Relative to a plethora of industries seeing capital flow into them, digital infrastructure has seen over $100 billion flow into the space over the past handful of years, and according to Anubhav Raj, CFO, Aligned, that trend is expected to continue. “Data centres were once considered a niche asset class, with many real estate investors wondering what the alternative use of the assets would be given their cost basis if there was not adequate demand,” he says. “Infrastructure investors wondered whether data centres fit within their mandate. That has all changed over the last several years, where you have found an abundance of capital from a surfeit of sources looking for digital infrastructure platforms, with many not able to put their full allocation to work.”
This capital is increasingly looking to invest in platforms where sustainability is a key pillar. “The bar of sustainability keeps rising to maintain pace with our largest customers, whose own internal mandates and actions illustrate the growing importance being put into sustainability,” Raj continues. “As long as governments are publicly mandating sustainability and renewable targets and the most visible customers in the space continue evolving their requirements (which extends down to their respective employee bases’ views), digital infrastructure providers will continue to expand their sustainability investments in order to differentiate their products. I expect sustainable investments to continue to increase in pace over time.”
There have been data points from various governmental entities, think tanks, customer, and competitor Environmental, Social and Governance (ESG) reports suggesting necessary investments over time to achieve certain targets. As data centres account for a material portion of global energy consumption annually, continuing to grow, the industry will come under increasing focus to make sustainable investments. However, determining the required investment level is challenging today as the industry is still young and constantly evolving.
“We are continuing to see varying levels of sophistication related to sustainable investments across the industry today, though this will likely balance out,” Raj explains. “I believe our competitors see this and will continue making investments to maintain pace with customer requirements. Are we in, or will we see soon, an equilibrium of sorts as it relates to sustainable investments? It is tough to say. I do feel confident that the market will dictate movement towards an investment equilibrium over time.”
Funding sources for digital infrastructure
Investment in the digital infrastructure space has been plentiful in recent years, a trend that most would expect to continue. The investments are not driven by one business model either. “You are seeing infrastructure funds, sovereign funds, real estate funds, private equity, venture capitals, and public equity all placing bets on business models that include build to suit, colocation, retail, managed services, edge, towers, small cells, and fibre – which will likely continue to evolve to maintain pace with technological advancements that require ever-improving latency parameters and transmission and storage quantities,” Raj says. “Digital infrastructure and sustainable investments are seemingly blending together over time, so an investment in digital infrastructure requires an investment in sustainability.
“While today it can sometimes be challenging for third party colocation providers to engage in longer term PPAs/VPPAs, as the cost to produce and develop these new projects improves over time through better economics in the underwriting process and/or lower build costs for the equipment, more capital will flow into associated sustainable infrastructure developments.”
Plugging the funding gaps
Any holes in the funding landscape are likely to be tied to macroeconomic developments, pressure, and the overall economic landscape. “As an example, while COVID-19 has exposed the need for additional digital infrastructure – which we have noticed in our pipeline – many companies who are still navigating their digital migration process are being forced to assess the best use of capital over the near term,” Raj explains. “This can obviously put a pause on investment for some sectors most impacted by the pandemic.
“The same would go for an economic downturn. While digital infrastructure is secular in nature relative to other REIT (real estate investment trust) classes (as shown this year), any situation that would cause potential customers to re-evaluate their capital needs could hinder funding – at least temporarily. While I believe these customers would continue to deploy infrastructure directly supporting their products and services, so as to not lose ground to their respective competitors, investments beyond this could become of less importance over a near-term period.”
Behind the drive for sustainability
There is no doubt that there is a growing appreciation for green investment but it is often hard to judge whether this is altruism from the investment community or whether it is being forced on them by public demand, industry requirement or government regulations. “There are a number of funds that are focusing on renewable or sustainable type assets; however, I would argue that the primary drivers are government mandates and our largest customers jockeying for position on this front,” Raj concludes. “It is a widely held view that the world cannot address climate change and sustainability without transforming infrastructure and aside from the ethical imperative, most, if not all, believe it is central to long-term value creation. Green investment, to me, is putting financial and human capital into projects or developments that can have a positive, lasting impact on our environment.
“Just like in any other industry, necessity will breed innovation. Companies are increasingly competing on sustainability relative objectives. Sooner or later, all new technologies will be reporting metrics based on these objectives and, as I mentioned before, it will likely be something that if you do not invest into it will keep you from getting to the table competitively.”
Aligned’s recent $1 billion sustainability-linked financing has a portion of the interest rate directly tied to the company’s core ESG objectives, and key performance indicators (KPIs) covering renewable energy, sustainability reporting and workplace safety. These KPIs include a commitment to match 100 per cent of its annual energy consumption to zero-carbon renewable energy by 2024.