Digitalisation is vital for sustainable growth

With much of the world forced to work from home because of the COVID-19 pandemic, many companies and organisations feel grateful they can keep operations running because of the many digital tools that are available to collaborate and communicate. The shift to remote work has sharply reduced the number of people commuting to work, contributing to visibly cleaner skies in many areas of the world.

In times of crisis, digital technology is a lifesaver. Looking further ahead, technology is also widely considered as a key enabler of many sustainability issues, including transitioning towards a carbon neutral economy. There are many operational and organisational processes that, if digitised, could consume less energy. Smart grids, for example, can deliver electricity more efficiently, smart buildings can optimise energy usage based on need, and connected mobility has the potential to move people and goods more effectively and shrink the carbon footprint of transportation.

But digital growth must be managed sustainably. The digital industry's energy usage is increasing by 4%¹ a year, which runs counter to the objective of the Paris Agreement to decouple energy consumption from GDP growth. Its digital carbon footprint includes telecommunication networks, data centres, terminals (stationary and portables) and Internet of Things (IoT) sensors. Keeping the machines humming and providing redundancy so data and documents remain highly available and don't get lost comes at a high carbon cost — digital devices and back-end infrastructure consume a vast amount of electricity, even if digitalisation enables greater energy efficiency in other industries.

More devices relying on a sprawling infrastructure

The growth in demand for digital technologies is set to drive even greater energy usage. The direct energy footprint of information and communication technology also includes energy for the production and use of computer equipment (which is growing 9%¹ per annum). As a result, the share of the information and communication technology sector in global greenhouse gas (GHGs) has grown from 2.5% in 2013 (roughly equivalent to current air travel emissions) to 3.7% in 2019¹.

Much of the increased demand is for short-lifespan digital equipment like phones and laptops. That trend is unlikely to abate as developing countries catch up with technology advances in developed markets. For instance, in 2018, the average American owned 10 digitally connected devices and consumed 150 gigabytes of data monthly. By contrast, the average Indian owned only one device and consumed just two gigabytes monthly¹. There is a need to ensure a lean progression in digitisation to limit energy consumption, whilst also enabling developing countries to derive the multiple benefits from an increased use of technology.

Meanwhile, users of digital technology often underestimate the carbon footprint of their devices and cloud consumption. Digital devices like phones and laptops have become so small and lightweight that, even as they are constantly recharged, many people have a hard time imagining they consume a lot of electricity. In addition, instant communication and video streaming and backing up files in the cloud can seem like magic — the physical infrastructure that makes cloud-based computing possible is invisible to users, and the associated energy consumption is rarely considered.

This all adds up to a risk that the massive investments made in digital technology will ultimately lead to a net increase in the environmental footprint of the sector, even as the sector provides multiple solutions to decarbonise other industries. For instance, Microsoft reports that it expects its operations and suppliers will emit 16 million metric tons of carbon in 2020 — the equivalent of one year of electricity use by more than two million average U.S. households.

Only 100,000 tons will be scope 1 GHG emissions, direct emissions from sources that are owned or controlled by Microsoft. Four million tons will be scope 2 (emissions from the generation of purchased electricity consumed by the company) and the remaining 12 million tons will be scope 3 (indirect emissions along the entire supply chain).

A growing awareness and commitment

And yet digitalisation is vital to future economic growth and the sustainability transition. Efforts have been made to reduce the environmental impact of digital technologies so that their innovative potential in service of a climate transition isn't tarnished by growing energy consumption. For instance, there's been a cultural shift where consumers are nudged to question the economic and social utility of purchasing and consuming digital objects and services. This shift has been inspired, in part, by a growing awareness of the environmental impact of the production of electronics and the challenges of dealing with the e-waste that is accumulating. There has been increased demand for carbon audits for digital projects to ensure their environmental and social impacts do not outweigh contributions to economic growth.

Most significantly, the largest players in the technology industry have the financial power to focus on emissions and have signaled their commitment to comply with the Paris Agreement. Apple and Microsoft have both pledged to become carbon negative across all three scopes of emissions. Microsoft has the ambitious goal to be carbon negative by 2030 and to cut its direct and scope 3 emissions in half by 2030.

Apple and Microsoft have both pledged to become carbon negative across all three scopes of emissions. Microsoft has the ambitious goal to be carbon negative by 2030.

Microsoft has also pledged to remove by 2050 all the carbon from the environment that it has emitted either directly or through electrical consumption since 1975, when it was founded. Additionally, the company has launched a $1 billion climate innovation fund to accelerate the global development of carbon reduction, capture and removal technologies, and is actively working with suppliers to ensure the reduction of emissions across its entire supply chain.

Apple already powers 100% of its operations with 100% renewable energy. The company is also actively encouraging its suppliers to invest in clean energy — more than 40 have committed to do so. Apple is also focusing on reducing waste along its entire supply chain, aided by its iPhone recycling robot “Daisy". Like Microsoft, Apple fully discloses its scope 1, 2 and 3 emissions, and has since 2015 decoupled its revenue growth from carbon emissions.

Many of the smaller technology companies, though, still have some way to go to understand the full “additionality" of their emissions. For instance, a small software company providing energy reduction software to heavy industries might not disclose its carbon emissions, as it believes them to be negligible, but in reality the negative footprint of the emissions avoided by clients could be significant.

A balancing act

There is a balance that must be struck between the need to reduce emissions from the technology sector and the vitally important role digital technologies play in economic and social development — and in keeping the world connected in times of emergency. While the technology sector is moving fast towards reduced emissions, the net environmental impact of digital technologies is hard to compute.

It's important not to underestimate the direct and indirect environmental impacts of growing digital usage and the risk that growing investment into digital technologies, if not focused on sustainability, will over time increase the sector's carbon footprint.

At Lombard Odier we are tracking the evolution of digitisation very closely. We see Digitisation as an overarching, irreversible trend and key enabler of the Sustainability Revolution and future economic growth. But there must be the correct balance between decoupled digital growth, greater energy efficiency across harder-to-abate sectors enabled by the digital revolution, and a focus on the tech sector as a net-negative emissions generator.

¹ https://am.lombardodier.com/contents/news/investment-viewpoints/2020/march/the-future-is-fintech.html