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

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

Disclosure

For Public Distribution in the United States. For Institutional, Professional, Qualified, and/or Wholesale Investor Use Only in other Permitted Jurisdictions as defined by local laws and regulations.

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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This material may contain ‘forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

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Persons who are not Eligible Persons, including but not limited to those individuals or other persons who fall within the FCA’s definition of ‘retail clients’, should not use or rely upon this website or the information contained therein and may not engage the services of Principal Real Estate or any of its affiliates, or invest in any Fund. Potential investors are advised that all or most of the protections provided by the UK regulatory system will not apply and that the UK Financial Services Compensation Scheme may not be available in relation to an investment in a Fund or separate account.

The contents of this website have not been verified or approved by any competent regulatory or supervisory authority. No liability, whether in negligence or otherwise, arising directly or indirectly from the use of the information or any part of it on this website is accepted and no representation, warranty or undertaking, whether express or implied, is or will be made at any time by Principal Real Estate or its affiliates or any of their respective advisers, directors, officers, employees, representatives or other agents (“Principal Agents”) for any information or any of the opinions contained herein or for any errors, omissions or misstatements.

None of Principal Real Estate or its affiliates or any Principal Agents makes or has been authorised to make any representation or warranties, whether express or implied, in relation to Principal Real Estate or regarding the truth, accuracy or completeness of any of the information contained on this website at any time. No representation or warranty is given by Principal Real Estate, its affiliates or the Principal Agents as to the achievement or reasonableness of, and no reliance should be placed on any projections, targets, estimates or forecasts contained in the information on this website. Furthermore, nothing contained on this website is or should be relied on as a promise or representation as to the future. No reliance may be placed by any person for any purpose whatsoever on the information or opinions contained on this website or on its completeness, accuracy or fairness at any time.

Principal Global Investors (Europe) Limited is not authorised by the FCA to directly deal with retail investors; any distribution of the Fund to retail investors in Europe is facilitated by fund distributors with which Principal Global Investors (Europe) Limited has entered distribution arrangements, pursuant to advice provided to investors by those distributors, based on the documents Principal Global Investors (Europe) Limited provides. Retail investors should not be provided with access to this website.

The name of the Swiss representative is ACOLIN Fund Services AG, Stadelhoferstrasse 18, CH-8001 Zürich. The name of the Swiss paying agent is Banque Cantonale de Genève, 17, quai de l’Ile, 1204 Geneva. Investors can obtain the prospectus, trust deed, the simplified prospectuses and the annual and semi-annual reports free of charge from the representative in Switzerland.
The value of units and the income from them may fall as well as rise.

Investments in the Funds are neither insured nor guaranteed by the US Government or the Federal Deposit Insurance Corporation and are not deposits or obligations of, or guaranteed by, Principal Global Investors.

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Nothing contained in this website shall constitute an offer or solicitation, in relation to units in the Funds or generally, in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or not authorised.

In particular, shares issued by the Company, and units in the Funds, have not been and will not be registered under the United States Securities Act of 1933 as amended or the securities laws of any state or political subdivision of the United States and may not, except in a transaction which does not violate US securities laws, be directly offered or sold in the United States or to any US Person. The Company will not be registered under the United States Investment Company Act of 1940 as amended.

This website is reserved exclusively for non-US persons and should not be accessed by any person in the United States.

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The information in this website contains general information only on investment matters and should not be considered as a comprehensive statement on any matter and should not be relied upon as such nor should it be construed as specific investment advice, an opinion or recommendation. The general information it contains does not take account of any investor’s investment objectives, particular needs or financial situation, nor should it be relied upon in any way as a forecast or guarantee of future events regarding a particular investment or the markets in general. Past performance is not a reliable indicator of future performance and should not be relied upon as a significant basis for an investment decision.

You should also inform yourself as to (a) the possible tax consequences, (b) the legal requirements and (c) any foreign exchange restrictions or exchange control requirements which you might encounter under the laws of the countries of your citizenship, residence or domicile and which might be relevant to any investment, including the subscription, holding, transfer or disposal of units in the Funds

Delegation of Investment Management to Affiliates

Products upon which composite results contained in this material, if any, are based may not themselves be available in the United Kingdom and certain other jurisdictions; however, the underlying investment management capability can be made available to institutional investors subject to all applicable local regulations and restrictions. In connection with its management of client portfolios, PGIE may delegate management authority to affiliates that are not authorised and regulated by the Financial Conduct Authority. In any such case, the client may not benefit from all protections afforded by rules and regulations enacted under the Financial Services and Markets Act 2000.

Disclaimer
The information on this website is given by Principal Global Investors in good faith and has been derived from sources believed to be reliable and accurate as at their date. However, Principal Global Investors makes no representation or warranty of any kind for the accuracy or completeness of the information and it is under no obligation to update or correct any errors in the information after the date of publication. This website also contains videos where the comments were valid on the date the video was recorded. Markets move continuously and you should only rely on current information for any investment decisions.

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This website contains general information only on investment matters and nothing in this website is intended to constitute or form part of any offer or inducement to issue or sell, or any solicitation of any offer to subscribe for or purchase, any securities or investment products in the UAE (including the Dubai International Financial Centre) and accordingly should not be construed as such. Information in this website is not directed at you if we are prohibited by any law of any jurisdiction from making the information on this site available to you and is not intended for any use that would be contrary to local law or regulation. Products or services mentioned on this site are subject to legal and regulatory requirements in applicable jurisdictions and may not be available in all jurisdictions. Accordingly, persons are required to inform themselves of and observe any such restrictions.

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Evolving data center sustainability and the role of the capital partner

AT-A-GLANCE

Why data center sustainability matters

Customer requirements

Business value

Bottom line

Footnotes