Data center owners face an uphill climb to meet environmental benchmarks

Objectives, like reducing total GHG emissions, conflict with the industry's rapid growth

As the world evolves toward a carbon neutral future, commercial real estate owners are prioritizing environmental objectives to reduce building emissions, but some property types face an arduous journey to meet these goals. Data centers are at the top of that list. The U.S. Department of Energy (DOE) estimates that these specialized properties use 10 to 50 times more energy per floor space than the average commercial office building, and they account for 2% of the total electrical use in the U.S.

Data centers are voracious consumers of energy, but owners and operators have been moving in the right direction. According to JLL’s Global Data Center Outlook Report, the sector has steadily reduced its power usage effectiveness (PUE) score over the last 15 years from 2.5 in 2006 to a record low of 1.57 last year. (A score of 1 indicates 100% energy effectiveness.) Despite this progress, meeting new environmental benchmarks is becoming markedly onerous. Data center owners must balance internal business goals with rigorous customer requirements.

Moving forward, there is a pressing need to adopt standardized sustainability reporting. In March 2022, the Securities and Exchange Commission (SEC) proposed a rule to enhance and standardize climate-related disclosures for investors. The new rule would require U.S. companies with more than $25 million in assets to report climate-related risks that are reasonably likely to have a material impact on their businesses, results of operations, or financial conditions.

A new gold standard

Today, there are an amalgam of metrics data center owners use to map energy usage. Most companies report PUE and power consumption, and, recently, the top 10 wholesale and colocation providers began to track renewable energy, water usage, carbon emissions, and electronic waste, all of which are important measures of a building’s footprint.

The SEC’s new disclosure requirements are aimed at providing industrywide clarity, transparency, and consistency based on carbon emissions, where, currently, there is no uniform standard for investors to track.

“If adopted, [the proposal] would provide investors with consistent, comparable, and decision-useful information for making their investment decisions, and it would provide consistent and clear reporting obligations for issuers,” said Gary Gensler, SEC chair.

The proposed rule will define climate risk similar to popular frameworks already in use, like the Task Force on Climate-Related Financial Disclosures (TFCD) and the Greenhouse Gas Protocol (GGP). According to the SEC, under the proposed rule, investors will be required to disclose climate-related risks and risk management as well as how climate-related risks impact the business and consolidated financial statements, business strategy, and outlook. Investors will also be required to report the impact of climate-related events in financial statements. In terms of reporting, companies will disclose information about their direct (Scope 1) and indirect (Scope 2) greenhouse gas (GHG) emissions purchased from electricity or other forms of energy and any “material” GHG emissions from activities across its entire value chain (Scope 3), including upstream suppliers and downstream functions. The “materiality” of Scope 3 emissions will require further clarification.

While the SEC’s intent is to streamline sustainability reporting across all industries in response to the widespread adoption of environmental, social, and governance (ESG) goals, there are unique implications for data centers. Scope 3 disclosures for a business will likely need to include the GHG emissions data for their colocation or cloud data center vendors provided that these emissions are material. While the definition of “material” disclosures is loosely defined, for many organizations, the sizable portion of Scope 3 GHG emissions associated with their outsourced data center providers will need to be reported.

The magnitude of this expected requirement can be seen in recent company statements. Microsoft revealed in its 2021 Environmental Sustainability Report that Scope 3 emissions are difficult to control and that its Scope 3 GHG output grew by 23% year over year, wiping out any reductions to its direct and indirect emissions. The increase in Scope 3 emissions was due to significant global data center expansions, according to the company.

“This serves as an important reminder that Scope 3 emissions are the most difficult to control and reduce,” Microsoft reported in its 2021 Sustainability Report. “This year has highlighted the challenges of reducing Scope 3 emissions, and we’re committed to sharing our learnings to help other organizations who are wrestling with these same challenges.”

“... it would be wise for data center occupiers and owners to educate themselves now to ensure they can execute their sustainability strategies and achieve their goals in the future. ”

Translating strategy into action

Standardized reporting will position companies and investors to develop more effective environmental strategies, but to effectuate change and reduce carbon emissions, investors need to act. The widespread procurement of on- and off-site renewable energy through power purchase agreements (PPAs) is the most popular way for data centers owners and operators to lower carbon emissions at scale.

Since 2010, PPA volume has reached a cumulative 109 GW — roughly enough power to charge 1 million Nissan Leafs — and last year alone, PPA volume reached 31.1 GW. The Americas are leading the globe in PPAs with 20.3 GW in volume last year, thanks to big tech companies, which have utilized PPAs to meet aggressive ESG goals. Last year, for example, Microsoft signed 5.8 GW in new renewable energy PPAs.

Hyperscalers — tech companies operating in multiple verticals (such as Amazon and Google) — are also driving the PPA activity. These organizations have committed to increase the performance of their renewable energy portfolios and have signed major PPAs to reach those goals. JLL Research noted one hyperscaler signed a single onshore wind deal with Southern Power in 2021 for 118 MW.

Over the last five years, tech companies have been the largest buyers of PPAs, but that isn’t much of a surprise. The technology sector is also the primary user of data centers, and it has driven exceptional growth in the data center sector with record-breaking mergers and acquisitions activity, new construction, and absorption rates. Last year, U.S. data center absorption reached 885.7 MW, and the construction pipeline grew 18.9% year over year. Demand for data center facilities will only continue to climb as information technology integrates into daily life.

Currently, environmental objectives, like reducing total GHG emissions, conflict with the industry's rapid growth. However, through standardized reporting practices, it’s possible to understand the total scale of this challenge. Data center operators and owners need to consider the methods of establishing a complete accounting of GHG emissions and detailed action plans to consider their business growth into the needs for sustainable action.

The data center sector needs to work together on developing standardized sustainability goals to help the industry become more sustainable and consistently measure success. In an effort to achieve this, Infrastructure Masons created the iMasons Climate Accord (ICA) in May 2022, and 70 companies joined as founding members. Now, approximately 170 companies have joined the initiative.

SEC requirements will be coming probably sooner than later. So, it would be wise for data center occupiers and owners to educate themselves now to ensure they can execute their sustainability strategies and achieve their goals in the future.

Sean Farney

Sean Farney is executive director of data center strategy and innovation at JLL.

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February 2023

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