Investors Press Tech Giants on AI Power Needs

By Isla Binnie

NEW YORK (Reuters) – Investors managing hundreds of billions of dollars are demanding that Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL), and others provide more transparency regarding the power consumption required for artificial intelligence (AI) and advanced computing. This inquiry aims to assess whether the tech sector should maintain its strong representation in sustainable investment funds.

As conversations are in preliminary stages, six representatives from the fund industry across Europe and the United States stated they are keenly examining the environmental repercussions of the AI surge, which Goldman Sachs predicts will elevate data center power demand by 160% by 2030.

All investors contacted by Reuters confirmed they are not contemplating divestiture. Some leading tech firms, spearheading the AI initiative that necessitates the construction and operation of extensive data centers, have begun to document rising greenhouse gas emissions. This trend raises concerns among asset managers, who want assurance that their portfolios are performing well, both financially and environmentally. Despite tech companies’ continuous energy appetite due to AI and cloud computing acting as crucial growth vectors, many anticipate that efficiency in data centers will significantly improve.

Tech stocks have been favored by many funds, as they achieved substantial market gains while emitting fewer greenhouse gases compared to sectors like manufacturing and energy.

Although investments emphasizing environmental, social, and governance (ESG) issues have seen a decline since their peak during the pandemic, approximately $2.24 trillion remains in two of the strictest ESG categories: Article 8 and 9 funds under EU financial regulations, according to Morningstar Direct. As of last year, nearly $30 trillion resided in global equity funds.

A review of leading holdings within the biggest Article 8 and 9 funds reveals significant investments in technology titans such as Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Alphabet, Microsoft, Meta (NASDAQ:META), and Nvidia (NASDAQ:NVDA).

Concerns over high emissions could impact some of these investments if not adequately addressed, say industry analysts. Eric Pedersen, head of responsible investments at Nordea Asset Management, states, “What we will do is make the AI angle a central part of our climate-related engagement with tech companies.” He added that if these firms dilute their current commitments to renewable energy sources, they may face exclusion from more strictly defined funds, jeopardizing their sustainable investment status.

BIG SHIFT
Pedersen described AI as a potential “radical shift” within the standard composition of sustainable funds. “Where we have committed a proportion to sustainable investments in our internal ESG scoring, you might see it becoming harder for those companies to fulfil that,” he said.

Nordea, managing 265 billion euros ($291.7 billion) encompasses an investment of about 17 billion euros in shares from Microsoft, Amazon, Alphabet, Apple, NVIDIA, and Meta. Jason Qi, a senior ESG researcher at Morgan Stanley’s Calvert Research and Management, also expressed desires for deeper insights into current energy usage. While he indicated Microsoft is a frontrunner in providing data on power supply agreements, he noticed a lack of comprehensive disclosures from other firms regarding their AI-related power consumption.

As increasing questions are raised about Scope 3 emissions from the supply chain, companies like Microsoft, Amazon, and Nvidia have refrained from commenting, while Meta, Alphabet, Apple, and Tesla (NASDAQ:TSLA) have not responded to requests.

A CHALLENGE
Tech firms recognize the challenge associated with the rising demand for computational power and data centers. Microsoft reported a 30.9% surge in supply chain emissions in 2023, while Alphabet noted a 13% increase in total emissions, attributed to the power and material needs of its data centers. Both companies regard growing emissions as a challenge.

Meta has offset all operational emissions since 2020, yet the resources required for AI complicate its objective to maintain zero net emissions in its value chain by 2030. In contrast, both Amazon and Apple reported falling emissions this year.

Calvert’s Qi emphasized that the power demands would shift across different segments of the supply chain during various AI development stages, indicating that while data centers currently necessitate significant power, other companies may shoulder more responsibilities in the future. Proponents of AI contend that the technology might eventually enhance energy efficiency across other sectors.

An indication that these companies strive to power the AI surge through low-carbon energy is the increasing investment in nuclear power. Amazon recently announced plans to procure nuclear energy to complement renewables. Microsoft also reported signing a deal to rekindle a decommissioned nuclear facility in Pennsylvania, marking a historical first.

A spokesperson from Handelsbanken, which operates two Article 9 funds with Google and Microsoft among their top five holdings, remarked that improvements in sustainability data are facilitating portfolio adjustments where necessary. Article 9 funds aim to demonstrate an average reduction of 7% in carbon emissions every year from all constituent stocks, implying that companies increasing carbon emissions might see their fund weight diminish over time, according to 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,” she said.