If you were to look at the website of any major digital infrastructure provider – from Digital Realty to Echelon, and Vantage to Kao – you will find a page dedicated to that company’s environmental, social, and governance (ESG) commitments. Considering how much emphasis is placed on a modern business’s ability to deliver its product with consideration to ethics and impact, it is nigh-on impossible to create a workable business model and attract investment without a robust and measured set of ESG commitments.
In an open bulletin to industry professionals, Jennifer McConkey, senior director of operations and sustainability at Principal Real Estate Investors, says that ESG considerations are particularly vital for data centres. Data centres account for an estimated one per cent of worldwide electricity use, so the impact they have on global energy demand is significant. Data demand, McConkey goes on to explain, will only increase – from consumers, businesses, and emerging technologies such as artificial intelligence, driverless car technology, and 5G networks. Given the increased reliance on data and data storage, it is no wonder that data centre operators are taking important steps to ensure that ESG considerations are a priority.
This forms the crux of the argument for a new study developed by global investment firm, Actis, and system change company, Systemiq. The study, titled ‘Global Digital Infrastructure Investment: Enabling A Just Transition’, is designed to highlight the positive contribution that digital infrastructure can make to the economy, as well as the support it can provide in driving towards industrial decarbonisation.
“A lot of headlines around the world focus on the power consumption component of data centres, and we wanted to make sure that the broader role of digital infrastructure and digitalisation as an enabler of positive social outcomes was well understood,” says James Magor, director of responsible investment at Actis.
ESG requirements for data centre investment portfolios
“For data centres there are two ways of looking at ESG requirements in terms of what it actually means,” explains Magor. “There is a sector perspective and an asset perspective. The first thing is both looking at the positive benefits, but also the risks and impacts associated with it as a sector. At Actis, we have a co-linear approach, where we first target sectors that are contributing to sustainability solutions, and then we try to create sustainability leaders of all of our assets.
“When we invest in companies, we look to mitigate and manage the negatives, and accentuate the positives to the extent possible. So, that is how we think about ESG in the digital sector.”
One of the reasons Actis has a relatively large in-house sustainability team, continues Magor, is that the company takes a very hands-on approach to each investment rather than go through a generic checklist of requirements. Each opportunity is assessed based on the risks and positive impacts that it could provide, with some opportunities, such as decarbonisation of the power supply, being specific to location. The common goal, of course, is figuring out how to make all of their assets as efficient as possible.
“What that means, in practice, is the power usage effectiveness (PUE) must be among the top tier in each asset’s local market. We know that in a tropical market, like Lagos, what you can realistically achieve is going to be very different from an asset based in a more temperate climate, such as Nairobi, but the standard has to be top tier in that market. The same goes for water efficiency, our assets should strive to be among the most efficient in that local market.
“That is the short-term goal. Long-term, we look at how to make each asset a sustainability leader in its market. Lots of competitors are seeking to drive efficiency, which obviously makes good sense from a business perspective. Beyond that though, there are so many other ways in which the digital sector can contribute to positive ESG outcomes in a more holistic way, such as digital literacy and skills training, gender diversity initiatives, and so on.”
Enabling the net-zero transition
The Actis and Systemiq study goes to great lengths to explain the contribution that digital infrastructure can make in enabling the net-zero transition. According to the report, digital infrastructure is critical to achieving net-zero targets by 2050, helping to reduce the greenhouse gas intensity of electricity grids and drive efficiency in the real economy, enabling circular and service-based business models which use less resources, and embedding transparency into supply chains to support a nature-positive economy.
Jez Alleyn, an associate at Systemiq, says that one of the major ESG levers businesses can use to improve their ESG credentials is via energy usage. The issue of where a data centre sources its energy from – whether it is from a dedicated renewable energy source, a power purchase agreement (PPA) with a local provider, or straight from the grid – has moved to the forefront of conversations over the last decade. In 2019 the top five highest purchasers of PPA’s were big tech companies aiming to use more power from renewable sources.
“It is a really interesting trend that we are seeing emerging, and as well as helping to provide data centres and other elements of digital infrastructure with clean energy, on a global scale it is helping bring down the cost of renewable energy technologies,” says Alleyn. “There is a nice symbiotic relationship there which helps both the digital infrastructure industry and the global economy move towards net-zero.”
However, while progress is being made on reducing Scope 1 and 2 emissions – both direct emissions and indirect emissions associated things such as power supply – there is increasing concern over a lack of action on Scope 3 – indirect emissions from the supply chain as a whole. Recently, for example, Microsoft released an update on their net-zero goals, and showed that they were some ways from achieving them due to a lack of action on emissions in their supply chain.
Alleyn, however, believes that to some extent, the conversation on Scope 3 emissions moves away from core digital infrastructure. Companies like Microsoft are involved in creating end-use electronic devices, and so can have a greater impact on Scope 3 emissions overall.
“That is where a data centre operator can engage with the end user whose electricity use is then part of their Scope 3 emissions, and then they will be able to open up conversations around designing products with circularity in mind – making sure the components are using recycled materials, including digital watermarking for components so when the piece of equipment is deconstructed, the components can be reallocated back into the supply chain.
“Fundamentally, however, it is about taking ownership of improving energy efficiency in the most granular details you can so that the back end is completely covered. It is much easier to focus on Scope 3 if Scope 1 and 2 emissions have been reduced as much as possible.”
For Magor, there are limits in some scenarios as to how much it is possible to decarbonise a data centre, and operators would do themselves a disservice to hide behind system efficiency measures when it comes to Scope 3 emissions. Urban data centres which are dependent on the grid for power are relying on the decarbonisation of the whole power sector before they can deal with Scope 2 emissions, let alone Scope 3.
There is, however, cause for optimism. Actis and Systemiq have been working on identifying transition pathways, and estimate that the power sectors in most markets will run ahead of the country’s decarbonisation plans. Where the country has set a net-zero target of 2050, the power sector in that country should, in theory, be approaching zero up to 10 years beforehand.
Equally, professionals are all on board with efficiency and decarbonisation measures as a priority.
“There is a perfect alignment between sustainability professionals, myself, and the operators and customers when it comes to efficiency,” notes Magor. “There is no tension or trade-off between prioritising commercial and sustainable agendas, and that gives me reason to be optimistic about the future.”