Technology can also improve inclusion in areas such as financial services, agriculture, education and healthcare.
- Technology companies will play a crucial role as structural vectors of transition, improving the efficiency of the materials and services we use
- The energy transition will require technological advances. Technology can also improve inclusion in areas such as financial services, agriculture, education and healthcare
- Increased use of electronic devices, e-waste and energy-intensive blockchain technologies pose their own environmental challenges
- Our approach is to assess the alignment and resilience of investments to transition; design strategies that enable it to exploit its growth potential; fund green investments in early-stage or mature solutions that need to be scaled up.
Tech stocks are having a tough time, as shown by the performance of the tech-heavy Nasdaq index, which is down 25% year-to-date. However, beyond concerns of a short-term nature, technology will play a key role as a structural vector of transition in the service of sustainability. For investors, it is crucial to identify ways to take advantage of this as the transition progresses.
The sustainability challenge is enormous. Emissions must be halved by 2030. Clean hydrogen production must increase seven times a year to reach net-zero goals.1 We need to return 20% of farmland to its natural state within the next eight years while feeding a growing population. As our economy evolves from a take-use-throw away model to a circular, efficient, inclusive and clean (CLIC®) model, the acronym for Circular, Lean, Inclusive and Clean, systems, processes and productivity will have to change. Today’s high food and energy costs play a key role. Innovation will be key. And technology will be a powerful enabler throughout the value chain.
To meet the challenge ahead, we must, among other things, improve our use of energy sources. This forces us to change our energy mix and the efficiency of the materials and services we use. While technology companies will not produce greener electricity, cement or steel, they can play a key role in generating efficiencies that can save costs and resources. Computer modeling, robotics and 3D printing can reduce the resource consumption of manufacturing activities. Drones and advanced image analysis can help companies measure emissions and detect leaks. Connected sensors and blockchain technologies can optimize production and supply chains.
Many sectors already use software, electronic components and cloud computing2 to this end, which constitutes a vector of structural growth for technology companies. Migrating internal servers to the cloud, or “cloud,” could reduce CO2 emissions by around 60 million tonnes per year, according to estimates from consultancy Accenture3and IT costs by 30% to 50%4. The aerospace, automotive and construction industries use software to model forces and visualize new products. Insurers are using blockchain-based smart contracts to provide climate cover to farmers in Africa. Supermarkets are using AI-powered forecasting to improve order and delivery alignment with demand. Precision farming reduces fertilizer use through better targeting; vertical farms that work with internet-based sensors and automation can use up to 95% less water than traditional farms5. Moreover, efficiency gains are not limited to products: technology companies are also crucial in improving the efficiency of services, thanks to platforms that underpin the sharing economy, for example for the rental of expensive items or the sale of second-hand clothes.
Digitization and dematerialization could therefore be key factors in improving the efficiency of products and services. In some areas, these trends have reduced emissions, but also supported a sharp rise in stock prices, blurring the distinction between technology and other sectors: cars in the case of Tesla, or commerce in that of ‘Amazon. Technology companies also have a role to play in the transition to “net-zero” by improving the energy mix. Solar panels and wind turbines require integrated sensors, and the semiconductor content of an electric vehicle is almost twice that of a conventional car. Unlike fossil fuel-based systems, renewable energy requires smart grids connected to the Internet to manage flows and optimize resources. The energy transition will also require huge improvements in battery energy storage, as well as green hydrogen production, where progress often comes from tech start-ups. These advances are generally non-linear: the current demand for electric vehicles and renewable energy was unthinkable twenty years ago. Hydrogen-based power generation costs could be next to fall.
Despite some fears related to potential job losses due to technological progress, technology companies must also play a key role in making the transition to sustainability fairer. More efficient products and services and more affordable connected devices and systems could particularly benefit emerging countries in fields as varied as agriculture, sanitation, health, finance and education. One example is mobile payment apps that make financial services more inclusive. Or a platform designed by an artificial intelligence company that predicts dengue fever outbreaks three months in advance, with 81-84% accuracy, and is currently being tested in Malaysia, the Philippines and Brazil.
Tech giants with deep cash are also participating in funding such technologies at an early or mid-stage: alongside the Gates Foundation, Alphabet, Meta, Shopify and Stripe are investing in a new Frontier Fund aimed at scaling up technologies. carbon capture and storage6. Thanks to their low-capital-intensity models, technology companies generally have very little exposure to climate transition risks. According to our estimates established jointly with our technological partner Systemiq, the median CO2 investment ratio of software and services companies is an emission of 50 tons of CO2 per million dollars invested, compared to more than 3,000 tCO2e per million of dollars in the case of hydrocarbon companies. Nevertheless, it is worth analyzing the exposure of technology companies. Many small businesses do not publish figures on their emissions or sustainability in general. Separately, electrical appliances cause 27% of man-made greenhouse gas emissions7 and blockchain technologies are sometimes very energy-intensive. Another problem is e-waste, with approximately USD 60 billion of electronic products thrown away globally so far, according to a United Nations estimate. A single email has a carbon footprint equivalent to that of a small plastic bag.
However, even though the digital revolution has an environmental cost, investors are wondering if the technology can help us meet the climate challenge. In our current portfolio positioning, we prefer quality stocks to growth stocks. We therefore look for quality companies that are able to maintain their margins, that generate solid cash flows, and that have little debt and predictable profits. From a structural point of view, the role of technology companies could be that of facilitators and accelerators, as the various sectors integrate their solutions. To integrate technology investments into a sustainable portfolio, we follow a three-pronged approach. First, we assess the alignment and resilience of investments to transition. Then we design strategies that capture its upside potential. Finally, we fund green investments in early-stage or mature solutions that need to be scaled up to avoid a “green premium” driving up costs. In this way, technology can be leveraged to achieve sustainability goals, reduce climate risk and improve investment performance.
2 Commonly used English expression, meaning “cloud computing”
3 The Green Behind the Cloud, Accenture, September 2020
4 Source: OpsRamp 2020 Survey, The Emergence of Cloud-First Enterprises
5 Source: Aerofarms
6 Frontier (frontierclimate.com)
7 Source: Bill Gates, How to Avoid a Climate Disaster