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AI Revolution Transforms Clean Investment

Soaring power demand from data centres offers diverse opportunities for energy transition funds, says Pictet Asset Management.

The rise of generative artificial intelligence (AI) is driving a wave of investment in low-carbon technology, as investors rush to meet rocketing energy demand from data centres.

That’s according to Jennifer Boscardin-Ching, a Client Portfolio Manager with Pictet Asset Management, who has seen AI become the most transformative trend in clean energy investing.

“Over the last year, I think the most prevalent topic that has been on top of everyone’s mind [in the green investment sector] has been the expectation of a large build-out of data centres driven by AI,” Boscardin-Ching, who specialises in energy transition investments at the Swiss group, told ESG Investor.

“In regions like Europe or the US, after two decades of flat electricity demand, now you have increasing electricity demand. But at the same time you have an ageing grid. So that presents interesting investment opportunities,” she said.

Soaring demand

Pictet estimates power demand from data centres globally will double in the space of just five years, going from 60 gigawatts in 2023 to 122GW in 2027 – or almost double the entire electricity generation capacity of the UK. By 2030, data centres in the US will consume 8% of the nation’s power, up from 3% today, according to Goldman Sachs.

Soaring energy demand from AI has already hit the carbon footprints of tech companies. Microsoft – a company that aims to be carbon negative by 20230 – this year reported its carbon emissions in 2023 were up almost 30% on 2020 levels, largely thanks to the soaring energy needs of its AI business.

This has drawn criticism from green groups, who worry renewable energy rollout will not be able to meet soaring increases in electricity demand from AI data centres, and the gap will be plugged with fossil fuel-generated power.

But this has not put off investors. A survey published this week by the Index Industry Association found asset managers were “enthralled by the possibilities afforded by generative AI”,  with two-thirds saying it was the number one topic of discussion over the last year. This seemed to be at the expense of ESG-related investments, which fell down the list of asset managers’ priorities.

But Boscardin-Ching said green investment and AI were closely connected. “Broadly speaking the more demand for electricity should be positive for renewables and green investment,” she said.

This trend saw Microsoft enter a US$10 billion deal with Brookfield Asset Management in May to develop 10.5 gigawatts of renewables, while this week Google parent Alphabet signed an agreement with Energix Renewables for 1.5 gigawatts of solar power.

But AI provides all sorts green investment opportunities beyond renewable energy generation and grid infrastructure, Boscardin-Ching said, pointing to energy-efficient cooling technologies as a promising area.

“Where is all that energy consumption in data centres coming from? A lot of it is coming from cooling needs – to cool down the data centres,” she said, adding any kind of efficient cooling solutions “is an interesting space to look into”.

“It’s not clear cut what the winning technology will be. But generally speaking, we’re moving from more traditional air-cooling technologies to now more liquid cooling, and then on the early stage of the innovation curve, there’s immersion cooling where you have the entire data rack in the cooler itself.”

Semiconductors also a green theme

As the rise in AI sends demand for semiconductors through the roof – it was bullish sentiment about AI that this year turned US-based Nvidia into one of the world’s most valuable companies virtually overnight – the green transition is also driving demand for chips. Pictet classes certain chip companies as energy transition investments.

“A very important segment for us in the energy transition is what we call ‘enabling technology’ space,” Boscardin-Ching.

“We’re talking about … certain semiconductor companies, especially power semiconductors, certain types of semiconductor technology, silicon carbide – these are critical as components for electric vehicles, for renewable energy projects, solar power inverters, etc. And so that is within our definition of our investment opportunity set,” she said.

These areas have benefited from favourable treatment in the US under President Joe Biden’s administration, including from the Inflation Reduction Act (IRA), which provides generous tax credits to clean technologies; and the CHIPS Act, which subsidises US chip manufacturers in an effort to reduce reliance on Asian producers, especially Taiwan – which dominates manufacture of chips used in the most powerful computing processes.

While the CHIPS Act is bipartisan, Republican presidential candidate Donald Trump has signalled he would attempt to repeal the IRA if he won in the November presidential election. Conscious of this risk, Boscardin-Ching said Pictet was careful to invest only in companies that stand up without subsidies.

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