Artificial intelligence (AI) technologies are being increasingly included into product offers by global technological companies including Alphabet, Amazon, Apple, Meta, and Microsoft. Particularly with regard to greenhouse gas emissions, the significant energy consumption linked with artificial intelligence training and operation causes questions about the environmental effect. Should investors want these businesses to reveal their energy consumption in order to figure Scope 3 GHG emissions?
From the vantage point of a sustainable investor, a company’s discount factor—that is, cost of capital—may suffer depending on its carbon emissions. Higher emissions companies might be subject to more government scrutiny, possible carbon taxes, and reputational risk that would all affect their Weighted Average Cost of Capital (WACC). Conversely, businesses with long-term commitments—such as those to clean energy—may reduce their discount rate because of reduced environmental risk.
The entire quantity of carbon emissions directly and indirectly generated by an activity or over the lifetime of a product is known as its carbon footprint. Investors may also rely on carbon footprint as a surrogate for the operations’ sustainability of companies. Companies that use energy well could indicate to investors that they are more resistant to changes in energy prices and regulations and the viability of success in reaching Net-Zero targets.
Investors may wonder the integrity of the company’s overall carbon neutrality for the technological leaders whose energy consumption has very considerably increased due to artificial intelligence operations and yet whose stated carbon footprint may not look as greatly increased.
Big Tech Support of Private AI Enterprises
Unlike rivals like Alphabet and Amazon, Microsoft’s AI initiatives have generally been more scattered. Spending substantially in OpenAI (~$10B), Microsoft sought to catch up and maybe overtake its rivals. Integrated into Microsoft’s Azure cloud platform, OpenAI’s models have helped to establish Microsoft as a major actor in the AI scene.
Anthropic is another instance of major investment in a private artificial intelligence business made by giant technology firms. Amazon has committed $4 billion[6]. Alphabet promised to spend up to $2B in Anthropic[7] prior to that. From an investment standpoint, their total share is still believed to be in the range of 30%; so, their scale and timing come second to Microsoft. The forthcoming financial reports and sustainability disclosures will reveal how Alphabet and Amazon will present their investment in Anthropic.
These massive business investments complicate the issue of accurately calculating and presenting overall greenhouse gas emissions considerably further. A recent Financial Times article, “Big Tech’s bid to rewrite the rules on net zero,” “examines in great detail this issue of complexity and a lack of agreed approach,” noting where such gaps are and how big energy users could be able to hide their actual emissions. Our research examines these problems and considers the broader consequences for disclosures in which businesses have significant corporate investments in AI-oriented startups.
Conventions and Implications: Difficulties
Introduced three “Scopes” (Scope 1, Scope 2, and Scope 3) for GHG accounting and reporting reasons, the Greenhouse Gas Protocol, which provides the most often used greenhouse gas accounting rules and guidelines worldwide.
Scope 1: Direct GHG emissions. Direct GHG emissions come from either owned or managed firm assets.
Scope 2: Indirect GHG emissions related to electricity Scope 2 tracks GHG emissions resulting from the company’s consumption of purchased electricity. Scope 2 emissions physically take place at the producing site of power.
Scope 3: Other indirect GHGs. An alternate reporting category called Scope 3 lets one treat all other indirect emissions. Though they result from sources not owned or under control by the company, Scope 3 emissions result from its actions.
The Greenhouse Gas Protocol’s “Technical Guidance for Calculating Scope 3 Emissions” advises businesses to consider the respective Scope 1 and 2 emissions of the investments made in the reporting year. Therefore, depending on the ownership, revealing the Scope 1 and 2 of investee companies in the Scope 3 emissions of the investor firm corresponds with global sustainability objectives and recommendations. However, there are various difficulties as well.
- Reporting indirect emissions with accuracy calls for strong methods of data collecting and validation.
- Detailed disclosures could expose private information about competing strategies and operational efficiencies.
- Including GHG emissions data from partners—like OpenAI—into Microsoft’s reporting system presents significant administrative and technological difficulties and the possibility of double counting.
- Grasping Net Zero and Carbon Neutrality
Differentiating “carbon neutrality” from “net-zero” emissions will help assess a corporation’s environmental pledges. Carbon neutrality is the decrease of a company’s emissions using credits or other strategies without directly lowering the emissions at the source. On the other hand, a corporation reaching net zero is reducing its total emissions across its activities and supply chain to as near zero as feasible, using offsets exclusively to offset inevitable emissions.
