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The rise of AI & climate risks amplify existing water risks faced by thirsty data centres

CWR releases a new report, “China ICT running dry? The rise of AI & climate risks amplify existing water risks faced by thirsty data centres”. The report reveals 4.3mn data centre racks in China consume around 1.3bn m3 today but can rise to >3bn m3 by 2030. This will put pressure on already stressed water resources, especially as the rise of AI & chatbots could see water use surge by a shocking 20x.

For perspective, ~1.3bn m3 is 1.9x the water use for households & services in Tianjin, a city of 13.7mn people… but with data centre growth plus AI, this could explode to more than 500mn people!

Clearly, this doesn’t bode well for China ICT as it is already highly exposed to various water risks. Of the 4.3mn national data centre racks:

• 46% are located in regions as dry as the Middle East;
• At least 41% are located in regions that are highly prone to drought while at least 28% are in areas highly prone to floods + at least 1/5 are very prone to both;
• 56% are located in coastal regions vulnerable to storm surge & sea level rise; and
• >75% lie in 3 river basins – Yellow, Yangtze & Pearl = vulnerable to basin & regulatory risks.

Elon Musk’s Tesla Bait-and-Switch Is Getting Old The EV company keeps pushing its “next phase of growth” message, but it’s getting harder to look past a slump in vehicle sales and its unexciting lineup.

In case you didn’t know that Tesla Inc. is on the cusp of a new wave of growth, it is now slashing its workforce by more than one-in-ten. It’s all there in the memo.

Chief Executive Elon Musk informed the ranks this weekend that more than 14,000 of them — based on year-end 2023 figures — would be leaving the electric vehicle manufacturer forthwith. The announcement is one part regret, three parts optimism. The phrase “next phase of growth” appears up top and in the kicker, with a derivative of it somewhere in the middle, too. This is all quite normal corporate stuff: Companies doing big layoffs must emphasize the leaner, fitter organism that will emerge. But this is Tesla at an interesting moment in its development, so the context matters.

Threats to food security are rising globally as governments grapple with the fallout from fluctuating commodity prices amid a cost of living crisis and increased economic, geopolitical and environmental volatility, according to our latest research.

Our Food Security Index (FSI), which evaluates the availability, access and stability of food supplies in 186 countries, shows that 135 countries have seen an increase in risk since 2022-Q4, compared to 48 where the risk decreased. Only 13 countries fall within the low risk category of the latest edition of the FSI, the lowest number since the dataset launched in 2017.

Risks continue to run highest in parts of the developing world, with countries in Africa, Asia and the Americas most at risk. But the data – which also considers nutritional outcomes for each country’s population - highlights rising food insecurity even among rich nations, with Europe witnessing the largest increase in risk of any region. The likes of Australia, New Zealand and Canada have also seen an uptick.

The way investors assess firms has seen a radical change in the last several years. Environmental, Social, and Governance (ESG) aspects have become important indications of a company’s long-term health and resilience, surpassing traditional financial measurements. Corporate governance procedures, social responsibility, and environmental stewardship are just a few of the many topics covered by ESG.  

ESG disclosure scores are becoming more and more important in influencing investor perception and promoting financial success as investors grow to understand the value of sustainability and moral behaviour. In this blog, we will look into the ways in which businesses can use ESG activities to gain a competitive edge and sustain growth as we delve deeply into the complex interplay between investor perception, financial performance, and ESG disclosure scores. 

The European Union (EU)’s Corporate Sustainability Reporting Directive (CSRD) aims to make corporate sustainability reporting more transparent, consistent, and standardized to help drive capital towards sustainable investment as part of the new Green Deal.

Companies subject to the CSRD will have to prepare a “sustainability statement” according to the new European Sustainability Reporting Standards (ESRS), with the first set of sector-agnostic standards having been adopted by the European Commission in July 2023. Sector-specific standards as well as standards for small- and medium-sized businesses and non-EU parent companies are still under development.

Additionally, specific implementation elements, such as filing deadlines and consequences of non-compliance, are still being finalized, as EU member states are in the process of transposing the directive’s requirements to national law by July 1, 2024.  by July 1, 2024.  

Analysis from Sustainable Fitch indicates that US corporates lag most international peers on corporate environmental disclosures, as reflected in broadly lower ratings achieved by US-based entities than mainly European peers. With the advent of the newly adopted Securities Exchange and Commission (SEC) climate rules, disclosure requirements for larger US-based companies increase.

Although the rules are already being broadly challenged, we view these findings as an important indicator of the overall preparedness, or in cases lack thereof, of US entities in complying with more robust disclosure requirements. These include similar requirements coming from the state of California’s recent climate disclosure bills, as well as from the EU’s reporting requirements for non-EU entities operating in the region.

