Most market indices were up for the month of May, with ongoing investor optimism about the economic outlook supporting risk assets. The fund delivered positive performance over the month of +1.3%. Following falls in inflation, sentiment in global equities is more positive with markets expecting that central bank tightening is nearing its end. This environment should be more supportive for the generally smaller and more growth-orientated impact stocks we invest in.

This month Katie Woodhouse considers the impact of the increasing importance of AI. While it clearly has the potential to provide solutions that generate real environmental benefits, the current reality is that it’s making existing sustainability challenges even greater. She discusses how the potential positive impact of AI will only be realised if AI solutions can be delivered with a dramatically lower greenhouse gas and water footprint. Within WHEB’s investment strategy, we explicitly look for businesses what will help make this a reality.

Top Holdings (alphabetically)

Agilent Technologies Inc

United States

Health Care

Agilent Technologies is a specialist in the development and manufacture of bio-analytics for the life sciences and chemical analysis industries. The company's mission is to advance quality of life. Within healthcare, its analytical instruments are used in the development and testing of healthcare products. Agilent also has a chemical analysis business which makes equipment for monitoring levels of pollutants in the ambient environment and or measuring contaminants in food and the human body

Ecolab Inc

United States

Materials

Ecolab sells cleaning products and services to restaurants, hotels, hospitals, food and beverage producers and other businesses. The company has a particular focus on energy and water efficiency. Ecolab has developed a range of products and services that help to reduce, and in some cases even eliminate, the use of water in a wide range of industrial applications. In turn, this helps to lower costs through a reduction of energy and water impacts.

ICON PLC

United States

Health Care

ICON is a clinical research organisation (CRO) which provides outsourced development services on a global basis to the pharmaceutical, biotechnology and medical device industries. The company's mission is to accelerate the development of drugs and devices that save lives and improve the quality of life. ICON specialises in the strategic development, management and analysis of programmes to support all stages of the of the clinical development process.

Infineon Technologies AG

Germany

Information Technology

Infineon Technologies manufactures semiconductors and related systems. The company's products include power semiconductors, as well as microcontrollers and radio frequency products and sensors. The products are key enablers of several important end markets including electric and hybrid road vehicles, renewable power generation including wind turbines, efficient power management in industrial systems and applications and in other types of electrical infrastructure.

Keyence Corp

Japan

Information Technology

The company's products include machine visions systems including sensors and measuring instruments that are primarily used in the automation of factories. These components help customers achieve higher levels of efficiency, energy-savings, improved material utilisation and reduced wastage and quality management.

Linde PLC

United States

Materials

Linde Plc produces and distributes industrial gases. The company operates globally supplying oxygen, hydrogen and other gases to a very wide range of downstream markets including into manufacturing industries, petrochemical and electronics industries. The gases are used in a variety of applications including in making manufacturing processes more efficient and in reducing harmful emissions. The company is establishing a strong presence in the green hydrogen market and also sells oxygen and other gases into the healthcare sector.

MSA Safety Inc

United States

Industrials

Founded in Pittsburgh in 1914, MSA originally stood for Mine Safety Appliances. This was changed in 2014 to MSA Safety to reflect the broader range of products the company has developed. Today, MSA still manufactures products such as fixed gas and flame detection systems which are used across industry. They are also a leading manufacturer of self-contained breathing apparatus and fire helmets for firefighters as well as fall protection equipment for working at height.

Schneider Electric SE

France

Industrials

Schneider Electric is a leading global provider of low- and medium-voltage electrical products and systems as well as automation control equipment. It specialises in digital automation and energy management, serving customers in the home, building and infrastructure industries. Its products and services promotes sustainability and energy efficiency through driving digital transformation in manufacturing processes and energy technologies.

Thermo Fisher Scientific Inc

United States

Health Care

Thermo Fisher Scientific is one of the largest suppliers of analytical instrument, equipment, consumables and software for healthcare and environmental research, analysis, discovery and diagnostics. The company offers a very wide range of products and services including the equipment needed to analyse samples as well as the variety of containers and other consumables needed to handle them.

