Making ESG profitable

A 2017 study by McKinsey Global Institute on 615 listed US companies over a 15-year period from 2001, found that companies that were managed for the long-term, outperformed their short-term oriented peers: Revenue was c. 50% higher while their net income was on average 36 % higher than short-term focused firms. Their market capitalization grew more, their shareholder returns were higher, and they created significantly more jobs.

A long-term view requires the courage to invest in downturns and avoid jumping on bandwagons that do not make strategic sense. To maintain growth, it requires constant innovation.

Particularly in large organisations, short term interests conflict with the behaviours that enable them to profit from discontinuities or challenge the status quo (the two basic pillars of innovation). Any professional racer will tell you that success comes from looking further ahead to pre-empt tight turns, obstacles and to take advantage of new routes, not right in front of your feet.

One of the discontinuities is Regulation. For the environment this is moving rapidly and as the climate crisis becomes more acute, will intensify. It will increase costs of the status quo, through compliance, fines and/or taxation, squeezing margins and diverting attention and resources from growth strategies to crisis management. This will hit in the near-term.

Take the example of Hydrovolt - a JV between Norsk Hydro (which gets the aluminium casing) and Northvolt (which gets the battery metals). This is cross industry collaboration that creates synergies to meet a growing market disruption, to counter Chinese dominance, address resource scarcity and meet incoming regulatory constraints. The fundamentals are strong (as Warren Buffet might say) and it is more than likely to deliver strong, sustainable returns. Perhaps not in the short term, but the direction of travel is clear, especially against the background of the forthcoming EU Critical Raw Materials Act and this company will likely be thriving while others are panicking.

Separately, the CO2e elephant in the room is Scope 3 accounting, especially for banks’ through their lending activity, will be huge. It will bring all those external climate costs onto the financial statements and so is an area of hot debate. This misses the point, though. Regulation will come in to drive this down, whether the benchmark now, is high or low.

The other big discontinuity is #demographic, reflected in a sea-change in demand and supply. Already driven by socio, political and economic shifts such as high energy prices from war and the cost of living crisis; Government commitments to renewables as climate change causes havoc; Chinese dominance of the EV component supply market.

As the consumerist baby boom generation withers, Gen X and Z will take over as the dominant economic driving force and will be less tolerant of companies that do not safeguard their and their families’ future.

Does that matter? Just as Nokia did, you can put your head in the sand and point to short term dominance/profits, but the writing is on the wall, even if CFOs and CSOs argue it is not measurable and so cannot be incorporated into a strategic plan. If they read Doz and Wilson’s seminal book “Ringtone” on the matter, they might think again. “

As a tech savvy group the new consumer/investors will not wish to give up their digital comforts and so demand for greater capacity in sustainable data processing will rise. This will be the next great shift, but one to which fixed asset heavy industry will take time to respond.

Established, dominant corporations control how, how much and at what price cloud computing and storage is available. Few CTOs question the genuine sustainability of the infrastructure (sourcing green energy does not make your process green – Scope 2 vs Scope 1) or even the reasonableness of the charges. However, while these firms enhance incrementally, to justify high margins and drive profitability there is little competitive pressure to radically change, even as the technology and the demographics change (remember Nokia?). Given the total CO2e footprint of the energy that that is used in data processing alone (excluding servers buildings etc, let alone energy used by other industries and society) already exceeds the 2050 global budget set by the Paris Accord to maintain the 1.5C target, this is simply, frighteningly unsustainable.

So, where is all this going? Net Zero Compute is challenging the status quo of how data processing is delivered, with an ecosystem that offers net negative emissions from capturing and reusing waste heat from high performance computing, in partnership with one of the world’s fastest growing and most sustainable server OEMs.

The approach connects trends in:

·??????? Regulatory direction

·??????? Cooling technology

·??????? Sustainability requirements in other industries

·??????? Investor demand for credible, auditable emissions reduction

All as a result of changing policies, to respond to emerging social and political demand, to create synergies that allow two critical changes to the data processing model:

Lower variable cost, with increased processing capacity thanks to cooling tech, with higher density installation and so a smaller physical footprint

Modular units that benefit from converting existing, unwanted sites or integration into existing complexes and enable distributed, nearby and thiuslow-latency service for high-performance computing clients (such as AI, graphics, data rendering, algorithmic trading etc)

The key is that the waste heat is efficiently captured and used for any or all of the following:

·??????? Return power to the grid and/or

·??????? Supply energy to a nearby industrial process and/or

·??????? Drive GHG capture or prevention and/or

·??????? Provide retail or industrial heating

The results are jaw-dropping. At the conservative end of the scale over 100% of the CO2e from the entire value chain can be offset (see chart below).

Sceptics will say that this will all cost a fortune and cannot be profitable, but the careful R&D and collaboration since 2018 has created a business model with lower margins and improved balance sheet:

·??????? Reducing costs via more efficient (e.g. cooling) technology

·??????? These enable higher density installation that reduces fixed costs.

·??????? Converting a waste product into a marketable resource for secondary retail and commercial customers and

·??????? Creating valuable CO2e offsets that create an asset with increasing value as Voluntary Carbon Markets expand and can be traded or offered to primary customers to offset their Scope 3 emissions.

This is the future of Data Processing which, with the accelerating growth of digitisation, fuelled by AI, will only put greater demand on existing (ageing) infrastructure and energy provision.

More importantly, while creating superior returns, it directly reduces CO2e emissions in more than one industry and eases demand on scarce resources. This is the sort of activity where ESG investing succeeds in delivering returns, but to more than one stakeholder group.