ESG in the Datacenter: Green bonds financing sustainability goals

ESG in the Datacenter: Green bonds financing sustainability goals

Green bonds have emerged as a new way for corporations to finance environmentally friendly projects. These financial instruments present two main benefits: They build credibility (and often garner positive recognition) for a company’s sustainability goals and decrease financing barriers for a sustainability-related project.

For datacenters, green bonds become particularly important as the industry pushes to address its largest cost factor, electricity. These bonds are used to finance projects aimed at achieving higher levels of energy efficiency, building a more sustainable datacenter model.

Sustainability barriers facing datacenters

Sustainability has been top-of-mind across several industries. As the private sector attempts to cut back on greenhouse gas emissions, companies are forced to get creative to satisfy the increasing amount of environmentally conscious investors. Environmental, social and governance (ESG) values are now central to how many companies run their business, and key performance indicators have been developed to assess how companies are doing as they work toward those goals.

Datacenter providers have come under fire mainly due to the high amounts of electricity their facilities consume. Digital Realty Trust estimates that the datacenter industry consumes over 90 billion kilowatt-hours of electricity on a yearly basis, or approximately 3% of all the electricity consumed around the globe per year, an amount that is set to increase as the industry matures and operations grow.

With green bonds, the industry found a way to make sustainability projects financially viable. These projects not only improve energy efficiency and reduce greenhouse gas emissions, but also decrease operating costs for providers and ultimately help the datacenter industry as whole, preventing future energy shortages.

What is an AI Datacenter?

What is a green bond?

The first green bond was issued by the European Investment Bank in 2007, with the World Bank following suit in 2008. These bonds served as the basis for the creation of the Green Bond Principles draft by investment banks under the World Bank and International Capital Market Association to shape the green bond market and help future issuers. Under the GBP, issuers must provide detailed information to investors, including the use of proceeds, a process for project evaluation, and the management and reporting of proceeds.

The Climate Bonds Initiative also released its own guidelines for green bonds issuance, called the Climate Bond Standard, which is generally complementary to GBP standards. According to the CBI, over $473 billion worth of green bonds were issued globally in 2021, with the United States, the European Union and China leading as the largest markets by volume issuance.

Green bonds differ from other sustainability-related financial instruments, such as sustainability-linked bonds, in that funds raised from green bonds issuance must be utilized for specific projects with positive environmental or social outcomes. A sustainability-linked bond, on the other hand, can be used for more general corporate purposes, as long as the company using it meets certain sustainability milestones.

Data to support the claim

Academic literature points to issuers seeing an increase in ownership by long-term and environmentally conscious investors when issuing green bonds – investors perceive it positively as the companies actively addressing climate issues. Previous research has also indicated that a company’s stock liquidity can also improve with green bond issuances.

When looking more broadly at ESG ratings and disclosures, which green bonds encourage, previous literature has also seen positive effects on companies’ performance. Research from Journal of Financial Economics and Journal of Corporate Finance indicates that companies with higher ratings or higher levels of disclosure see lower cost of capital, increased shareholder value and stock performance that often outperforms broader equity markets.

The greenwashing problem: Is the datacenter’s grass always greener?

Greenwashing has emerged as a major issue associated with green bonds and the broader push for ESG. Greenwashing occurs when companies make false or misleading claims about how sustainable their projects, or the company itself, actually are. The GBP paints a broad picture of which projects could qualify for green bond financing, leaving ample room for issuers to be dishonest about the green aspects of their business, since investors cannot verify “sustainability” for a fact until after the project is complete.

Greenwashing is certainly a problem when it comes to considering the true impacts of green bonds. For example, some corporate issuers have previously used green bond proceeds to pay down debt rather than for specific sustainability projects, claiming that the additional financial freedom would allow them to pay for sustainability projects in the future.

A lack of regulations and protections for investors could discourage some from endorsing these projects, even if they were to theoretically align with one’s environmental values.

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