Investing in the cloud: cutting emissions but not alpha

The data centres enabling our always-on lifestyle consume 3% of the global electricity supply and account for 2% of greenhouse gas emissions, putting cloud computing on par with the airline industry. But where airlines face rising fuel costs and falling margins, cloud computing is stepping up energy efficiency while providing sustainable growth. At NN Investment Partners, we have identified alpha generation opportunities for investors seeking exposure to the transition towards cloud computing, which offers a smaller carbon footprint without sacrificing returns.

Cloud computing refers to outsourcing a company’s IT needs, from data and storage to software. The economic model of cloud computing lies in spreading the data centre costs by co-locating users, which leads to more efficient utilization compared with private data centres. A secure cloud infrastructure enables innovation and offers the benefits of connectivity while also guaranteeing the privacy of client data and citizens via protection against cybercrime.

The growth of the cloud computing business model presents new investment opportunities in firms that are making the digital transition. Firms such as Adobe, Intuit and Microsoft play a major role in the digital transformation of our economy and are expected to gain the largest incremental percentage of IT budgets in the next three years, mainly as a result of the shift from on-premises workloads towards the cloud. The overall industry offers favourable growth, an attractive subscription-based business model and a positive environmental impact. And with boardrooms prioritizing cloud computing and the digital transformation, the sector as a whole looks set to grow apace for the foreseeable future.

Hendrik-Jan Boer, Head of Sustainable & Impact Equity Investing at NN Investment Partners commented: “Our sustainable equity funds, such as the NN (L) Global Sustainable Equity fund, are well positioned to take advantage of the growth in cloud computing (for example, with holdings in companies such as Adobe, Intuit and Microsoft). These investments have had a positive impact on both our carbon footprint and alpha generation.[1] As the digital transformation continues and cloud computing becomes an ever more inescapable part of our daily lives, we project growing opportunities for investors seeking to reduce carbon emissions and still benefit from alpha generation.”

From an environmental perspective, we have identified many benefits offered by cloud computing. A cloud-based infrastructure is more energy-efficient than a traditional on-premises setup. Server capacity in the cloud scales up and down to fit fluctuating requirements, so customers use only the energy they need and don’t leave outsize carbon footprints. Hyperscale cloud leaders such as Adobe, Microsoft Azure and Amazon Web Services (which provides the cloud infrastructure for Intuit) have committed to achieving 100% renewable energy usage and have already made significant strides towards that goal. Investors seeking to shrink their carbon footprint can do so by investing in tech giants that have committed to operational greenness.

Hendrik-Jan Boer added: “Even as cloud computing opens up a world of possibilities, the digital transition is not risk-free. Cloud computing stocks are currently trading at elevated valuation levels, and cybersecurity risks are also prevalent. Even as cloud computing opens up a world of possibilities, the digital transition is not risk-free. Cloud computing stocks are currently trading at elevated valuation levels, and cybersecurity risks are also prevalent. We assess these factors throughout our screening processes to ensure the fullest possible analysis of our investment decisions. Even after taking these risks into account, we still believe it’s greener in the cloud. Cloud computing not only saves billions of dollars in energy costs but can also reduce carbon emissions by millions of metric tons. Through our investments in cloud computing shares in our sustainable equity funds, we offer our clients sustainable growth exposure combined with a shrinking carbon footprint, without sacrificing returns.”