Investors will be part of the green energy revolution, as they seek to align their portfolios with climate resilience. It’s a trend that has large implications for the data center industry, which is experiencing a historic influx of capital to build digital infrastructure.
On Earth Day 2021, the essential nature of the climate crisis is placing a higher priority on sustainable finance that prioritizes ESG criteria (environmental, social and governance) in selecting targets for lending and funding. This creates both opportunities and challenges for data center operators.
The data center industry has emerged as a force for the commercialization of renewable energy at Internet scale, with Google, Amazon, Microsoft, Apple and Switch sourcing solar and wind generation to power their cloud data centers. Sustainable finance is a new frontier in addressing climate change, bringing accountability into the business of how companies fund their operations. That’s why DCF made it one of our Eight Trends That Will Shape the Data Center Industry in 2021.
Building data centers is an expensive business that requires a steady flow of money, typically both debt and equity. As more investors make sustainability a factor in their investment decisions, data center developers will face growing scrutiny of their energy efficiency and sourcing of renewables like solar and wind power.
The response to climate change is being accelerated by the Biden Administration, which said today that the U.S. will aim to cut its greenhouse gas emissions in half by 2030, using 2005 levels as a benchmark.
A Green Shift in the Capital Markets
Some of the largest multi-tenant data center operators are already deeply engaged in sustainable finance. Equinix, Aligned and Digital Realty have all raised funds in the past year using green bonds or sustainability-linked loans.
There will be more green funding deals in the future, driven by investors’ growing appetite for sustainable options. There were 76 new climate-aware funds launched globally in 2020, according to Morningstar, which now tracks more than 400 mutual funds and exchange-traded funds globally that have climate change as a key theme.
“Sustainable debt is likely to go through the roof this year,” said Dr. Richard Mattison, the CEO of Trucost, a unit of S&P that assesses corporate risk from climate change. “This year we expect to see many more funds springing up targeted at sustainability and green outcomes. Where investors want to put their money is going to lead to a huge change in capital markets, and most financial institutions are recognizing that.”
One of the leading voices in the shift to sustainable investing has been Blackrock, the world’s largest asset manager with more than $8 trillion in assets under management.
“As more and more investors choose to tilt their investments towards sustainability-focused companies, the tectonic shift we are seeing will accelerate further,” said Larry Fink, the CEO of Blackrock, in a recent investor letter to CEOs. “And because this will have such a dramatic impact on how capital is allocated, every management team and board will need to consider how this will impact their company’s stock.
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“Companies that are not quickly preparing themselves will see their businesses and valuations suffer, as these same stakeholders lose confidence that those companies can adapt their business models to the dramatic changes that are coming,” Fink wrote.
Data Center Leaders Tap Green Bonds, SLLs
“ESG has been around for a while, and it is beginning to permeate the financial institutions and the way they think,” said Andrew Schaap, the CEO of Aligned, which lined up a $1 billion sustainability-linked loan (SLL). “Investors and financial institutions are also being held accountable for their sustainability practices. You’ll start seeing it more. The banks are clamoring to be involved in these.”
SLLs belong to a family of sustainable debt that also includes “green loans” in which the borrowing will directly fund a sustainable project. Sustainability-linked debt instruments like the Aligned loan are not project-specific, but look to ensure a company’s overall ESG performance through sustainable performance targets that reduce the borrowing cost.
Digital Realty was the first data center operator to use green loans, and has raised more than $5 billion since 2015 using green loans, and is one of the winners of the 2021 Climate Bond Award recognizing corporate leadership in green finance. The company has a section of its web site that documents its green bonds and the projects that they have supported.
“Investors have shown a clear preference for securities with a commitment to sustainable investment, and the green bond market offers an efficient means of aligning our financing strategy with our corporate sustainability objectives,” said Andrew Power, the Chief Financial Officer at Digital Realty.
Equinix sold 1.1 billion Euro in green bonds in February, and will use the proceeds to fund green energy projects to support the company’s data center footprint. The notes have an average interest cost of 0.66 percent, representing a 2.215 percent reduction in cost compared to the company’s existing Euro-denominated notes. By using the green bond to refinance the credit line it used for green energy acquisitions, Equinix realized 11.1 million Euro in savings.
This was the company’s second green bond, following a $1.35 billion green bond in September 2020. Equinix has developed a Green Finance Framework based on the Green Bond Principles, a set of guidelines that promote transparency in green debt disclosures.
A Greener Future for Finance and Investing
“The Green Bond is one of the many tools we’re using to advance our environmental sustainability initiatives and continue to make progress towards achieving our ambitious sustainability goals,” said Keith Taylor, the Chief Financial Officer for Equinix.
Aligned says it is the first data center company to use a sustainability-linked loan (SLL), in which the borrower earns a lower interest rate by hitting benchmarks for sustainable practices. Under terms of the $1 billion loan to fund data center construction, Aligned will meet key performance indicators (KPIs) for its corporate performance on sustainability benchmarks, including:
- Renewable Energy: A commitment to match 100% of Aligned’s annual energy consumption to zero-carbon renewable energy by 2024.
- Sustainability Reporting: Transparency and continuous improvement across sustainability best practices. This target aligns the Company’s ESG reporting efforts with a leading global standard, maximizing consistency in ESG disclosure for Aligned stakeholders.
- Workplace Safety: A commitment to having / reporting on an industry-leading Total Recordable Incident Rate (TRIR).
Sustainability is a growing priority for infrastructure funds, who have become one of the most important investor classes in the data center sector.
“Infrastructure funds are clearly focused on ESG and sustainability,” said Pim Rothweiler, head of TMT (Tech, Media, Telco) at ING Capital, an early leader in sustainable finance.
Retail investors will also play a role in driving sustainable investing and accountability, especially as millennials become more affluent and represent a growing force in money management.
“We are sitting in the middle of the largest wealth transfer in history,” said Mattison, noting estimates that younger Americans will inherit between $24 trillion and $68 trillion in wealth. “The majority of millennials would prefer to make sure their investments have some kind of positive impact. We will have heightened disclosure requirements to prove your fund is green, and to make sure that the companies you invest in are green.”
Banks and SEC Are Watching Climate Risk
Companies not motivated by the carrot may experience the stick, as banks and regulators are also looking for more transparency and accountability on business risks for companies that ignore climate change.
“Climate risk is increasingly integrated into credit analysis,” said Fitch, the bond ratings agency, in a recent analysis. “Pressures on corporates to decarbonize increasingly comes from the banking sector. Stakeholders and regulators force banks’ senior management to look more carefully at bank customers’ carbon footprints and assess how they fit in with their public carbon-reduction targets. Many leading banks have already made public commitments to achieve net-zero targets throughout their entire value chains, including Scope 3 emissions coming from their counterparties, such as borrowers, in line with Paris Agreement timeframes.”
Under the Biden administration, the Securities and Exchange Commission has elevated climate risk as an enforcement priority. Acting SEC Chair Allison Herren Lee recently directed the agency’s Division of Corporation Finance to “enhance its focus on climate-related disclosure” in public company filings, and has issued guidance on its climate focus.
“Now more than ever, investors are considering climate-related issues when making their investment decisions,” said Lee. “It is our responsibility to ensure that they have access to material information when planning for their financial future.”
But experts in sustainable finance say corporations’ motives should be realigned because it is what their stakeholders require.
“Sustainable business is good business,” said Dan Shurey, Vice President of Sustainable Finance at ING. “I think that’s become pretty well recognized across sectors. It’s no longer a nice to have it’s a need to have.”