Big tech and ESG: Index giants falling short on standards

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Investors are not generally aware of the poor ESG credentials of the world’s largest internet companies, which despite their heavy weighting within global ESG indices are responsible for a sizeable environmental impact, and pose risk to investors by virtue of their social and governance standards, research suggests.

A report from investment house Alquity, entitled Are We Ignoring the Environmental and Social Impact of the Internet?, was published earlier this month and reveals that modern computing is responsible for about 3% of global CO2 emissions – equivalent to the entire aviation industry – while energy usage from the data servers they rely on could grow to 11% of total global energy consumption by 2030.

China’s data centre industry alone consumed 161 terawatt-hours of electricity in 2018, equal to the electricity consumption of the whole of Thailand that year, according to the report, while a single Google search in 2009 was estimated to require the same energy consumption as running an LED bulb for three minutes.

The report is particularly significant for US tech giants, with Alquity identifying a number of specific issues for each and which have become a growing part of major ESG indices.

Information technology firms now make up 22.2% of the MSCI World ESG index, the top five constituents of which are Apple, Microsoft, Amazon, Facebook and Google’s parent company Alphabet.

A similar theme is seen in the FTSE All-World ex-Fossil Fuels index, the only top ten constituent of which that does not have a tech focus is pharmaceuticals firm Johnson & Johnson.

“Technology companies (particularly internet-oriented ones) are not often seen as potentially problematic areas for environmentally conscious investors,” Alquity said.

“Given the potential for negative environmental and social risks, combined with the increasing weights in their respective indices, we believe that ESG and sustainable investors should take a much closer look at the E&S performance of such companies.”

 

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