The Science-Based Targets Initiative (SBTi) defines net zero as “a state of balance between anthropogenic emissions and anthropogenic removals.” To stabilize world temperatures, net-zero GHG emissions must be reached globally; targets under the SBTi Net-Zero Standard must cover all emissions outlined by the United Nations Framework Convention on Climate Change (UNFCCC)/Kyoto Protocol.
The Corporate Net-Zero Standard published by the SBTi helps businesses to match world net-zero targets. To keep global warming to 1.5°C over pre-industrial levels, it calls for quick, dramatic emission cuts with a 50% decrease by 2030 and at least 90% by 2050. Businesses claiming carbon neutrality could offset CO2 without lowering emissions to the levels required for net-zero or covering all greenhouse gases.
Certificate of Renewable Energy
Moreover, present GHG accounting rules let businesses employ “Renewable Energy Certificates” (RECs) to document lower emissions from acquired electricity (Scope 2), thereby helping them to reach their science-based targets. A market-based tool, a renewable energy certificate stands for the property rights to renewable electricity generation’s environmental, social, and other non-power qualities. One REC is granted upon generating and distributing one megawatt-hour (MWh) of electricity from a renewable energy source to the grid[16]. Whether renewable electricity is bought from outside the company or placed in its facility, RECs—the legal instruments used in renewable electricity markets—allow for the accounting of renewable electricity and its characteristics. The owner of a REC could make original claims related to renewable electricity generated by the REC (e.g., utilizing or being provided with a MWh of renewable electricity, therefore lowering the carbon footprint connected with electricity usage)
Scope 3GHG Emissions and Funding
The most significant and complicated kind of greenhouse gas emissions is scope three, which comprises indirect emissions from a company’s whole value chain. The energy required by data centres, vendors, and partners can be significant for technology firms investing in artificial intelligence. Moreover, the Greenhouse Gas Protocol states that Scope 3 emissions include those from investments ( Category 15) and advises businesses to consider the corresponding Scope 1 and Scope 2 emissions of the investments made in the reporting year.
One such is Microsoft’s collaboration with OpenAI, which calls for vast computational resources for the training and application of artificial intelligence models. Unless run on sustainable energy, artificial intelligence-model development procedures are highly energy-intensive and can significantly contribute to absolute greenhouse gas emissions. It is expected to have consumed 1,287 MWh for training, even in smaller models like GPT-3. Based on the GHG Equivalencies Calculator of the US Environmental Protection Agency (EPA), this comes to 591 tCO2e[20], equivalent to GHG emissions from 60k gallons of gasoline or 591k pounds of coal. Still, most (>61% per capita) of the energy produced from fossil fuels is created today. The carbon footprint left by this usage would be notable. Given artificial intelligence’s important role in Microsoft’s goods and services, an investor might view OpenAI’s energy usage as a side effect of Microsoft’s activities. Investors could add OpenAI’s GHG emissions to Microsoft’s Scope 3 emissions per the GHG Protocol.
To our knowledge, Microsoft does not explicitly disclose OpenAI’s emissions. Likewise, Amazon and Alphabet have invested in outside artificial intelligence businesses like Anthropic, raising the issue of how these businesses should be credited with emissions in their following filings.
Though there could be indirect proof of OpenAI’s influence on Microsoft’s emissions in its stated 30.9% rise in Scope 3 emissions since its 2020 baseline, I did not find any direct reference to OpenAI. Since Scope 3 excludes Category 15 of the GHG Protocol, which is irrelevant to Microsoft, Microsoft’s disclosure excludes that category. Category 15 relates to investments. Given their collaboration, some of OpenAI’s use of Microsoft’s products would have been covered by Microsoft’s disclosure of Scope 1 and 2. Microsoft should include OpenAI’s Scope 1 and 2 in its Scope 3 emissions, given its significant ownership in OpenAI (~49%).
To sum up, revealing the energy consumption and GHG emissions of investees is a first step towards total environmental responsibility. Although there are difficulties, the ethical need and congruence with worldwide sustainability models highlight the relevance of such disclosures. Global tech leaders should create a precedent for the technology sector and lead by example as stakeholders demand openness and sustainability, promoting an environmental responsibility culture.
