Without doubt, one of the greatest innovations of recent times has been the digitisation of society, which has brought with it a myriad of economic benefits: a 2020 report by the AIIB showed broadband access as having one of the highest impacts to GDP growth with a doubling of broadband speed resulting in a 0.3% increase to GDP growth. Developing the infrastructure underpinning the digital economy is therefore critical to economic development, with infrastructure investment into the telecommunications sector standing at $213bn according to Infralogic in 2021 (a growth of x3.1 from 2019 levels). However, forecasts highlight an annual funding gap globally of circa US$1 trillion anticipated by 2040, the majority of which will be attributable to Asia and middle / low-income countries.

Many of the early investors within the space, mainly telecom companies, have been the primary funders in the development of infrastructure assets. However, in a bid to improve return-on-equity (on the back of pressures from shareholders), they are increasingly looking to divest these capital-intensive assets. Several investment managers have viewed this as an opportunity to launch specialist digital infrastructure funds to acquire assets such as: data centres, fibre amongst others, but also to invest into new greenfield developments. Whilst there is a clear economic rationale for this asset class (e.g. long-term revenue streams, growing consumer demand), many also view it as supportive from a sustainability perspective, noting in particular its social impact from greater interconnectedness between communities.

When determining the relevance of various ESG factors for digital, we should bear in mind the concept of double materiality – that companies should simultaneously assess sustainability matters that are: 

1. Financially material in influencing business value; and
2. Material to the planet and society

Put another way, we need to look at both the internal and external implications for any activity. Furthermore, these implications can be both positive and negative, so both dimensions need to be factored into any investment decision or ESG integration policy when assessing these assets. To illustrate this point, we have mapped out some of the key ESG considerations for digital infrastructure in Figure 1. The graphic highlights how digital assets (such as data centres) contribute to greenhouse gas (GHG) emissions via their own operations but equally, potentially have a much bigger remediating effect with regards to GHG emissions in its enablement of cloud technologies and foregoing the need for; business travel, commuting and acceleration of information dissemination. 

Figure 1: Outline of ESG consideration for digital infrastructure

According to the Andrae & Edler, global emission from cloud computing represents between 2.5% to 3.7% of all global GHG emissions and is forecast to represent 6.7% of GHG emissions by 2030 (with an associated GHG emissions footprint of 4.8 Gt CO2e in 2030). 

Figure 2: Share of Communication Technology of global GHG emissions

With respect to data centres, life cycle analysis (LCA) shows that it is the operational usage that is responsible for most climate change impacts. Three factors affecting the carbon footprint of data centres are: 

1. Electricity consumption (to run the servers) 
2. Water consumption (to cool the servers), and 
3. Lifetime of the equipment (which impacts the frequency of replacements). 

Consequently, the Power Usage Effectiveness (PUE) imposed has become a key metric in assessing the efficiency of data centres as it indicates how much energy consumed by the data centre is actually used to power computing devices (in contrast to cooling). As of today, the best data centres in the world attain a PUE in the region of 1.2 but this will likely evolve over time as newer technologies are deployed to better utilise power.

Staying ahead of the curve (or only ever so slightly behind it) is crucial for continued success, and there is a strong possibility that quantum computing will join the other digital infrastructure assets as another digital utility. Often mentioned as a game changing technology, with a developing suite of use cases that focus on improvements to existing processes and business models (influencing decision making), quantum technology is an enhancement on classical computing in the following areas:

• Simulation
• Artificial intelligence / machine learning 
• Optimisation, and 
• Factorisation

Naturally, many of the emerging use cases also have several ESG implications which we have outlined in Figure 3 below. For example, cyber risk has dramatically increased in light of recent geo-political events, and so enhancing security protocol should be an enduring area of joint focus for both Chief Sustainability Officers (CSOs) and Chief Digital Information Officers (CDIO). 

As the technology develops, quantum cryptography can and should be considered by CSOs as a tool for addressing these security concerns. In addition, there are several positive implications from an environmental perspective, namely the potential for the rapid development of new, more efficient industrial catalysts that will ultimately underpin the emerging industries of the future, such as green hydrogen and ammonia. 

Figure 3: ESG implications for Quantum Technology (not exhaustive)

Future users of quantum computing are also likely to access the technology via the cloud in the near term and so the interplay with other digital infrastructure will be important for the commercial viability of the technology. Regardless, there is still some way to go before the technology and applications are widely in use, but we expect funding into the sector, which has largely been via governments and large technology institutions to date (McKinsey estimated that US$1.8 billion was invested into the sector in 2021, more than double the US$0.7 billion invested in 2020), will increasingly attract private capital to further accelerate growth of the emerging technology.

