Going “Green” – how can data centres be financed sustainably?
Jan Richter, Berenberg Infrastructure & Energy
With the global data centre sector growing strongly, its massive hunger for power and its environmental impact are making the news headlines. However, sustainable financing criteria are increasingly becoming applicable to them.
Data Centres are at the core of global digital infrastructure interest, constituting the backbone of exponentially growing data production and consumption. As the number and capacity of data centres are strongly increasing, the focus is also being placed on critical aspects of these shiny new facilities. Due to their high energy usage, the significant amounts of water used for cooling and the emission of ample excess heat, data centres have a tangible environmental impact amidst times of increasing environmental awareness.
A group of stakeholders particularly wary of their environmental responsibility are investors and lenders to digital infrastructure projects. In the past sustainability of these projects has been tracked by adherence mainly to the Equator Principles. Today, many providers of funding have already adapted their investment criteria to reflect an extended set of sustainability goals. This comes as part of a renewed pledge towards improving the environmental and social impact of their investments, but is also driven by recent, sustainability-focussed updates in regulation. Consequently, the possibility to fund projects is becoming increasingly dependent - if not contingent - on evidence of their sustainable nature.
Significant potential of the expanding data centre infrastructure is driving the need for sustainable solutions
Data centre power usage is currently estimated to constitute c. 1% of the entire global energy demand and is forecasted to increase even more in the coming years. In Germany, power usage of data centres in 2020 made up c. 2.9% of total power demand. It is certain that the number of data centres will have to strongly increase in the future, only to meet digitalisation targets of today. Numerous applications driving the social and industrial digitalisation are only possible on a large scale, if sufficient data centre capacity is available. These applications include high-performance modelling in the health, meteorology, automotive and finance sectors as well as artificial intelligence and machine learning. Considering the undisputable economic and social opportunities data centres are enabling, the leading questions are how to limit their environmental impact and how to justify their extensive use from a sustainability perspective, with a view to responsibly fund the large investment amounts needed for their development.
Ample opportunity to increase environmental friendliness of data centres
Developers and operators of data centres are already acknowledging the need to become more sustainable, which is reflected in a large share of high energy efficiency and low-emission developments currently being implemented, especially in “green data centre” projects. This trend is further supported by the recent EU digital strategy, which includes the target of European data centres becoming climate-neutral by 2030.
To mitigate the recent environmental shortcomings of the data centre sector, the main areas of activity to increase efficiency will be the following:
- Using green power from renewable energy sources
- Increasing power usage efficiency (i.e. decreasing the amount of energy not directly used for data processing)
- Implementing alternative cooling solutions to minimise water usage
- Using excess heat to decrease the power usage for generating heat elsewhere (e.g. district heating)
- Extending the useful life of buildings and components through repairs, upgrades and recycling
For investors and lenders, in cooperation with their technical advisors, key investment criteria and performance indicators can be derived from the action points above, allowing an initial sustainability due diligence and the subsequent monitoring of social and environmental goals for each project. This ties in with the recent adoption of ESG principles (including, but beyond the so far used Equator Principles) and sustainability reporting requirements. Equally, data centre developers and operators are adhering to similar self-imposed environmental responsibility and (public) reporting policies in light of the required actions towards greener data centres.
Sustainable data centres are already existing and being financed today
Based on the above, and taking into account that in recently developed data centres, required measures, which consider and conserve resources have been implemented from the beginning, data centres can be classified as a sustainable asset class already.
Funding is, however, still contingent on
- assessing on a deal-by-deal basis that a set of externally validated, sustainability-focussed investment criteria are being complied with, and
- the possibility to ongoingly monitor defined sustainability performance indicators in adherence e.g. to internal or external ESG criteria.
In the future, with still increasing focus on resource efficiency, we expect an even more rigid framework of environmental goals, both among responsibly acting developers and operators as well as investors and lenders. Sustainability will likely become a key criterion in deciding whether funding can be provided for a project. Rating agencies (inter alia providing ESG ratings) and funders’ technical experts will play a central role in enabling and supporting these decisions. The compliance with sustainability goals in the data centre sector will however be enabled through
- the development of more efficient IT and cooling technology,
- use cases for data centre emissions (mainly heat), and most importantly
- a reduced impact of the required resources on the environment.
Concerning the latter point especially, it is key that only green, i.e. carbon-neutral power must be used, tying the growth of the data centre sector closely to the existence of a reliable renewable energy sector, sufficiently catering for data centres’ power demand.
Berenberg’s dedicated Infrastructure & Energy Team already provides mezzanine and unitranche financing via its funds in both the digital infrastructure as well as the renewable energy sector. Please contact us if you would like to discuss your project with us.
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Date: May 2021