*This article was produced in partnership with T. Rowe Price
Impact investors have a unique role to play in accentuating the benefits of artificial intelligence and helping to mitigate the downsides as the coming productivity revolution gets underway.
T. Rowe Price portfolio manager Hari Balkrishna scours the globe for companies that derive at least half their revenue from activities that positively impact society or the environment, as part of the global asset manager’s global impact equity strategy.
As such, he has had a front row seat to positive impact (or otherwise) of companies associated with the early stages of the AI phenomenon – and the results are mixed.
“When I think about AI, there’s an opportunity but there’s also a cost,” the London-based Balkrishna tells Professional Planner on an Australian visit last month. “The opportunity is [mostly] about productivity…and the cost is really coming, in my opinion, in terms of the cost to the planet.”
On the one hand, Balkrishna sees enormous positive impact stemming from the productivity AI tools can help generate, particularly in the medical sphere. He gives the example of speedier clinical and drug trials, which could result in patients receiving treatment or even diseases being eradicated sooner. The fund he helps run holds equity in biotech companies including New York Stock Exchange-listed Thermo Fisher Scientific and Nasdaq-listed Intuitive Surgical, which would be likely beneficiaries of AI-enabled productivity gains and innovations.
It may also assist companies (or investors) meet the UN Sustainable Development Goals through improved and more transparent data and research.
On the other hand, as an impact investor, Balkrishna is acutely aware of the energy generation downside of AI, which invariably has an adverse impact on carbon emissions. Much of this adverse impact stems from data centres, which – while often spoken about as an attractive investing thematic in their own right – come with a substantial carbon footprint stemming from their electricity usage.
He references estimates that, by 2026 alone, the electricity consumption of these data centres globally will be equal to the electricity consumption of the entire nation of Japan.
This presents a potential dilemma for impact investors who wish to influence and accelerate the positive promises of AI, but are cognisant of the ESG implications.
However, companies that seek to have a positive impact on the world are also helping to solve this problem, allowing their investors to be part of the solution, Balkrishna says.
He offers two examples of portfolio companies that fit this bill. The first, Brookfield Renewable Partners, in May inked a “first of its kind global framework agreement” with Microsoft to develop 10.5 gigawatts of new renewable energy capacity between 2026 and 2030, to back its data centre and cloud computing needs in the US and Europe. The deal was claimed by the two parties to be “almost eight times larger than the largest single corporate PPA [power purchase agreement] ever signed”.
“When you are a company like Microsoft, you have a problem where your data centre is creating these emissions,” Balkrishna says. “You kind of need to look for a partner that helps to obviate some of the negative impacts.”
The second, Vertiv, is tackling the same problem of the carbon footprint of data centres from another angle. Its thermal technology is involved in the actual cooling of data centres via both air cooling and liquid cooling of the underlying chips.
‘Impact at scale’
The growing number of companies producing technology or goods and services that achieve or pursue impact – Balkrishna estimates a universe of about 400 that fit this bill – should give investors comfort that there are innovators out there actively taking it upon themselves to solve complex civilisational problems.
But they also speak to the important role of impact investors in public markets. The impact investing theme is arguably more advanced in unlisted markets, but holding equity in a company allows an investor to influence behaviour at scale, he says.
“You need the participation of a whole range of actors to achieve a lot of these objectives, [such as] the UN Sustainable Development Goals,” Balkrishna says.
“You need philanthropy, you need government regulation, you need the participation of the unlisted sector, but equally, you need listed equities because the benefit of having impact in terms of owning and influencing this equities is that ‘impact at scale’ argument.
“I’m not saying that you can’t do that in the unlisted space, you can…but what I would say is the kind of companies we’re working and dealing with, if we can change and influence behaviour, that has implications in a way that it’s just not possible at the small scale.”
Investors in impact equities, for example, are also at the forefront of the conversation around GLP‑1s or obesity drugs – which, like AI, are both trending and complicated. “The potential longer‑term medical benefits from GLP‑1s are potentially enormous, given obesity has been identified as an upstream driver of more than 200 different diseases,” Balkrishna wrote in a recent insights paper for T. Rowe Price. “But we also have to be aware of their distribution.”
Access to these drugs, especially in the United States where socioeconomic factors can be decisive in the quality of medical care available, may drive further inequalities between different demographics, he warns. These are the kinds of issues asset managers invested in these companies can put on their radar and ensure management prioritises, on behalf of their intermediary clients and end users.
Another example Balkrishna gives of impact at scale is Brazil’s Nubank, a company involved in financial inclusion efforts in Latin America. His team estimates that the company has given 6 million customers access to financial services for the first time. But the potential addressable market of under-banked or under-served people in the region is larger still, attesting to the broader impact of holding its stock and engaging with management.
Nubank is also an example of where a company with an explicit impact motivation still stacks up commercially. Due to its large addressable market, Balkrishna’s team believes the stock’s value will compound at a more attractive rate than more mainstream financials.
Of the 400-odd companies in the strategy’s investible universe, Balkrishna and his team construct a portfolio of about 60 after fundamental analysis.
Impact investors in equity markets do not have to choose between doing well or doing good, he says. Nor do they have to confine their portfolios to unlisted, early-stage or micro-cap companies.
“We are very much investing in money-good businesses that make good cashflow margins today, that we can see delivering positive impact and positive financial performance,” he says. “We have a dual objective.”
