Ethical funds get picky as carbon bakes into AI-heavy benchmarks

Ethical investors are being deliberate about their artificial intelligence (AI) exposure in a bid to keep carbon profiles of portfolios in check.

Australian Ethical said the $14.5 billion super fund does not take a position on AI as a category and instead looks beyond the label to assess the specific technology, its use case, and where a company sits within the broader AI value chain.

"From a sustainability perspective, the environmental footprint of AI infrastructure is a material investment consideration for us," Australian Ethical chief impact and ethics officer Alison George said.

"Energy use associated with AI workloads is growing rapidly, and companies that cannot demonstrate credible environmental standards at the infrastructure layer carry real risk. We account for that in our investment decisions, including by not investing in, or removing from our investable universe, companies that do not meet our expectations."

Janus Henderson associate portfolio manager on the global sustainable equities team Suney Hindocha said while AI is the dominant growth driver in the global economy and a major multi-year investment cycle, it would not be sensible for a sustainable portfolio to concentrate in a single AI infrastructure trade.

"The risk in the benchmark today is that the global stock indices have become more concentrated towards AI-related infrastructure beneficiaries," Hindocha said.

"Many of those companies are excellent businesses, but they are often more cyclical, and more carbon-intensive than the capital-light digital businesses that led markets for much of the previous decade. There is both an investment risk and a sustainability risk emerging in the index itself."

George said the environmental and social considerations vary depending on where a company operates within the AI value chain.

"At the data centre layer, we focus on factors such as energy sources, emissions and water use. We have approved companies with strong environmental credentials, including renewable energy matching and responsible water management practices, while excluding others where the evidence didn't support those standards," she said.

Australian Ethical has stayed clear of Cogent Communications due to insufficient evidence of meaningful efforts to address environmental impact and energy intensity across its data centre-heavy business.

"By contrast, Aligned Data Centres meets our criteria and is considered investable because of its environmental standards, including the use of closed-loop water technology and zero-carbon renewable energy certificates," George said.

"At the model and platform layer, the focus shifts to issues such as transparency, embedded bias, safety practices and safeguards against harmful outputs. An example of a company we have assessed as not investable is SpaceX/X/Grok, due to serious human rights concerns, inadequate safeguards against harmful content generation, and insufficient controls to prevent further harms."

To strike the right balance, Janus Henderson thinks about portfolios across three broad categories including green AI infrastructure, AI beneficiaries, AI-resilient or AI-immune businesses.

Hindocha said portfolio level carbon matters, and Janus Henderson portfolio scope one, two, and three weighted average carbon intensity has fallen by around 5% over the last five years, and it is currently around 47% below the benchmark.

"While the MSCI World benchmarks scope one, two, and three weighted average carbon intensity has increased over that period, so that is a proof point that we want to emphasise," he said.

"We believe it is possible to participate in the AI investment cycle while maintaining a materially lower carbon profile than the benchmark. The answer is not to avoid AI, and it is not to chase the index blindly. The answer is to selectively participate with diversification and with carbon discipline."