Xylem Inc/NY

United States

Industrials

Xylem manufactures a wide range of products and provides services to the water industry. The company's water infrastructure business provides a range of pumps, filtration and testing and treatment equipment to water utilities. The company also supplies commercial, residential markets with water and wastewater systems, and provides measurement and control solutions. Xylem's strategy is characterised by the application of intelligent technology to improve water efficiency, in products such as smart meters and intelligent monitoring equipment.

Market Review                

Most market indices were up for the month of May, with ongoing investor optimism about the economic outlook supporting risk assets. The MSCI World Index of stocks was up +2.0%.

US equities were the best performers during the month, supported by better than expected first quarter earnings results across several sectors.  The largest technology stocks continued to drive an outsized portion of Index performance, with more than half of the S&P 500’s performance attributed to NVIDIA, Apple, Microsoft and Google (all of which do not fit in our universe of companies that solve sustainability challenges).

In Europe, PMI (Purchasing Managers Index) data released during the month confirmed that economic confidence is improving.

Regional monetary policy is beginning to diverge. In the US, disinflationary trends are beginning to stall and hopes of an imminent rate cut beginning to fade. In the eurozone, the European Central Bank (ECB) appears to be more confident about the economy’s disinflationary path. Expectations of falling interest rates favoured growth styles, which outperformed value styles.

Technology and Utilities were the strongest sectors in the global market while Energy and Consumer Discretionary lagged.

Fund Review

The fund delivered positive performance over the month of +1.3%.

The Cleaner Energy theme was the largest positive contributor, due to sharp rises in First Solar and Nextracker. There have been several supportive US policy decisions recently to develop the US utility-scale solar market, as well as an increasing number of corporate customers looking to secure clean energy sources.

The Sustainable Transport theme also performed well, driven by the holdings in Infineon and Aptiv. Infineon lowered its full-year guidance due to challenging end markets.  This was much anticipated and received positively by investors. Aptiv released better than expected Q1 results in May, with a favourable exit from a joint venture with Hyundai on autonomous vehicles.

On the other side of the ledger, Daifuku (in the Resource Efficiency theme) was the weakest contribution to returns. The company published a new mid-term plan forecasting strong revenue growth. However, expectations for flat margins as well as short-term headwinds in some segments and regions weighed on the stock. Trimble, another holding in the Resource Efficiency theme, fell in the month.  Weak demand in their hardware business, and on concerns relating to the delay of a financial filing, weighed on the stock. We have met with management and continue to believe that Trimble can grow earnings, particularly from their ‘Construction One’ strategy.

Outlook

Following the fall in inflation, sentiment in global equities is more positive with markets expecting that central bank tightening is nearing its end. This environment should be more supportive for the generally smaller and more growth-orientated impact stocks we invest in.

Meanwhile, several of our key sustainability markets have cyclical challenges to overcome, as well as repositioning around China’s changing role in global manufacturing.  We remain convinced that the companies we invest in retain the competitive edge to deliver the transition to a more sustainable economy.

AI: developing humanity’s superpower above all costs

By Katie Woodhouse

Barely a day goes by without a fresh news story regarding Artificial Intelligence (AI). Last month, OpenAI released its demo of the latest version of its Chat Bot, ChatGPT 4o, an impressive, if not slightly terrifying, glimpse into the not-so-distant future of AI assistants.¹

Some of the benefits of AI are clear to see but the famous proverb “with great power comes great responsibility,” comes to mind as the race to develop the new technology takes precedence over all other considerations. The societal impact of AI is something that is discussed fiercely in businesses and governments globally. But what are the environmental impacts?

Racing ahead

Unfortunately, these are not good. According to the International Energy Agency, one query on ChatGPT uses ten times the energy of a standard Google search.² These negative impacts of AI were very visible in May when Microsoft published its 2024 Environmental Sustainability Report. This detailed environmental developments at Microsoft since 2020 when the company announced ambitious pledges, including its aim to be carbon negative and water positive by 2030. Since 2020 however, Microsoft has reported a 30% increase in total scope 1, 2 and 3 greenhouse gas (GHG) emissions, and an 87% increase in water consumption.³ These increased impacts are almost entirely due to the construction of data centres – the critical infrastructure powering AI.

A few months prior to the publication of the report, Microsoft published its AI Sustainability playbook in which the company argued that “AI is a vital tool to help accelerate the deployment of existing sustainability solutions and the development of new ones – faster, cheaper and better”.⁴ The irony is not lost on us that AI is seen as a game-changer for accelerating climate solutions when it is currently the main cause of surging energy demand and consequent GHG emissions.

