22 September 2021

Making the right connections

As the global economy goes digital, the telecoms, media and communications sector is taking on a double-edged challenge – to manage its environmental footprint as well as providing sustainable solutions for its customers, Mark Nicholls reports

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The technology, media and telecommunications sector has a carbon challenge it's trying to solve. 

Much of the emissions associated with the sector can be traced to the energy-hungry data centres that are handling the spiralling need for data processing and storage. And they are growing fast: global investment in data centres is set to rise from $245 billion in 2019 to $432 billion in 2025, according to Research & Markets.

"From an impact perspective, the most material environmental issues for data centre operators include energy management and associated Scope 2 and 3 greenhouse gas emissions," says Dan Shurey, director of sustainable finance at ING in New York. "There is a real opportunity to use sustainable finance to meaningfully address the direct impacts of data centre operators, as well as the indirect impacts for their customers."

Dan ShureyING has been working with a number of data centre operators to raise finance, through the issue of green bonds to fund investments to improve the energy efficiency of data centres, to help them switch to cleaner energy sources, and to invest in the buildings and related infrastructure.

For example, ING has helped California-based digital infrastructure company and data centre real estate investment trust Equinix structure and issue a series of green bonds to finance improvements in data centre energy efficiency, invest in renewables, and better manage water use and waste. In this regard, the company is responding directly to customer demand.

"When we talk to customers, the availability of low-carbon or renewable energy to power their infrastructure is one of their top priorities," Jennifer Ruch, the firm's sustainability director, said on a recent webinar. "Through Equinix's commitments to pursuing 100% renewable energy use and becoming climate neutral globally by 2030, we are directly addressing our customers' sustainability requirements, greening their supply chains as well as providing a premium interconnection, security and infrastructure needed to grow their businesses."

"This shows how sustainability is no longer just a value driver, but an essential business pillar for the clients we work with," Shurey adds.

There are benefits to operators from structuring and issuing sustainable finance products that go beyond the purely financial – it sends a signal to clients that the operators are moving in the right direction in sustainability terms, he says. "From a client retention perspective, operators need to have an offering that will allow their clients to meet their net-zero or science-based decarbonisation targets ... These transactions can help companies to highlight their sustainability targets – both how they intend to meet them and how they hold themselves accountable."

"This shows how sustainability is no longer just a value driver, but an essential business pillar for the clients we work with" Dan Shurey

There is some complexity in terms of how sustainable finance products are structured in the space. Investments in energy management improvements are often measured against 'power usage effectiveness' (PUE) thresholds, explains Shurey. "In the sustainable finance market, there's no global standard for what is a good enough PUE ... most times a company debuts in the sustainable finance market, they are looking to match or beat the prior PUE target threshold."

"It's become a race to show that they have the most energy efficient data centre infrastructure," he adds.

Further complexity comes from the geographic location of the relevant datacentres. Those in cooler climates may have to use less energy on temperature management, while there is also an interrelationship with water scarcity, where good water stewardship might even come at the cost of energy efficiency. "This speaks to the fact that there is no magic metric that needs to be addressed – the more that data centre operators and investors explore their impacts, the more they realise they are multifaceted," he adds. "It is crucial that any sustainable finance structure addresses the unique ESG considerations of the issuer".

A recent example of a data centre operator that has helped increase focus on water use in digital infrastructure assets is Texas-based Aligned. The company was the world's first to develop a green securitisation programme for data centres, and was also the first include measures of water used in cooling to define the green eligibility of data centre projects.

"Aligned's innovative approach to both green securitisation and water usage effectiveness is a logical next step in the market's evolution and was well-received by stakeholders" says Shurey. ING acted as sole green structuring advisor for the debut deal.

The TMT sector's sustainability impacts extend beyond direct energy use, notes Shurey. Given the anticipated growth in the sector, companies need to consider the embedded carbon for which they are responsible, particularly from materials used in construction of large data centre infrastructure.

"Where Equinix was more innovative was in focusing not just on operational performance, but also looking to develop a way to measure embodied carbon in its facilities," says Zach Margolis, sustainable finance manager at Sustainalytics in Toronto, which certified the company's green bond framework. "It's an area that the sustainable finance market has not yet grappled with in as much depth as operational energy. It's great to see them taking the first steps in that direction."

Equinix's approach involves conducting whole-building lifecycle analysis to quantify the carbon emissions associated with the building of its data centres. In addition, it plans to develop a methodology to evaluate and benchmark the carbon emissions of the building materials it uses.

Other companies in the sector are looking down their value chains and linking sustainable finance to their efforts to help their customers reduce emissions, notes Margolis. Both Vodafone and Verizon, for example, have both referenced, in their green bond frameworks, references to investments, for example in 5G and the Internet of Things, that have the potential to reduce energy use and therefore emissions among their users.

But it's not only the sector's environmental challenges that could benefit from the application of sustainable finance, says Shurey. For example, there are social issues around access to and distribution of its products and services. Impact investors could, potentially, be an attractive source of capital to help finance the extension of services to underserved communities, he suggests. "I see real potential for sustainable finance to help address material social topics in the sector," he says.

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