The year 2020 will forever be remembered by investors for the rapid growth in provider and client interest in sustainable investment strategies, however more recently investor angst about the performance of some sustainable investment funds has resulted in outflows and scepticism from clients.
Meanwhile, 2024 will forever be remembered as the year when the world became aware of the potential for artificial intelligence to impact our lives and our investment portfolios.
But while one group of investors are nurturing substantial gains from investments in companies such as Nvidia and Google, there is another cohort of people who, since 2020, have placed their faith in sustainable funds, which after an initial period of strong performance, have done less well in a world of higher interest rates.
The link between technology stocks and many of the holdings that would appear in a sustainable portfolio is that both are likely to be 'growth' equities, that is, they derive the bulk of their returns in the future, rather than the present.
Growth equities would also be expected to underperform in a world where interest rates rise, as both tech stocks, to a limited extent, and sustainable investments have done since 2021.
But while the two sectors have that in common, there is also much that separates them, as Martin Frandsen, global equity portfolio manager at Principal Asset Management, notes that: “AI and data centres are enormous consumers of energy.”
Louis-Simon Ferland, chief executive at Boreal Investment Management, says: “Computationally intensive industries are projected to consume 25 per cent of all global energy by 2030.
"And while major players in generative AI like Apple are making commitments to provide data centres that are carbon neutral and powered entirely by renewable energy, the unanswered question is really whether the grid has the capacity and the localised energy load to support the brown to green transition.
“In other words, while it is theoretically possible to deliver infrastructure that meets and even exceeds ESG requirements, the true challenge is not on the surface but under our feet.
"There is an immediate need to significantly upgrade, and in so doing decarbonise the grid, to meet the demands of power sustainably; not just new power-hungry technologies, but the very basics of our supply chain logistics."
Can the two co-exist?
So does this mean clients may ultimately have to choose between investing in sustainably themed equities or technology focused stocks?
Luciano Lilloy, fund manager at sustainable fund house Impax, says that while it is the case that data centres in particular consume lots of energy, he says that over the longer term, data centres are more energy efficient than the alternatives.
Lilloy acknowledges the issue with data centres is that around 70 per cent of the costs associated with operating such a facility come from the energy bill.
But he adds: “Energy consumption doesn’t tell the whole story. AI can for example be used in the management of buildings to help reduce energy consumption, and with cooling systems, to help companies better understand the right temperature for their offices.
