2024 Sustainable Investing Trends
Third Quarter
Key Takeaways
The rapid growth of artificial intelligence is stressing critical electrical and water resources to power and cool data centers.
We expect to see continued innovation as companies develop new ways to cool data centers with less water and store power in batteries to reduce stress on the grid.
The Environmental Impact of AI: Power and Water Concerns
There is tremendous excitement about how artificial intelligence (AI) has driven the stock market higher and could change the world. However, with all the talk about the power of AI, we think the topic of “AI and power” needs more attention.
AI's potential seems limitless in terms of its impact on workplace efficiency and innovation. We know that AI requires massive amounts of electricity and water. Given the power needed to run its servers and the necessary water to cool its data centers, AI will stress critical power and water resources globally.
“We still don’t appreciate the energy needs of this technology [and] there’s no way to get there without a breakthrough,” Sam Altman, founder of OpenAI (ChatGPT’s creator), said recently.1
Many U.S. states are under pressure to meet AI's growing power demands. In Georgia, for example, the demand for electricity over the next decade is expected to increase 17-fold. Virginia will need to add the equivalent of several large nuclear power plants to support the new data centers planned in the state. Texas, already experiencing electricity shortages during hot summers, faces similar challenges.2
Estimates show that ChatGPT consumes 260.42 MWh of power over a typical 24-hour period.3 In contrast, an average three-bedroom house in the U.S. uses 11.7 MWh per year.4 This means that ChatGPT uses over 20 times the annual power consumption of a three-bedroom home in just one day. Unless this additional power comes from clean, renewable sources, it will significantly increase global carbon emissions.
While AI has the potential to improve power efficiency and make power grids more resilient, would these benefits offset the negative impact of the significant power it consumes? According to a recent International Energy Agency report, “data centers, cryptocurrencies, and artificial intelligence consumed about 460 terawatt-hours of electricity in 2022.”5 This power usage is more than all the electricity used in France in 2022; it could double by 2026.6
Electricity is only one aspect of AI’s voracious appetite — it is also tremendously thirsty. Operating a data center consumes significant water. From 2021 to 2022, before the release of ChatGPT, Microsoft’s water usage increased by 34%.7 In its latest environmental sustainability report, Microsoft admitted it is “not yet on track” to reduce water usage and replenish more than it consumes in its data center operations.
A recent study predicts that global AI demand may require 4.2 to 6.6 billion cubic meters of water by 2027, more than half the water used annually in the UK and enough to fill 1.2 to 1.7 million Olympic-sized swimming pools.8
Meanwhile, climate change is causing severe droughts, and a growing global population needs more water for agriculture and daily living. Companies investing heavily in AI must understand and manage these risks for their shareholders and the communities sharing these resources. We believe the explosion in AI, especially generative AI, will necessitate significant investment in new power sources, increased grid capacity, and advancements in water recycling and desalination.
We expect to see continued investment in climate tech innovation. Companies are developing new ways to cool data centers with less water and to store power in huge batteries to reduce stress on the grid. We also foresee investment opportunities in new energy and water infrastructure, with Big Tech companies often leading the way. For instance, Microsoft plans to invest in its energy infrastructure using small nuclear reactors. Google aims to replenish 120% of the freshwater it consumes by 2030, likely relying on new air-cooling technology to achieve this goal.
Technology companies have been the darlings of sustainable investing due to their relatively low emissions. However, big tech companies will likely drive significant energy and water needs in the future. As they pursue their game-changing AI ventures, they will likely face increasing scrutiny over how they manage their insatiable appetites for these resources.
¹ Justine Calma, “Sam Altman Says the Future of AI Depends on Breakthroughs in Clean Energy,” The Verge, January 19, 2024.
² Evan Halper, “Amid Explosive Demand, America Is Running Out of Power,” Washington Post, March 7, 2024.
³ Zodhya, “How Much Energy Does ChatGPT Consume?” Medium, May 19, 2023.
⁴ Sam Wigness, “What’s the Average Electric Bill for a 3-Bedroom House?” Solar.com, December 21, 2023.
⁵ International Energy Agency, “Electricity 2024: Analysis and Forecast to 2026,” January 2024.
⁶ Statista, “Electricity Consumption Worldwide in 2022, by Leading Country,” February 2024.
⁷ Sebastian Moss, “Microsoft’s Water Consumption Jumps 34 Percent Amid AI Boom,” Energy & Sustainability Channel, September 12, 2023.
⁸ Pengfei Li, Jianyi Yang, Mohammad A. Islam, and Shaolei Ren, “Making AI Less ‘Thirsty’: Uncovering and Addressing the Secret Water Footprint of AI Models,” Cornell University, ArXiv Archive, October 29, 2023.
Many of American Century’s investment strategies incorporate sustainability factors, using environmental, social, and/or governance (ESG) data, into their investment processes in addition to traditional financial analysis. However, when doing so, the portfolio managers may not consider sustainability-related factors with respect to every investment decision and, even when such factors are considered, they may conclude that other attributes of an investment outweigh sustainability factors when making decisions for the portfolio. The incorporation of sustainability factors may limit the investment opportunities available to a portfolio, and the portfolio may or may not outperform those investment strategies that do not incorporate sustainability factors. ESG data used by the portfolio managers often lacks standardization, consistency, and transparency, and for certain companies such data may not be available, complete, or accurate.
Sustainable Investing Definitions:
Integrated: An investment strategy that integrates sustainability-related factors aims to make investment decisions through the analysis of sustainability factors alongside other financial variables in an effort to make more informed investment decisions. A portfolio that incorporates sustainability factors may or may not outperform those investment strategies that do not incorporate sustainability factors. Portfolio managers have ultimate discretion in how sustainability factors may impact a portfolio’s holdings, and depending on their analysis, investment decisions may not be affected by sustainability factors.
Sustainability Focused: A sustainability-focused investment strategy seeks to invest, under normal market conditions, in securities that meet certain sustainability-related criteria or standards in an effort to promote sustainable characteristics, in addition to seeking superior, long-term, risk-adjusted returns. Alternatively, or in addition to traditional financial analysis, the investment strategy may filter its investment universe by excluding certain securities, industry, or sectors based on sustainability factors and/or business activities that do not meet specific values or norms. A sustainability focus may limit the investment opportunities available to a portfolio. Therefore, the portfolio may underperform or perform differently than other portfolios that do not have a sustainability investment focus. Sustainability-focused investment strategies include but are not limited to exclusionary, positive screening, best-in-class, best-in-progress, thematic, and impact approaches.
Sustainability focuses on meeting the needs of the present without compromising the ability of future generations to meet their needs. There are many different approaches to Sustainability, with motives varying from positive societal impact, to wanting to achieve competitive financial results, or both. Methods of sustainable investing include active share ownership, integration of ESG factors, thematic investing, impact investing and exclusion among others.
References to specific securities are for illustrative purposes only and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.
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