Big data and clean energy transformation

• New AI, machine learning, and “big data” applications are developing rapidly, creating new computational and power demands on our road to net zero

• The close relationship between energy efficiency and data centre efficiency is leading to voluntary commitments by cloud service providers to 100% clean energy use by 2030

• By considering clean energy as an essential part of data centre design and expansion, cloud service providers can provide additional protections against climate risks

• Investors can support long-term value creation and mitigate energy transition risks by calling on Information Communication Technology (ICT) investee companies to establish clean energy requirements for existing and future growth.

In 1965, Gordon Moore predicted that the number of transistors on an integrated circuit would double every two years, and by inference, so would computational power. From Moore’s co-founding of Intel Corporation in 1968 and for the next 50 years, this observation, now called Moore’s Law, held true.

Today artificial intelligence (AI), machine learning, and “big data” applications are creating a renaissance in ICT. AI is being used for drug discovery, deep learning algorithms are used to power voice assistants, and 5G networks are enabling the future of self-driving cars. The computational demands for these new applications have grown at an unprecedented rate. According to San Francisco-based OpenAI, the amount of computational power consumed by AI models have now shattered Moore’s law, doubling every 3.4 months.

Source: OpenAI

New demands and trends

According to the International Energy Agency (IEA), global internet traffic increased by 40% in 2020 and 15-fold since 2010 and is anticipated to continue to grow as high bandwidth applications such as streaming services expand. 5G radio networks will allow for the expansion of the “internet of things”, allowing 1 million connected devices per square kilometer as well as providing the necessary high data transfer speeds and low latency for autonomous vehicles and telemedicine.

Increases to computational demand have been largely offset by improvements to hardware energy efficiency, as increasing chip density is synonymous with energy efficiency. Between 2015 and 2020 a threefold increase in data centre workload required only 14% more energy. Early indications suggest that new energy-demanding technologies, such as the 5G network infrastructure that currently requires three times the energy of conventional 4G will see similar improvements in energy use.

However, energy efficiency alone will not address the widespread adoption these new technologies will have on future energy demands. Consider the recent popularity of cryptocurrencies: Bitcoin mining’s energy consumption has grown to an estimated 103.7 TWh in 2021 exceeding the annual electricity generation of Alberta and Saskatchewan combined. While bitcoin is in a league of its own for energy consumption, the cryptocurrency industry is aware of the concerns brought forward by institutional investors. Ethereum, for example, is currently in the process of switching from proof-of-work to proof-of-stake to (among other things) reduce energy demands.

Source: Cambridge Centre for Alternative Finance’s Cambridge Bitcoin Energy Consumption Index

While analysts disagree on how the next generation of AI, blockchain, or yet-to-be-created applications will evolve, it is clear that energy efficiency and clean energy will be critical to achieve both our computational demands and our ambition for a net zero future.

Although decarbonization for the ICT sector is easier than for harder to abate sectors such as oil and gas, transportation or industrials, one big shared challenge remains: the IEA indicates that to stay on target for reaching global net zero by 2050, global renewable energy capacity needs to be 80% higher than the current rate of growth by 2026, with solar and wind capacity alone needing to double over the next five years.

Five energy trends to watch for are:

Clean energy by 2030

Increasing availability and affordability of clean energy sources, along with increasing market demand for carbon neutral services from customers, and potential regulatory action is driving voluntary commitments to 100% clean energy by 2030 by the ICT sector.

Government regulators have considered establishing regulatory requirements for data centre power usage efficiency and clean energy. In the EU, a proposed regulation was sufficient to inspire the formation of the Climate Neutral Data Centre Alliance, an industry-led initiative targeting 100% clean energy powered by 2030. Microsoft has committed to 100% clean energy by 2025 and net zero by 2030, with the additional goal of becoming carbon negative to erase their historical emissions by 2050.

Cloud services and tackling Scope 3

Cloud service providers are increasingly motivated to adopt clean energy policies to support their customer’s carbon neutrality statements. While the emissions from owned or co-located data centres are easily captured under a company’s Scope 1 and 2 carbon footprint, an external cloud service is considered a voluntary Scope 3 disclosure under the GHG Protocol. These emissions can be a significant portion of a company’s footprint, resulting in potential challenges to the company’s carbon neutrality assertion if they fail to disclose them. Some cloud service providers offer clients with carbon statements indicating their share of emissions based on their usage, leaving the company to determine whether the emissions are material or not.