Ninety One's latest report covers key areas including:

• Climate solutions and transition sleeves
• Optimising existing allocations for returns and impact
• Equities and credit, and sovereign allocations 
• Private markets

If you read this, another geopolitical event has triggered fears in financial markets. In this note, I provide a simple checklist to help investors make sense of the events from a fundamental perspective. Based on the evidence from dozens of empirical studies I provide a list of questions to answer and how to position portfolios in reaction to these answers.

A guide to help investors separate the signal from the noise

We live in a world where wars, civil strife, and geopolitical tensions have an increasing influence on markets. There are plenty of geopolitics consultants ready to help investors with advice and even more strategists who pretend to know how to play markets in a time of geopolitical tensions.

This survival guide is not specific to any particular crisis at hand but based on an analysis of the extensive empirical literature on the impact of wars, civil wars, terror acts, and similar events. 

We all know that if someone divests from a company, all they do is sell the shares to another investor who may care less about the environmental or social record of a company. But David Whyte from the Queen Mary University in London tracked what happened to the shares in BP and Shell that were sold by large investors divesting from these companies. And the results are sobering.

Whyte tracked the changes in shareholding of the 20 largest institutional investors in the two UK oil majors after the Paris Climate Accords in late 2015 until 2022. On average, he found that the largest institutions increased their shareholdings while smaller shareholders tended to divest. Most notably, the largest two to three shareholders, which tend to be Blackrock and Vanguard together with Norges Bank all increased their shareholdings in BP and Shell.

This is ShareAction's third benchmark of the insurance sector. It assess the policies and practices of 65 of the world's largest insurance companies across a range of environmental and social issues.

In this report we assess three different types of insurers:

> Life & Health (L&H) insurers

> Insurers with a relevant property and casualty business (P&C)

> Lloyd's of London's managing agents (MA)

Three ranking tables outlining the performance of insurance companies can be found on the link below.

With over 7,000 companies – of which 100 are valued at over $1 billion – climate tech has emerged as a pillar of ESG and sustainability investing. As the energy transition unfolds, these technologies are only poised to capture more market share.

The novelty of many climate tech solutions makes it difficult for investors to assess their progress, market penetration, and impact on existing players – especially since most operate in private markets.

Jefferies’ Sustainability & Transition team set out to examine the landscape of climate tech investing; analyzing its current state, trajectory over the next year; key developments and innovations; and more.

This article explores ten of the most widely discussed assumptions, fact-checking them and providing interpretation to help companies understand how the CSDDD applies to them and start their journey to basic compliance and beyond.

Every month, SRI-Connect reviews the sustainability issues and related research and analytical op-ed that have been of most interest to sustainable investors over the previous 90 days.

(We do this to help companies, investors and research providers understand current trends and thinking and to shape their future communications and research focus.  See ‘stay updated actions’ below.)

The sector generating most interest in Jan, Feb & March was the Energy sector - with the top pieces listed below.  (Next sectors were: [2] Food products [3] Chemicals [4] Pharma & [5] Metals & Mining)

Editor’s comment

Ed: What we found interesting in this ‘most hit’ selection is the number of different asset classes that feature as affected by sustainability & energy transition in the sector: equity, listed debt, commodities & private equity.

Sustainable Fitch: Transition Assessments Flag Hurdles for Energy Companies

The twelve energy companies Sustainable Fitch has evaluated using their Transition Assessment (TA) methodology have, to date, made limited progress towards net zero and 42% of them received the second-lowest grade (brown).

Targets are also patchy, in some cases only applying to certain parts of the company.

For most of the companies [we] assessed, long-terms pledges to transition to net zero have yet to translate into concrete steps to shift energy companies’ business mixes away from fossil fuels.

ISS ESG: 2024 Global Outlook Report: Key ESG Risks and Opportunities for Investors

In 2024, the ESG investment landscape will continue to develop, influenced by factors such as climate change, technology, and evolving regulations, among others.

ISS discusses the energy transition and the likely impacts of this, including the increased demand for critical materials essential for clean energy technology.

Along with the growing use of clean technologies, mining companies’ focus on decarbonizing their own operations is contributing to global emissions reduction. Major challenges and trends include divesting from high-carbon-emitting assets (e,g., coal), energy efficiency, and using renewable energy sources

ISS identifies the key global trends identified by ISS ESG that sustainable investors will likely be focusing on through 2024.

SRI-C: Energy & Mining companies: Dates for sustainable investor update presentations

With reporting season approaching, SRI-Connect surveyed the investor relations pages of Energy & Mining companies to see which had announced dates for presentations to sustainable investors.

We list four upcoming events and would encourage all companies to let us know about their ESG / sustainability investor communications so we can support (for free) its reach and efficiency.

Wood McKenzie: Energy transition outlook

Wood Mackenzie’s energy transition outlook report maps three different routes through the energy transition with increasing levels of ambition – but also difficulty and investment.

