The environmental effects of digitalisation

We examine the environmental implications of the ever-expanding digital world.

Key points

• As the usage of digital devices and digital services increases, so does the demand for energy. Specifically, these technologies rely upon traditional energy resources, which can increase carbon emissions and cause negative health outcomes. Switching to renewable energy sources can mitigate the negative environmental effects of the growing digital world.
• We believe the European Union has a very well-developed electronic waste (e-waste) management infrastructure, and other countries have an opportunity to follow a similar regulatory blueprint, enabling better recycling of e-waste.
• Traditional data centre cooling mechanisms require huge amounts of water. Currently, there are no effective alternatives, and as data centres continue to grow, water usage is expected to rise significantly.

Over the last few decades, the digital world has continued to evolve, easing our day-to-day lives through technologies like artificial intelligence, internet of things (IoT) and blockchain. However, as these capabilities advance, their effect on the environment also grows.

As the usage of digital devices and digital services increases, so does the demand for energy. Specifically, these technologies rely upon traditional energy and natural resources, which can exacerbate the effects of climate change and cause negative health outcomes. Additionally, data centres, upon which these technologies rely, can consume large amounts of water and produce enormous amounts of electronic waste (e-waste), further damaging our environment. However, shifting energy usage to renewable sources should help limit this potential damage. Similarly, we believe there are solutions that could limit water usage and ease disposal of e-waste.

Energy

Just as oil is the backbone of the global energy supply, data centres are the backbone of our digital world. In 2021, global data centres used more than 200 terawatt-hours (TWh) of energy, representing nearly 1% of total global energy consumption. While the workload of global data centres has increased over three times since 2015 and ten times since 2010, overall energy consumption only increased by mid-double digits between 2015-2021 based on data from the International Energy Agency (IEA).[1]

This impressive result is achieved through higher utilisation rates and energy-efficient hyperscale data centres. The growth of electricity demand has been optimised through rapid advances in the efficiency of servers, storage devices, and data centre infrastructure, as well as a transition from small, inefficient data centres to larger and more efficient cloud and hyperscale data centres. In particular, hyperscale data centres are very energy efficient, using proportionately less energy for cooling than smaller data centres. Big data centres are becoming not only more effective but also more popular as a result of modern technology.

Power efficiency for data centres is measured in power usage effectiveness (PUE) or total energy consumption per data centre as a multiple of energy consumed by its servers. Therefore, data centres with lower PUE are considered more energy efficient. Hyperscale data centres (typically operated by large technology firms) tend to have a PUE ratio of 1.2, making them up to two times more power efficient than traditional players. These hyperscale data centres are known to optimise their PUEs through dedicated cooling facilities and scale, allowing them to save a significant amount of energy via improved efficiency.

Improvements in semiconductors play a crucial role in driving data centre energy efficiency, as processing and storage accounts for the largest share of energy use in the data centre industry. While lowering PUE levels has benefitted the industry as a whole, this improving trend has recently begun to stagnate as the progress toward enhancing the density of transistors into chips has slowed. Looking ahead, further environmental advancement for the data centre industry is likely to require innovation from the semiconductor industry, particularly in the field of chip design, which seeks to enhance overall efficiencies.

Switching to renewable energy sources can also mitigate the negative environmental effects of the growing digital world.

The costs of energy generation from fossil fuels and nuclear depend largely on two factors: the price of the fuel that is burned and the power plant’s operating costs. Conversely, renewable energy power plant operational costs are low, and, most importantly, energy consumers do not pay for their fuel, making it a more affordable option.

There have also been dramatic improvements in cost competitiveness for solar and wind energy generators, owing in part to the enhanced ability of photovoltaic technology, which converts sunlight into electrical energy, and wind technology to extract power from renewable resources. Most importantly, renewable energy technologies follow learning curves – with each doubling of the cumulative installed capacity, the price should decline by the same fraction. Lower prices lead to higher demand, and higher demand forces developers to scale up their project sizes, further lowering operational and maintenance expenses.