Considering the positive stock market reaction whenever a company mentions AI, it begs the question if Microsoft, as well as the other large tech companies, are highlighting a tension between growth and their short-term shareholders’ interest and the long-term interests of our planet.

The data centres required to power AI and cloud-computing are notoriously energy and water intensive. The International Energy Agency (IEA) report that data centre demand comprised 3.6% of total power consumed across the US, Europe and China in 2022. This is forecast to increase to 7% by 2026.⁵ To put this in perspective, this is equivalent to the current annual energy usage of Japan.⁶ The combined electricity use by Amazon, Microsoft and Google more than doubled between 2017 to 2021.⁷ A gold star to whoever can guess which stocks were the most widely held in ESG funds in 2023, according to Morningstar.⁸

Cleaning up after AI

These huge additional energy demands require substantial investment in new energy infrastructure. Luckily, many of the mega-cap tech companies have ambitious renewable energy targets they are required to meet. While Microsoft is woefully off course in meetings its carbon reduction targets it is nonetheless investing in renewable energy infrastructure. A prime example is the company’s huge US$10bn agreement with Brookfield Renewable Partners for the development of 10.5GW of new clean energy projects, coming in at eight times the size of the previous largest renewable energy agreement.⁹

Microsoft in particular has gone some way to atone for their carbon sins. Last month at the Microsoft Build conference, CEO, Satya Nadella, reaffirmed Microsoft’s commitment to power it’s data centres with 100% renewable energy by 2025.¹⁰ As a result of Nadella’s comments, First Solar and Nextracker, US-based manufacturers of solar panels and tracking systems respectively and both held in the fund, rose 18.5% and 13.6% on the day, with other companies in our Cleaner Energy theme not far behind.¹¹

Getting this new renewable energy to the data centres will also require substantial upgrades to the grid. This is set to benefit Schneider Electric, a provider of energy management technologies and solutions.

Making sure that any additional energy requirements are met with renewable power is one way of limiting the negative impacts of AI on the environment. Improving the efficiency with which water and energy are used is another. With 40% of the energy usage of data centres used for cooling the equipment, there is significant need for efficiency. Trane Technologies produce energy-efficient air conditioning systems and related services that are ideal for use in data centres. In the first quarter of 2024, Trane’s commercial air conditioning system bookings were up 30% compared to the same quarter in 2023. Similarly, TE Connectivity’s Thermal Bridge technology can provide double the improvement in thermal resistance when compared to traditional methods – reducing the need for higher speed fans and lowering energy usage in data centres.¹²

As Microsoft argue in their AI Sustainability sourcebook, AI clearly has the potential to provide solutions that generate real environmental benefits. The current reality however is that AI is just making our existing sustainability challenges even greater. Realising the potential positive impact of AI will only be realised if AI solutions can be delivered with a dramatically lower GHG and water footprint.  Within WHEB’s investment strategy, we explicitly look for businesses that will help make this a reality.

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¹ https://chat.chatbotapp.ai/
² https://iea.blob.core.windows.net/assets/18f3ed24-4b26-4c83-a3d2-8a1be51c8cc8/Electricity2024-Analysisandforecastto2026.pdf
³ https://query.prod.cms.rt.microsoft.com/cms/api/am/binary/RW1lMjE
⁴ https://blogs.microsoft.com/on-the-issues/2023/11/16/accelerating-sustainability-ai-playbook/
⁵ https://www.iea.org/reports/electricity-2024
⁶ https://www.ft.com/content/70f3ce57-1d02-4aa9-a94f-d8d728671672
⁷ https://www.iea.org/reports/electricity-2024
⁸ https://www.morningstar.com/sustainable-investing/what-stocks-do-esg-funds-own-here-are-three
⁹ https://www.esgtoday.com/microsoft-signs-largest-ever-corporate-renewable-energy-purchase-deal-with-brookfield/
¹⁰ https://news.microsoft.com/wp-content/uploads/prod/2024/05/Satya-Nadella_Transcript_KEY01_Build2024.pdf
¹¹ Factset price data
¹² https://www.te.com/en/about-te/perspectives-on-technology/rapid-expansion-of-data-centers.html