It is their independent assessment of what it would take to deliver on countries’ announced net zero pledges and potential outcomes for the planet.

BarCap: Can global energy evolve to achieve net zero by 2050?

There is some good news in the race to net zero: Lower-carbon fuels are gaining traction and the capacity of renewables is growing rapidly.  But overall, progress towards targets is still slow, particularly when it comes to gains in energy intensity.

BarCap’s Research analysts outline five areas where policy-makers, companies, investors and consumers can start to step up the pace: [1] Reduce consumption, eliminate waste [2] Clean up electricity generation [3] Substitute with hydrogen [4] Biofuels without compromise [5] Locking up carbon.

IEA: Global Methane Tracker 2024

Methane is responsible for around 30% of the rise in global temperatures since the Industrial Revolution, and rapid and sustained reductions in methane emissions are key to limiting near-term global warming and improving air quality.

The energy sector – including oil, natural gas, coal and bioenergy – accounts for over a third of methane emissions from human activity.

The IEA’s Global Methane Tracker is an indispensable tool in the fight to bring down emissions from across the energy sector.

Man GLG: Extracting the Best from Natural Resources

Investors often must navigate a combination of cyclical and secular forces, ranging from geopolitical unrest to volatile inflation. Natural resource investments, referring to assets which derive from nature such as agriculture, oil and gas, and metals, are often overlooked by investors.  Man GLG believes that they should form a core part of any well-diversified portfolio. In this paper, they outline some of the key attributes of the asset class which lead us to this conclusion

Carbon Tracker: Private Eyes Wide Shut: Private Equity Investments in Oil and Gas at Risk from Energy Transition

Projections for oil and gas demand present a bleak picture for the industry: the International Energy Agency (IEA) now foresees global demand for oil, gas, and coal all peaking by the end of this decade. This seismic shift in energy consumption will have significant consequences for energy investors, across all asset classes.

This report is primarily written for private equity investors – both General Partners (GPs) and Limited Partners (LPs) – and highlights the unique risks which they face from continued investment in Upstream, alongside those facing listed equity investors.

Also widely receiving hits from Carbon Tracker over the last 90 days:

• Carbon Tracker: 2024: Misreading and mistiming the energy transition – Carbon moves from valuable commodity to stranded element (Blogpost)
• Carbon Tracker: Key Climate and Energy questions for 2024 (Blogpost)

Shell: Sustainability Report 2023

Shell's latest report covers details of their sustainability activities including:

• Achieving net-zero emissions 
• Respecting nature 
• Powering lives 
• Sustainability in oil and gas activities 
• Performance data

(Ed: Posting sustainability reports to SRI-Connect is a free and super-efficient way via here for companies to notify sustainable investors and analysts about the publication of their reports … and – as this post shows – they get lots of attention).

ClearBridge: Let's Make a Deal: Energy Edition (Podcast)

ClearBridge’s energy analyst discusses the latest in the energy sector, including his takeaways from recent large mergers in oil and gas, the prospects of upstream producers versus oilfield services, and what oil and gas companies are doing to lower their emissions and play a role in the energy transition.

EDF: Financing Methane Abatement: Introduction to sustainable debt instruments

An emerging role for finance in the energy transition is through the use of "sustainable finance instruments" - where capital is explicitly intended to fund an organization's sustainability projects and goals (think green bonds, sustainability-linked bonds, blended finance, etc.).

We break down the wonky world of sustainable debt in our latest primer, where we analyze its features, trends, and 17 case studies (featuring Eni, Enbridge, Shell, BapCo, the blue bond, the rhino bond, and more!).

Stay updated actions

• For all: To receive an ongoing, comprehensive and free flow of research and analytical op-ed that is relevant to professionals within the sustainable investment industry, please join the SRI-Connect network via here.  (Access is limited to those with current professional exposure to the sustainable investment / ESG value chain)
• For investors: Review the research pieces below and connect with the analysts that wrote them
• For research providers: Review the pieces below and – through your own research – extend and challenge them by engaging yourself in the sustainable investment debate
• For listed companies (in this sector): … who are preparing their sustainable investor presentations for the months ahead … be sure to cover the issues raised and your response to them in your forthcoming communications
• (For listed companies – in other sectors), contact me directly for a FREE report on what’s occupying the minds of investors in your sector.

Sompo Holdings: Sustainability Report 2023

The main purpose of the Sompo Holdings Sustainability Report 2023 is to report on the efforts of the Sompo Group to achieve “Materiality,” which are priority environmental (E), social (S), and governance (G) issues, for realizing the Group’s Purpose.

Published in March 2024, the report covers the period April 2022 - March 2023, and was compiled based on international guidelines such as the United Nations Global Compact and the GRI Standards.