Recent spikes in demand for cloud services significantly increased Scope 3 carbon outputs of the ICT sector. Microsoft in its 2021 Sustainability Report acknowledged challenges to overall carbon reduction, reporting a 23% rise in carbon output due to a large increase in Scope 3 emissions – specifically because of the growth of its cloud services business and an increase in sales and usage of its devices. For reference: Scope 3 emissions account for over 97% of Microsoft’s carbon emissions, a trend that is shared within the sector. With Scope 3 being the most underreported across all sectors, including in ICT, encouraging Scope 3 reporting and Scope 3 emissions reductions is crucial for investors looking to adequately monitor and reduce their own carbon footprint in their portfolios.

In 2021, we recommended to the Canadian Securities Administrators (CSA) that Scope 1, Scope 2, and material Scope 3 reporting should be mandatory for all reporting issuers in Canada, based on the GHG Protocol methodology*.

*CSA Notice and Request for Comment on Proposed National Instrument 51‐107 Disclosure of Climate‐related Matters

Power purchase agreements

Through forward-looking Power Purchase Agreements (PPA), companies can secure clean energy directly from a supplier before the new generation has been developed. In addition to reducing cost and supply risks, PPAs help to finance the development of new clean generation sources.

Data center as a DER

Distributed energy resources (DERs) are electricity-producing resources such as wind farms or “controllable loads” including storage systems. As electricity grids are rapidly modernizing to accommodate new distributed power suppliers, data centres can play a role as a “controllable load” in grid balancing and building optimization by sharing uninterruptable power supply infrastructure with co-tenants or as a buffer to the local electricity distribution system. In a report by BloombergNEF, Eaton and Statkraft, data centres were found to be “a largely untapped resource to support the grid and the integration of renewables.”

Northern exposure

Cloud service companies are relocating data centres globally in areas like Sweden, Denmark, and Norway where an abundance of hydroelectricity and cool temperatures provide both inexpensive clean power and reduced cooling costs. Construction of arctic data centres further reduce cooling requirements and increase energy efficiencies.

In Canada, development of data centres has been concentrated in urban areas where high-speed infrastructure already exists. However, as Canada seeks to bring high speed internet to all Canadians by 2030 through four billion dollar of new infrastructure spending, potential growth of data centers in Northern Canada coupled with Canada’s climate commitment to the Paris Agreement, could make Canada an attractive clean energy potential on a global stage.

What investors can do

BMO GAM understands that climate change presents an existential risk to our environment, economy, and society.

Measuring and mitigating climate change risks is critical to our role as asset managers. As an active member of Climate Action 100+ and Climate Engagement Canada, we are committed to achieving net zero carbon emissions across all assets under management by 2050.The transformation of the energy sector to clean energy sources is key to achieving a net zero future and is one of our key focus areas for Climate Action. ICT companies can create a competitive advantage and mitigate climate-related risks by committing to clean energy, prioritizing energy efficient hardware and infrastructure, and aligning development with new sources of clean energy generation.

Asset owners and investors should consider the following when engaging investee companies:

• Is the company net zero aligned, or has the company made net zero commitments?

• Has the company made a commitment to clean energy that is ambitious and comparable to their industry peers?

• Has the company made a net zero carbon commitment, by 2050, in line with the Paris Agreement?

• Does the company have a plan for decarbonization to support their commitments? Does the plan include consideration for transitioning existing energy use to clean sources, and securing clean energy with growth?

• Does the company disclose its Scope 3 emissions and what plans does it have in place to address these?

• Does the company consider energy efficiency and minimum power usage effectiveness in their technology procurements?

• Beyond energy, has the company looked at broader climate-related risks, such as their technology lifecycle and capacity to manage electronic waste?

• Has the company disclosed and shown meaningful progress on energy conservation and climate risks?
  

About BMO Global Asset Management's Responsible Investing Team

BMO Global Asset Management’s Responsible Investing team manages and develops the firm’s Responsible Investing (RI) thought leadership, publishing regular insights and deep dives on a variety of emerging environmental, social and governance (ESG) topics. The team collaborates with investment teams on emerging ESG developments, provides ongoing ESG integration support, employs a progressive approach to stewardship activities and oversees BMO Global Asset Management’s ESG initiatives and commitments to responsible investing.