Investors Demand Clarity on AI's Environmental Impact

By Isla Binnie

NEW YORK (Reuters) – Investors managing hundreds of billions of dollars are urging Microsoft, Alphabet, and others for insights on the power requirements for artificial intelligence (AI) and advanced computing. This move aims to assess whether these companies should continue to dominate sustainable funds.

As discussions are still in early stages, six fund executives from Europe and the US are focusing on the environmental effects of the AI surge, which Goldman Sachs predicts could increase data center power demand by 160% by 2030.

No investors contacted by Reuters indicated plans to divest.

Leading tech firms in the AI sector are now reporting higher greenhouse gas emissions, raising concerns among asset managers who aim to maintain environmentally responsible portfolios. Despite the growing power demands, tech's expansion driven by AI and cloud computing is expected to persist, although many anticipate significant improvements in data center efficiency.

Tech stocks have been favored by many sustainable funds due to their remarkable market performance and relatively lower greenhouse gas emissions compared to other sectors like manufacturing and energy.

Although investments tied to environmental, social, and governance (ESG) criteria have waned since the pandemic's peak, approximately $2.24 trillion remains tied up in stringent ESG categories, particularly Article 8 and 9 funds under EU laws, as per Morningstar Direct. Nearly $30 trillion was held in global equity funds last year.

An examination of holdings in the largest funds reveals heavy investments in major tech companies such as Apple, Amazon, Alphabet, Microsoft, Meta, and Nvidia. Concerns may rise if these issues are not adequately resolved.

Eric Pedersen, head of responsible investments at Nordea Asset Management, stated, "What we will do is make the AI angle a central part of our climate-related engagement with tech companies." If these firms ease commitments to renewable energy, they might be excluded from stricter funds, harming their sustainable investment standings.

An Article 8 fund aims to promote environmental or social characteristics, while an Article 9 fund is focused on sustainable investments, according to EU regulations.

A BIG SHIFT
Pedersen described AI as potentially transformative for the typical makeup of sustainable funds. He noted that as firms allocate more to sustainable investments in internal ESG scoring, it may become increasingly difficult for companies to meet those standards.

Nordea, managing €265 billion (approximately $291.7 billion), has invested around €17 billion in shares of tech giants including Microsoft, Amazon, Alphabet, Apple, Nvidia, and Meta.

Jason Qi, a senior ESG research analyst at Morgan Stanley's Calvert Research and Management, is seeking more detailed information from these companies about current energy usage. Qi mentioned Microsoft as a strong communicator of power supply information, yet expressed a need for more comprehensive disclosures.

Investors are also inquiring about Scope 3 emissions originating from the supply chain.

Microsoft, Amazon, and Nvidia declined to comment, while Meta, Alphabet, Apple, and Tesla did not respond to inquiries.

A CHALLENGE
The challenge posed by the rising demand for computing power and data centers is recognized by tech firms. For instance, Microsoft reported a 30.9% increase in supply chain emissions for 2023, while Alphabet noted a 13% rise in overall emissions due to data center demands. Both companies view increasing emissions as a hurdle.

Meta stated that it offset all operational emissions since 2020, though the resources essential for AI complicate the goal of emitting no more greenhouse gases than can be offset by 2030.

Recent reports from Amazon and Apple indicated a decrease in their emissions. Qi from Calvert suggested that the energy demands will vary across the supply chain at different AI development stages. AI advocates argue that the technology could ultimately enhance energy efficiency in other sectors.

Companies are committing to utilizing low-carbon energy resources to support the growth of AI. For example, Amazon recently began purchasing nuclear power to complement renewable sources, and Microsoft announced a deal to revive a shut-down nuclear plant in Pennsylvania, marking an unprecedented restart.

A representative from Handelsbanken noted that enhancing sustainability data streamlines portfolio adjustments, particularly for their Article 9 funds focusing on significant reductions in carbon emissions.

Aurora Samuelsson, head of sustainability at Handelsbanken Asset Management, stated, "We raise and will raise the relevant and material issues in our dialogue with the companies."