Deirdre Cooper

The amount of electricity consumed by AI is forecast to exceed 85 terawatt hours annually within a couple of years, more than many small countries^[1]. The latest whitepaper by Deirdre Cooper, Head of Sustainable Equity, and Graeme Baker, Co-Portfolio Manager, Global Environment, ‘Powering the AI revolution: a superscale cleantech opportunity?’ ^[2] examines the resultant investment opportunities across renewable energy and energy-efficiency solutions.

AI has the potential to significantly change trends in electricity demand in developed countries. McKinsey and the US Energy Information Administration (EIA) expect a 38% increase in US power demand over the next two decades, a startling increase from the 9% increase seen over the previous 20 years.

Increase in 5-year energy-demand growth forecasts by US utilities

Source: NextEra Energy, 2024

Deirdre Cooper, Head of Sustainable Equity: “While AI could be powered by dirty energy in the short term, over the medium term AI power demand is likely to be met by renewables. This is partly because renewables continue to be the most economic option for new power generation, and most of the assets in the transmission queue are renewables, which is the critical bottleneck. In addition, the biggest investors in AI have been companies with strong commitments to net zero.

As a result, we expect stronger tailwinds for companies involved in delivering clean energy. There are also significant growth opportunities for providers of solutions that improve datacentre efficiency, specifically server and infrastructure efficiency.

Cleantech pricing headroom is growing

As demand for renewable energy increases, power purchasers are already becoming less price sensitive when negotiating offtake contracts. This gives pricing headroom to companies across the cleantech value chain, not just developers like NextEra Energy, Iberdrola and Orsted, but also renewable and battery equipment manufacturers like Vestas Wind Systems, Sungrow, and CATL.

Power delivery and datacentre efficiency are crucial

The biggest challenge for AI datacentres is electrical power, the maximum capacity in megawatts that a datacentre needs available to be able to operate. A typical co-location datacentre^[3[] needs 20-30MW, but a dedicated AI campus might need 100- 500MW. Graeme Baker, Co-Portfolio Manager, Global Environment: “We see an opportunity for companies that provide technologies and services that are crucial to solving this power challenge. For example, locating datacentres close to high-voltage transmission infrastructure can help. Consequently, developers with better sites – such as NextEra Energy, which has significant undeveloped land rights in good locations – are likely to see their competitive advantages strengthen.”

Demand for power has also resulted in an increased need for certain electrical equipment, including high-voltage transformers and switchgear. This has led to shortages, with lead times for some technologies now running to years. Cooper adds: “Given the power-supply challenges facing datacentres in an AI world, the demand for efficiency gains will drive structural growth for companies that provide relevant solutions, such as Schneider Electric and Delta Electronics,.”

Cooper concludes: “It is important to note that most of the forecasted new datacentres are yet to be built, so investors need to treat power-demand forecasts with caution. But if they are even half right, the growth of the market for decarbonisation solutions will accelerate rapidly, expanding the opportunity set for investors.”

Read the report.

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Notes:
[1] Scientific American, October 2023.
[2] Powering the AI revolution: a superscale cleantech opportunity?
[3] In a co-location datacentre, multiple companies/third parties rent space. An enterprise datacentre is owned/used by one company

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Deirdre Cooper

Global Environment sees 70% of portfolio companies reduce their carbon intensity across Scope 1, 2, and 3 and 70% grow their carbon avoided in 2021

Ninety One, a global investment manager, has  published its fourth annual Global Environment Impact Report^[1], which provides its ‘sustainability attribution’ for every holding within the Global Environment portfolio – an assessment of each company’s contribution to a greener future and an appraisal of other environmental, social and governance (ESG) issues.

It has been a challenging 12 months for sustainable investing. However, the report highlights positive progress among the companies in the Global Environment portfolio, in terms of both carbon reporting and environmental impact which shows what can be achieved by focusing on sustainability with substance.

Deirdre Cooper and Graeme Baker, Co Portfolio Managers, Global Environment: “We have seen further improvements in portfolio companies’ reporting of carbon risk (Scope 1, 2 & 3 carbon emissions) and impact (carbon avoided). Over 95% of companies now report Scope 1 & 2 emissions, and the proportion of portfolio companies providing full carbon-risk reporting is now just over 50%. While carbon reporting is improving, we are seeing some meaningful restatements, particularly of Scope 3 emissions, where a change in methodology can result in very different emissions figures. This can make year-on-year comparisons between companies difficult. The fundamental and qualitative analysis of carbon data continues to be a vital overlay.

