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Big tech tops sustainability index, but energy reduction hard to achieve

Large-cap technology companies rank among the top S&P 500 constituents committed to renewable energy, but the data-heavy nature of many tech services requires a lot of computing power, with demand for energy sources sometimes outstripping the supply of renewable energy.

As tech investors and consumers become increasingly interested in sustainability, markets are rewarding companies taking steps to reduce their carbon footprint. The S&P 500 Carbon Efficient Index, which weights companies from the broader S&P 500 based on levels of carbon emissions per unit of revenue, outperformed the broader market index by about 3.5% over the past decade, as of Feb. 28, according to a back-tested analysis by S&P Dow Jones Indices that included theoretical performance from before the Carbon Efficient Index's 2018 launch.

However, that lead has waned at points in the past two years, and shorter-term holdings in the S&P 500 at times picked up a small lead over the Carbon Efficient Index.

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The Carbon Efficient Index's top 10 weighted companies closely resemble the top-weighted list for the broader S&P 500, led by big tech companies including Apple Inc., Microsoft Corp., Inc. and Facebook Inc. Google LLC parent Alphabet Inc. also makes the top 10 by weighting for both indexes. All of those tech companies issue annual sustainability reports and track progress on goals, including the transition to renewable energy.

"A lot of [tech companies] are being backed increasingly by shareholders, individuals or even groups who are made up of younger people much more aware of their responsibility to the planet and are therefore much more sensitive to and selective about the kind of companies they back," said Andrew Kitson, head of telecoms, media and technology macro research at Fitch Solutions.

A 2019 survey by the corporate-governance advisory firm Global Strategy Group found that 88% of consumers believe it is appropriate for companies to take a position on protecting the environment and 77% say it is appropriate to take a position on preventing climate change.

"I think as companies evaluate how they can shore up their position among a variety of stakeholders ... it's important to show that they are evaluating their impact, and, even incrementally, be better actors in the space," said Julie Hootkin, a partner at GSG.

Fitch's Kitson in a September 2019 report warned of the risk that companies' sustainability efforts will be diluted by increased demand for technologies that consume a lot of energy. He pointed to Google, saying the company's growing data center footprint will likely need more energy than it can source directly with local renewables, requiring the company to purchase carbon offsets to maintain its goal of remaining carbon neutral.

Google did not provide comment for this article, but its head of energy strategy and global infrastructure told Yahoo Finance in a December 2019 report that the company uses carbon offsets for regions where it is not yet possible to buy renewable energy. While carbon offsetting generally supports carbon reduction, it is not as effective as direct sourcing of renewable energy, said Trucost head of global research Steven Bullock in an interview. Trucost assesses climate risk.

"There's still uncertainty about how much renewables can be rolled out across data centers," Bullock said.

Part of the issue has to do with unintended consequences. Martin Wolf, doctoral candidate in the Massachusetts Institute of Technology EAPS environmental program, explained that a company may pay to protect a forest from deforestation, but rather than slowing deforestation efforts, the investment may simply lead logging companies to divert their efforts to another area. While there are sustainability standards in place to avoid this kind of "leakage" in the carbon-offsetting process, it still occurs, Wolf said. Leaning too heavily on imperfect carbon offsets can also create incentives to continue the use of fossil fuels, he added.

Kitson also highlighted ironies in big tech companies, including Microsoft, using energy-taxing services to help power sustainability efforts. A 2019 study by the University of Massachusetts Amherst found that the artificial intelligence training process can emit over 626,000 pounds of carbon dioxide, nearly five times the lifetime emissions of an average car, or the equivalent of about 300 round-trip flights between New York and San Francisco. Kitson said the tech industry may be bound to a long-term pattern of offsetting its fossil fuel usage rather than replacing it completely.

Microsoft did not respond to requests for comment on its carbon footprint for this article, though in January, it announced a comprehensive sustainability program that included a pledge to be carbon negative by 2030 and to remove its historical carbon impact by 2050, including both direct and indirect emissions from its supply chain under three "phases" of emissions production. The company also said it is launching a $1 billion fund to advance technological solutions to sustainability challenges.

S&P Global Ratings credit analyst Michael Ferguson, who specializes in environmental, social and governance policy and risk, said he believes the transition to renewable energy will accelerate over the next few years, as investors increasingly attempt to account for climate risk, pressuring companies to do the same.

"For a public company now, it's increasingly becoming a cost of doing business," Ferguson said of climate policy and disclosures.

Trucost is an offering of S&P Global Market Intelligence.