Given the key enabling role that digitisation plays within the sustainability agenda, prospective borrowers and investors can leverage this to their advantage by incorporating relevant ESG features into their respective financings. The economic benefits are certainly a key attraction, however, sophisticated borrowers also view sustainable finance as a valuable lever to drive behaviours within their internal organisations, or in the case of investment managers, across their invested asset base. This is summarised nicely by the Head of Sustainability at a UK infrastructure investment manager who recently said…

Appropriately structuring sustainable debt is therefore crucial in optimising its overall impact with several industry guidelines available to support both Key Performance Indicator (KPI) linked and use-of-proceeds financings. The International Capital Market Association (ICMA) is one such industry standard commonly referenced to guide structuring and has recently defined ESG KPIs for different sectors. Key themes for the technology sector include: energy efficiency; water management; and responsible material sourcing.

However, despite the industry moving towards greater standardisation more broadly, the heterogeneity of business models and pools of assets will require that the definitions of KPIs always remain somewhat bespoke, a fact particularly evident within the private finance space. This can prove problematic when it comes to the calibration of targets, and whilst we expect additional industry guidance to be forthcoming, it is also important to incorporate peer benchmarking and alignment with scientific guidance to determine credible ambition levels. 

Several digitally-oriented entities have already incorporated sustainability measures into their financings with a mixture of both KPI-linked structures and use-of-proceeds structures being used across the market. We have outlined the most prevalent KPIs and project categories in Chart 2. One of the more recent examples, Flexential’s Green Asset-Backed Security (ABS) in December 2021, is supported by Flexential’s Green Finance Framework that defines ‘green assets’ as: 1) new build data centres with PUE less than 1.4 as well as zero water usage in cooling; and 2) retrofitted data centres with PUE no greater than 1.5. Flexential also commits to annual reporting on the operational performance of the green assets attaining a second party opinion from Sustainalytics on the alignment of the framework to ICMA’s Green Bond Principles and Green Loan Principles. 

It is also worth noting that several asset owners are incorporating digital assets into their sustainable investing frameworks (e.g. PGGM in their Sustainable Development Goal (SDG) Investing Framework), and so the inclusion of KPIs helps to align incentives across the end-to-end investment value chain. Finally, whilst the applicability of sustainable finance to digitisation is clear, we are also seeing the digitisation of sustainable finance as noted by the use of blockchains in the trading of voluntary carbon credits (which we will explore in the third article of our series) to further enhance the sustainable impact of finance. 

Figure 4: Typical KPIs and Project Categories used in sustainable financing frameworks and transactions across the Technology Sector

Whilst we can see that there are several possibilities open to firms when structuring sustainable financing for digital infrastructure assets, a key requisite is the availability of data on sustainable impacts. This is evidentially much easier for environmental considerations but can prove challenging (though not impossible) when looking to evidence various social implications. This, we will discuss further in the second article of our series, where we will dive deeper into how we can address the challenges of categorising digital as a ‘social’ investment and outline a range of options from a sustainable financing perspective.

For those looking to discuss any of the above further, please reach out to our author: Rahel Haque, Vice President, Climate and ESG Capital Markets, or to Tom Cascales, Associate, Climate and ESG Capital Markets, who also contributed to the article.

• ICMA - International Capital Markets Association
• AIIB - Asia Infrastructure Investment Bank
• PUE - Power Usage Effectiveness: This is a metric used to determine the energy efficiency of a data centre and is calculated by dividing the total amount of power used to run the IT equipment within it.
• Quantum Computing - Computers utilising the properties of quantum physics to solve certain computational problems, such as factorisation, substantially faster than classical computers.
• Quantum Cryptography - A method of encryption that uses the naturally occurring properties of quantum mechanics to secure and transmit data in a way that cannot be hacked.
• LCA - Life cycle assessment: A methodology for assessing environmental impacts associated with all the stages of the lifecycle of a commercial product, process or service. 
• KPI-linked finance - Financing with embedded ESG targets in place resulting in a margin adjustment upon meeting / not meeting the pre-defined targets within the relevant periods.
• Use of proceeds finance - Financing that limits the collateral / proceeds of the financing to be used for specific, pre-defined activities. Activities typically relate to green, social or sustainable themes and are usually informed by industry standards (for example ICMA; EU Taxonomy).