Some of the most notable features of the global technology industry are:
- A concentrated landscape in which each subsector (online retail, social media, search, cloud, device manufacture) is dominated by a small number of global hyper-scalers
- Highly liquid companies, funded by strong margins and positive cash flow, with deep pockets for investment
- High levels of R&D investment together with a strong culture of innovation
- A crucial role as the enabler of innovation and change in other industries, including facilitating the global transition
The sector is experiencing several key trends as it seeks to address climate change and other environmental risks, including:
- A growing need to balance continual and rapid innovation with greater sustainability and lower environmental risks – for example, when growing 5G networks and building 6G
- Increasing pressure from consumers and other stakeholders to reduce the carbon footprint of cloud servers and other energy-intensive activities
- Greater levels of government intervention in a wide range of areas, including network coverage, data privacy, pollution, antitrust and fake news
Technology firms are pursuing environmental initiatives in a number of key areas. Some are very similar to those of other industries, but some are more unique and forward looking:
- Improving the environmental profile and efficiency of manufacturing plants and day-to-day operations
- Establishing that key manufacturing inputs such as rare earths are sourced ethically, while minimizing greenhouse gas emissions and environmental pollution
- Working to improve recycling rates for old or unwanted devices
- Exploring innovative approaches to reducing the energy consumption and carbon emissions of server hubs – such as situating them deep in the ocean to harness natural cooling
- Using cutting-edge advances in chemistry to reduce the environmental impact of device manufacturing
Financing challenges and solutions
Some of technology firms’ financing requirements – like funding investments in new production lines and other operational infrastructure – are relatively conventional.
Other requirements, such as funding cutting-edge R&D, have more niche characteristics – for example, it is typically hard to finance research with debt. Totally new innovations can also pose challenges of understanding for financial institutions, making it harder to identify and arrange appropriate financing. Set against that, many technology companies choose to finance these activities internally.
Another factor for financial institutions to monitor is the possibility that elements of the technology industry could be vulnerable to swings in sentiment and reputational damage if they are perceived as failing consumers – as seen in the recent collapse of some cryptocurrency businesses.
These analyses are simplified snapshots. The reality is far more complex, and transition pathways will evolve continuously in response to changing conditions and stakeholder views. For example, the latest EY Future Consumer Index shows “planet first” consumers gaining ground, even if rising food and energy prices mean that affordability remains the leading consumer priority in markets such as Scandinavia, Australia and the US. The Index also reveals significant gaps between consumers’ intentions and actions on sustainability.
Our new transition planning framework aims to capture nuances like these, providing financial institutions with a dynamic source of insight, and helping them to develop new and more sophisticated approaches to client engagement and decarbonization. In our next article in this series, we’ll share how the framework:
- Reflects how transition pathways are influenced by consumer preferences, governments actions and the evolution of technology
- Explores the current transition status and future initiatives of specific sectors
- Considers how investors, credit providers and risk carriers should react to, and enable, the transition to net zero
Given increasing concern about biodiversity loss, habitat destruction and plastic pollution, our new framework will also aim to address a growing set of environmental goals while avoiding social harm and protecting value for the planet.
It’s becoming essential for financial institutions aiming to meet their net zero commitments to be curious about environmental science, to understand the circumstances and challenges of different sectors, and to apply this knowledge and insight to their strategy and operations. We look forward to revealing more about our new framework for financing the transition during the months leading up to COP27 in Sharm el-Sheik.