How to play the next big trend in ESG investing: green data centers

Published Sun, Sep 12 20218:38 AM EDT

Data centers are critical to the modern economy, and as they grow in importance there's an "urgent need" to reduce their heavy environmental footprint, according to Barclays. The firm noted that data centers — although somewhat invisible — are the modern equivalent of a public utility, and investors shouldn't overlook the sector. Governments and companies are pushing data centers to cut their carbon footprints, and as the landscape shifts Barclays said there are a number of ways for investors to play the transition. "We see data centers being mission-critical and often overlooked by investors when discussing the sustainability profile of the ICT [information and communication technology] sector," the firm wrote in a recent note to clients. Barclays said that data centers make up roughly 1.5% of electricity consumption worldwide, and power costs amount to some 70% of total operating costs. Data centers also consumed an estimated 660 billion liters of water in 2020, which is up from 626 billion liters in 2014. Given that data centers need to have guaranteed power 24/7 they typically rely on backup diesel generators, while also requiring constant temperature controls. And then of course there's the equipment which carries its own environmental footprint. Customers such as large enterprises and government organizations are "applying pressure on data center operators in order to attract their business, given there is a collective benefit to be had." Some countries including Amsterdam, Ireland and Singapore have introduced strict environmental standards for all new data centers. "Given data centers are the epicenter of digital infrastructure, it is crucial the sector implements and promotes more sustainable choices and solutions," Barclays said, noting that sustainability-focused data centers will soon shift from a competitive advantage to a business imperative. Capital spending for worldwide data centers topped $187 billion in 2020, according to the firm, and there are plenty of entry points for investors looking to capitalize on this theme. Barclays highlighted seven key investment factors around the green data center ecosystem: renewable energy, backup power and generators, water usage, heat recycling, data storage and chip efficiency, circular design and business continuity. Equinix and Digital Realty Trust are two of the companies that operate data centers, and the they should see upside from data volume growth and the shift to businesses moving their data centers off premise in favor of service providers. "[Equinix] recognizes its environmental imperatives, and has made good progress by articulating targets, issuing green bonds, and attaining green certification for 69% of its square footage," the firm said, noting that the company operates 230 data centers across 64 metro areas. When it comes to Digital Realty Trust, Barclays pointed to the company establishing targets "ahead of its peer group," but noted that reaching 100% renewable energy usage could take between 5 and 10 years since the company is "more focused on the quality of its sustainability efforts rather than the speed of implementation." Moving away from the owners of the physical assets, data centers are a multi-billion dollar end market for semiconductor companies. Within the group, Barclays said Nvidia has exposure to greening data centers given its work on more-efficient hardware. The firm noted that the company powers nine of the top 10 most energy-efficient computers. Seagate and Western Digital have exposure in the data storage arena, while Palo Alto Networks provides cybersecurity for companies moving towards more efficient cloud-computing systems. Meanwhile, Microsoft , Salesforce and Oracle have exposure to the green data center theme through their software offerings. "We believe Microsoft is well placed to benefit from the Green Data Center investment theme as a 'theme leader' with various long-term sustainability targets relating to renewable energy and water efficiency," the firm said of the tech giant. When it comes to the public cloud, Amazon and Alphabet are two of the largest players. Given the size of each, targeting energy-efficient systems including using renewable energy has outsized impacts. 3M , Eaton and Johnson Controls provide crucial equipment, while Caterpillar and Cummins could see upside as data center buildout continues. "Data centers have provided a steady source of demand for the construction sector, with global spending expected to reach $200 billion in 2021," the firm said. Of course, given the number of companies involved in each component of data centers it's hard to measure the environmental impact of the entire value chain. But the firm said the importance will only increase. "We believe the discussion on green data centers will grow in importance over the next 5-10 years alongside reliance on digital infrastructure," the firm said. - CNBC's Michael Bloom contributed reporting.

A data center.

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