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Evolving data center sustainability and the role of the capital partner

November 5, 2024
Sebastian Dooley, CFA
Senior Fund Manager
Jennifer McConkey
Managing Director, ESG & Operations
Casey Miller
Managing Director, Portfolio Management
Julia Groenewold
ESG Manager
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AT-A-GLANCE

  • Customer requirements, business value, government regulations, and community sentiment are among the top drivers of data center providers’ investments in environmental sustainability.
  • The approach to sustainability has evolved over the years—from a focus on energy efficiency, then water efficiency, to greenhouse gas (GHG) emissions, waste, and local ecosystem impact.
  • Sustainability is a joint effort between data center providers, their customers, and their capital partner. At Principal, we work closely with our data center providers to reduce the environmental impact of their operations.
Sustainability is a key priority for most companies as they seek to mitigate climate change, manage risk, meet customer expectations, and attract investors. Increasingly, companies are looking beyond their own operations to their providers’ sustainability practices. In the data center industry, the largest customers have made aggressive climate pledges and providers are implementing a range of sustainability measures. In this paper, we explore the benefits data center providers realize from sustainability initiatives, how their approach to sustainability has evolved, and the role of the capital partner.

Why data center sustainability matters

Improving the environmental sustainability of data centers is essential for the health of the planet. It’s also good business. As one of the data center providers we work with puts it, “Sustainability is existential.” Customer requirements, business value, government regulations, and community sentiment are among the top drivers of data center providers’ investments in environmental sustainability.

Customer requirements

For most data center providers, the majority of revenue comes from a relatively small number of very large technology companies (hyperscalers) and Fortune 100 enterprises. These customers have all made significant commitments to reducing their environmental impact—for example, climate pledges in line with the Paris Climate Agreement and pledging to achieve net zero greenhouse gas emissions by 2050 or earlier.

These customers often have specific sustainability requirements for their data center providers. In fact, 80% of respondents to a Forrester survey of 1,033 global sustainability decision-makers at colocation providers say they see specifics on environmental sustainability during the bid/RFP/sales process with clients.   Accordingly, 83% of data center providers responding to the Forrester survey use sustainability as a way to attract new business, and 75% say they have lost business and/or investments due to not having sustainability programs in place.

Business value

Data center providers can realize significant business value from their investments in sustainability. For one, sustainability practices can improve a provider’s competitiveness. In most cases, utility costs are passed directly to the customer, so when a data center provider reduces the use of natural resources (i.e., energy and water) it’s good for the planet and helps reduce costs for the customer—two benefits that boost the provider’s competitive advantage. Furthermore, investments in sustainability are often investments in innovations that customers are seeking; direct liquid cooling is a good example.

Permitting is another way sustainability practices deliver business value for data center providers. In a growing number of data center markets, power and land constraints have made it more difficult to secure the permits necessary for development. In some markets, community pushback against data center development has further stymied the permitting process. Data center providers that are positioned well to respond to community sustainability concerns often have an easier time getting permitting approved for development.

Finally, sustainability practices have proven to help data center providers retain talented employees—a significant benefit given the industry’s perennial talent crunch.

Exhibit 1: Business benefits of sustainability initiatives

Percentage of survey respondents who listed this as a significant/transformational benefit
Source: A commissioned study conducted by Forrester Consulting on behalf of Schneider Electric in April 2022. 1,033 global sustainability decision-makers at colocation providers responded to the survey.

Bottom line

Whether data center providers are implementing sustainability practices because their customers demand it, to gain competitive advantage, to comply with government regulations, to improve community sentiment and smooth the development process—or, most likely, for all of those reasons—sustainability benefits the environment and is good for business.

Data center sustainability practices continue to evolve, and yesterday’s stretch goal may be today’s table stakes. Forward-thinking data center providers continue to innovate new ways to mitigate their impact. As a capital partner, we believe we have a responsibility to focus investments into these kinds of providers, and to support them as they fulfill their essential role as the cornerstones of the modern global economy—sustainably.

Real estate

Footnote

  1. Source: A commissioned study conducted by Forrester Consulting on behalf of Schneider Electric, April 2022.

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Risk Considerations
Investing involves risk, including possible loss of principal. Past Performance does not guarantee future return. Potential investors should be aware of the risks inherent to owning and investing in real estate, including value fluctuations, capital market pricing volatility, liquidity risks, leverage, credit risk, occupancy risk and legal risk. All these risks can lead to a decline in the value of the real estate, a decline in the income produced by the real estate and declines in the value or total loss in value of securities derived from investments in real estate. Data center properties and will only be attractive to a unique type of tenant. A limited tenant base increases the risk of vacancy. Additionally, a property designed to be a data center property, may be difficult to relet to another type of tenant or convert to another use. Thus, if operating a data center were to become unprofitable, the liquidation value of properties may be substantially less than would be the case if the properties were readily adaptable to other uses.

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