“Over the past year (i.e., FY2020 vs. FY2019), almost 70% of portfolio companies reduced Scope 1, 2 & 3 emissions intensity, and 70% increased their absolute carbon avoided – a measure of the extent to which a company’s products or services help to reduce emissions relative to the traditional alternative.”

The report also details the investment team’s engagements with portfolio companies, all of which provide products and/or services that contribute to sustainable decarbonisation.

“We continue to work towards improved carbon emissions reporting by our portfolio companies, with a focus on Scope 3 reporting, and towards all companies adopting science-based carbon-reduction targets.

“We have updated our appraisal against the EU taxonomy and continue to estimate that more than 40% of the strategy’s revenues are potentially aligned to the taxonomy (before applying the ‘Do No Significant Harm’ and ‘Minimum Social Safeguards’ tests). However, as we study the related data from the various external data providers and the handful of companies that have reported, it is becoming increasingly clear that there is quite a bit of room for interpretation in the taxonomy data. Therefore, it will be quite a while before we have consistent numbers across different companies. 17 portfolio companies (c.68%) currently have explicit carbon-reduction targets, and about 42% of portfolio holdings have targets approved by the Science Based Targets initiative (SBTi). This continues to be our key engagement focus.

“As investors, we don’t seek to appear ‘green’ by minimising our carbon footprint or maximising our ESG ratings. We aim to deliver ‘sustainability with substance’ through an externalities-based approach to research, examining the nonfinancial as well as the financial data and information, assessing each company’s performance in relation to all its stakeholders.

“That means deep research on the products and services that are helping to avoid carbon. It means studying, within our natural capital analysis, the company’s net zero plan and water data (imperfect though that currently is) and thinking about the company’s and its suppliers’ impact on biodiversity“, they note.

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[1] Global Environment Impact Report

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Deirdre Cooper

Addressing institutional investors’ increasing focus on the risks of climate change, Investec Asset Management has launched the Investec Global Environment Strategy.

The strategy, which invests in public companies across the value chain that benefit from the trend towards decarbonization, is designed to assist institutional investors exploring investment around long-term portfolio decarbonization. By seeking out those companies that stand to benefit from the energy transition, the strategy aims to provide investors with exposure to a $2.5trn growth opportunity as the world’s power generation mix transitions and decarbonizes, together with a natural hedge against the unknown impact of climate change.

Portfolio managers Deirdre Cooper and Graeme Baker will run the strategy, with the support of Investec Asset Management’s broader investment team. At the core of the strategy’s investment process is a detailed analysis of the full carbon value chain together with a unique approach to identifying businesses whose products are contributing actively to the reduction of carbon emissions.

John Green, co-CEO, commented, ‘With the world now increasingly focused on the question of how to address climate change, we believe that positive investment action must play a more prominent role in facilitating the transition to a lower carbon economy.’

The strategy aims to address climate risk and decarbonization in three ways; first, by providing access to the investment opportunity represented by companies participating in the sustainable transition towards decarbonization; second, redressing the balance of structural underexposure to the enablers and beneficiaries of decarbonization; and finally, providing a means by which to measure and hedge against systemic carbon risk in portfolios.

Deirdre Cooper, co-Portfolio Manager, said, ‘The world has embarked on its third energy transition: a relatively rapid shift in favour of low-carbon energy. Electricity needs to take market share from all other forms of energy, as we electrify transportation and heating. As the world electrifies, solar and wind are set to become the dominant and far more economical power sources, growing from 0.2% of the world’s power generation mix in 2000 to 7% in 2017, and this could grow to 80% by 2050. Electric vehicles will dominate new car sales by the same time.   Investment is required in all the related value chain.

The strategy’s investment universe is selected from 700 companies with a total market cap of over US$5 trillion. Selection methodology comprises of a two-stage screen, measuring environmental revenues and measuring ‘carbon avoided^[1]’. This includes considering a company’s reported Scope 1 & 2 emissions as defined by the CDP, but also the indirect emissions from the companies’ supply chains and products and services once they are sold, or ‘Scope 3’ carbon, as well as carbon avoided. When compared with traditional equity universes, the resulting Global Environment universe has minimal to no overlap with traditional equity allocations such as the FTSE 100 or MSCI All Country World Index and has no exposure to the 100 companies identified as the world’s largest carbon emitters by Climate Action 100.

John Green, co-CEO, said, “Humanity faces an unprecedented challenge: to transition quickly to a carbon-free growth model, ultimately leading to a more sustainable world. Because of this, the case for investing in public companies that tackle climate risk is a mainstream investment priority.’

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[1] This concept was first developed as part of the European Union’s Emissions Trading Scheme where heavy emitters were required either to cut their emissions or to buy carbon credits in the market from projects which avoided carbon.

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