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Sustainability is no longer a 'nice to have' goal for the data center industry

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Sustainability is no longer a 'nice to have' goal for the data center industry

Introduction

Data center operators can no longer consider implementing a sustainability strategy as a "checklist item" since failing to meet sustainability targets may result in lost clients, higher rates, and perhaps even carbon taxes or government fees introduced to penalize less "green" companies. In a more stringent scenario, regulation and legislation may induce data center operators that are less efficient or not focused on sustainability to quit their activity altogether if they cannot comply with environmental regulations.

Data center operators will increasingly need to comply with investor, client and regulatory sustainability requirements. Determining how to best improve sustainability can be difficult, although improving efficiency can reduce operating costs and attract new clients. Retrofitting older sites also can be expensive and runs the risk of causing outages. These key challenges for the data center industry were discussed at the 2022 Global Datacloud Conference, held April 25-27 in Monaco.

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The data center industry faces pressure from multiple sources — including government, financial markets and corporate clients — to improve sustainability and reduce carbon emissions. A sustainability strategy is no longer a simple "nice to have" item for data center operators; in the future, it may determine whether an operator succeeds or fails. Additionally, with financial organizations at both ends of the data center transaction — as both clients and providers of capital — data center owners and operators will need to meet a wide range of sustainability demands when seeking to fund future projects, particularly as pressure increases for private equity and real estate investors to make more green investments.

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Regulatory pressure

Data centers consume a lot of energy, with some estimates equating their carbon footprint to that of the airline industry. In response to the industry's increasing energy consumption, the European Commission issued a Code of Conduct for Energy Efficiency in Data Centers in 2008. The Joint Research Center of the European Commission manages the voluntary initiative, setting ambitious standards for companies willing to participate.

In 2019, the European Commission published the EU 2019/424 "Regulation on eco-design requirements for servers and data storage products," which establishes a set of technical standards that aim to minimize the environmental impact of the data center industry. The European Commission is exploring additional measures to improve energy efficiency for cloud computing and data centers. In addition, under the European Green Deal, data center facilities operating in the European Union are expected to become carbon-neutral by 2030.

The U.K. Department for Environment, Food and Rural Affairs has also developed an Information and Communication Technologies Sustainability Strategy that involves data center facilities and aims to reduce energy usage and carbon emissions while increasing efficiency by adopting a "circular economy" approach.

Similarly in the U.S., in 2021, lawmakers enacted the New Energy Act, which covers a broad range of energy efficiency initiatives, some of which specifically target the data center industry. The act also requires the government to conduct a study on energy and water usage in the U.S. data center industry.

Despite such government-led initiatives, data center electricity demand is projected to surge as the global economy digitizes, raising fears that data centers may consume an even larger share of total electricity production. To reduce the amount of energy used, environmental sustainability requirements for the industry may become mandatory and more stringent over the next decade. This shift may include introducing a carbon tax for companies that do not meet the requirement of net-zero emissions.

Some governments also seek to limit data center expansion, like in Dublin and the Netherlands, due in part to fears that their rising electricity demand will make it harder for governments to meet overall carbon reduction targets. At the same time, the cost and risk of retrofitting older data centers to meet potential efficiency and sustainability targets could result in the retirement of certain facilities, leading to possible supply shortages.

Investor pressure

In 2006, the United Nations launched the Principles for Responsible Investment, or PRI, an initiative that incorporates environmental, social and governance considerations in investment decisions. Based on the PRI's voluntary guidelines, investors can screen for certain sectors, issuers or securities that have either poor or positive ESG performance relative to industry peers. This screening can be done for ethical reasons and to help ensure that assets will not suddenly become "stranded" or unable to operate because of regulatory requirements or a change in client preferences.

The year-to-year increase in the number of signatories of the PRI suggests how seriously the financial system is taking sustainability. For example, in 2006, there were 63 signatories with $6 trillion in assets under management. In 2021, there were 3,826 signatories with $121.3 trillion.

Signatories of the PRI include banks, private equity firms, hedge funds and investment managers. In March 2022, for example, an investor group including PE firm KKR & Co. Inc. acquired CyrusOne Inc. in a transaction worth $15 billion — the largest deal in the data center industry. The world's largest PE fund, KKR is a signatory of the PRI. CyrusOne operates more than 50 data centers worldwide and announced in 2021 that all its European data centers were running 100% on renewable energy.

For a publicly traded real estate investment trust, becoming "green" may also mean inclusion in ESG stock market indices such as the S&P 500 ESG Index and S&P 500 Paris-Aligned Climate Index. Inclusion in such indices may improve companies' visibility and appeal to active and passive ESG investors.

Besides providing capital, the financial industry is also a client of data center operators. Banks, stock exchanges, data service providers, fintech firms and credit card companies often rely on data center facilities to secure flexibility, scalability, network speed, low latency and security for their global data exchange. Therefore, financial services companies looking to lease space in a colocation facility may also include sustainability in their criteria for selecting a data center operator.

Customer pressure

Another prevalent theme at the Global Datacloud Conference is that corporations are under increasing pressure to curb carbon emissions. A data center facility's Scope 1 and Scope 2 emissions, originating from sources controlled or owned by the data center, must be accounted for, while Scope 3, or supply chain, emissions by the data center's clients. In this framework, data center operators may need to lower their carbon emissions to attract or retain clients committed to improving their sustainability footprints.

Tech giants and potential leased data center customers have announced commitments to becoming carbon-neutral across their supply chain, with Apple Inc., for example, targeting 2030. In 2021, Twitter Inc. announced its decision to set science-based targets to reduce Scope 1, 2 and 3 emissions within a maximum of two years. Other digital giants such as Meta Platforms Inc. and Microsoft Corp. are also committed to reaching net-zero Scope 3 emissions. If seeking leased data center space, these companies can be expected to choose facilities that will achieve net-zero emissions in the near future.

Implementing sustainability strategies

There are plenty of reasons to improve sustainability. It is easier said than done, however, particularly for older facilities that require expensive retrofitting to boost sustainability and could risk an outage by undertaking such a project while operating. Global Datacloud Conference participants widely agreed that a sustainability strategy must be deployed and led by top executives. It must integrate IT, regulatory compliance, energy procurement and financial stakeholders within an organization.

A successful strategy requires setting carbon accounting metrics and clear targets for procuring renewables, reducing carbon emissions, improving Power Usage Effectiveness and using water efficiently. This will be a significant challenge, but the sooner data center firms take steps to become more sustainable, the better the chance they can work in partnership with regulators, investors, local residents and clients — and thus avoid being viewed as an undesirable, energy-hogging industry.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.

451 Research is part of S&P Global Market Intelligence. For more about 451 Research, please contact 451ClientServices@spglobal.com.

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