Big technology companies are facing huge pressure from investors to decarbonise their operations, and this is reflected in the steep increase in clean energy volumes purchases. Over two-thirds of global renewable purchasing comes from the US, and large technology companies have collectively signed over half of all power purchase agreements.[2]

Water

Data centre water consumption is an underpublicised topic that is poised to become a future concern with greater notoriety. Data centres utilise water for two purposes: electricity generation and cooling. Currently, there is no effective alternative cooling mechanism for these operations. Some companies have tried cooling servers with natural air but have found the practice to be less effective than water. With this in mind, as data centres continue to grow, water usage is expected to rise significantly.

Most US data centres are located in largely populated areas that experience water scarcity, including the Southwest states of California, Nevada and Arizona. Some are wary that higher water usage from these data centres could affect overall water supply, potentially creating political unrest in certain local communities. From our perspective, it could be in these companies’ best interests to find an alternative to water-based cooling mechanisms. Otherwise, they may face protests from local communities, political machinations, or potential taxes and governmental water regulations.

E-waste

E-waste is another serious risk owing to growing digitalisation. Several factors, including increased spending power and shorter refresh cycles driven by new technologies, have fuelled e-waste in recent decades. The volume of electronic waste generated worldwide in 2019 was roughly 54 million metric tonnes, with various projections showing an increase of 30% to 75 million metric tonnes by 2030. Asia, which is a global electronic manufacturing hub, generates close to 45% of global e-waste, while the Americas region, the second-largest hub, generates close to 24%, along with Europe generating 22%. In 2019, only 17.4% of global e-waste was recycled, with Europe contributing more than half of the recycled 9.3 million metric tonnes. Regions with the highest e-waste, Asia and the Americas, failed to incorporate this recycling mechanism.[3] From our perspective, a lack of governmental regulations and political reluctance has fuelled underinvestment in recycling e-waste in these regions.

Europe has a very well-developed e-waste management infrastructure that collects e-waste and recovers recyclable components, disposing of residuals in an environmentally friendly manner to avoid environmental pollution.

Most European e-waste is regulated by the Waste Electrical and Electronic Equipment Directive, which has set specific targets for e-waste collection and recycling. Furthermore, the European Union (EU) has regulations regarding the usage of hazardous chemicals in the creation of electronic equipment.

These regulations have helped the EU achieve success in managing e-waste, as demonstrated by its high percentage share of global e-waste recycling. We believe that other countries and regions have an opportunity to follow a similar regulatory blueprint, enabling better recycling of e-waste. This potential adoption could affect the business strategies of companies that operate regionally or do not already have significant exposure to the European region.

Conclusion

The environmental impact of digitalisation is beginning to be felt acutely worldwide. With increasing digitisation, the demand for digital services is expected to drive the production and supply of digital devices, requiring the use of more energy, particularly polluting fossil fuels. The greenhouse gas emissions that these energy sources emit are set to worsen climate change and ultimately have a negative effect on human health. We believe that digital devices, if built and operated using renewable energy resources and other recyclable components such as batteries, are likely to help improve human health by lowering pollution and slowing climate change. There are various opportunities for companies to re-evaluate their sustainability priorities, including using alternative energy sources, conserving water and disposing or recycling of e-waste. We believe that companies that employ these enhancements should be less affected by potential future regulations and better placed for future growth.

[1] Source: IEA.org, September 2022

https://www.iea.org/reports/data-centres-and-data-transmission-networks

[2] Source: IEA.org, 25 March 2021

https://www.iea.org/commentaries/5-ways-big-tech-could-have-big-impacts-on-clean-energy-transitions

[3] Source: Forti, Balde, Kuehr, Bel, “The Global E-waste Monitor 2020.” 1 July 2020.

https://ewastemonitor.info/wp-content/uploads/2020/11/GEM_2020_def_july1_low.pdf

Authors

Onkar Jagtap

Responsible investment analyst*

Robert C Zeuthen

Head of secular pod, portfolio manager