that fall under Articles 8 and 9 under European Union financial law, according to data firm Morningstar Direct. As of last year, there were nearly $30 trillion in global equity funds held.

A review of 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 those investments could be hurt if the concerns aren’t addressed, investors and analysts said.

“What we will do is make the AI ​​angle a central part of our climate engagement with technology companies,” said Eric Pedersen, head of responsible investment at Nordea Asset Management.

If companies were to weaken current commitments to source renewable energy now and in the future, managers could choose to exclude them from some of the more tightly defined funds.

That would count against getting “sustainable investment” status, he said.

An Article 8 fund is meant to “promote … environmental or social characteristics”, while an Article 9 fund “aims at sustainable investment”, EU rules say.

BIG CHANGE

Pedersen called AI “one of the biggest potential changes in the standard composition” of a sustainable fund.

“Where we have committed some to sustainable investment in our internal ESG score, you may see it become harder for those companies to meet that,” he said.

The 265 billion euros ($291.7 billion) managed by Nordea 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 for Morgan Stanley’s Calvert Research and Management, said he asked firms for more information on current energy use. Qi cited Microsoft as a leader in disclosing data such as power supply offers (PPAs), but said no company was sharing as much as he wanted.

“We’re waiting for more details on their AI-related power consumption, the volume of their PPAs, geographic distribution, duration,” Qi said.

Investors are also starting to ask more questions about so-called Scope 3 emissions arising 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.

Microsoft, for example, said emissions from its supply chain rose 30.9 percent in 2023, and Alphabet reported a 13 percent increase in total emissions, citing energy and material needs for data centers. Both said they treat rising emissions as a challenge.

Meta said this year it has fully offset emissions from its 2020 operations, but the resources required for AI will make it much more difficult to meet the goal of not emitting more greenhouse gases from its value chain in 2030 than can be offset .

In their most recent environmental reports, Amazon and Apple said their emissions had fallen. Calvert’s Qi said power 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 power now, other companies could bear more much load in the future. Proponents of AI say the technology could eventually help make other sectors more energy efficient.

One sign that companies are trying to fuel the low-carbon energy boom is increased investment in nuclear.

Amazon said this year it was starting to buy nuclear power to supplement renewables. And Microsoft said last week it had signed an agreement to help revive a nuclear power plant in Pennsylvania in the first restart of its kind in history.

A spokesman for Swedish bank Handelsbanken, which offers two Article 9 index-tracking funds with Google and Microsoft among their top five holdings, said the improvement in sustainability data makes it easier to identify areas where portfolios need to be adjusted.

Article 9 funds are built with the goal of showing an average 7% reduction in carbon emissions from all constituent stocks combined each year, “meaning that over time companies that increase their carbon emissions are likely to receive a lower weighting in the fund,” said Aurora Samuelsson, head of sustainability at Handelsbanken Asset Management.

“We will raise and raise the relevant and material issues in our dialogue with the companies,” Samuelsson said.