ESG in the cloud

As ESG is becoming a topic affecting more sectors, market leaders in cloud services are leading the way on making cloud computing, and data centres in particular, more sustainable. We explore the ways companies are tackling this issue and its importance to customers.

The intrinsic nature of data centres, and cloud technology in general, is not regarded as the most ESG-compliant, with the Smart 2020 report stating that environmental footprint from data centres tripled between 2002 and 2020. However, it is clear that companies, investors, stakeholders, and most importantly, customers, are placing a strong emphasis on ESG criteria when making decisions on which cloud companies and technologies to invest in, and it now seems that data centres and cloud services companies are ensuring ESG is one of their top priorities to align with their customers.

Naturally, the key impact of data centres is their energy consumption to combat the waste heat produced through using air conditioning and cooling systems. Energy efficiency is therefore at the forefront of most companies’ ESG strategies. The US has been leading the way on sustainability initiatives following studies by the US Department of Energy suggesting that 2% of all electrical consumption in the USA is through data centres, which is a key concern as the electricity used is produced through burning fossil fuels for the majority of data centres.

Legislative and regulatory drivers

Data centres and cloud service providers will increasingly become under more of a legislative and regulatory burden to take ESG seriously.

The Corporate Sustainability Reporting Directive ("CSRD") is intended to ensure that companies report reliable and comparable sustainability information that investors and other stakeholders need. It should also assist companies in meeting the increasing demands for sustainability information. The CSRD was formally adopted by the European Parliament and council of the European union in November 2022 and entered into force on 5 January 2023. It requires in-scope companies to report on sustainability-related issues in line with the detailed set of disclosure standards developed by the European Financial Reporting Advisory Group. The CSRD must be integrated into Member States’ national laws within 18 months.

The CSRD extends to large and listed EU companies, as well as to large third country companies which do substantial business in the EU or have securities listed on EU regulated markets. It is estimated that more than 50,000 companies will be covered by the new CSRD obligations, a significant increase from the 11,700 companies covered by the existing Non-Financial Reporting Directive 2014/95/EU.

It is expected that both data centres and hyperscalers will likely increase the level they monitor, report, and publicise their ESG impact just to meet the ever-more ESG targeted regulation.

Tackling environmental impact

The most advanced development in tackling energy efficiency is the move of many cloud giants like Microsoft, Facebook, Google and Amazon to a hyperscale model, using efficient information factories with uniform computing architecture to scale up thousands of servers. The hyperscale centres thereby use far less energy for everything as a result, from lights to cooling, and limits the number of servers required to perform the same functions. It is predicted that moving 80% of servers in small US data centres to a hyperscale function would result in a 25% drop in energy use.

A concern in the ability to achieve this is the disparity in resources between the large scale cloud providers with smaller-scale data centres. While the likes of Google have the capital to utilise this technology, many smaller data centre providers instead resorted to outdated, cheaper technology and equipment which is much harder to optimise for efficiency. As consumers, particularly large businesses, focus on ways to reduce their environmental impact, they are making environmentally conscious decisions in their service providers, and are more likely to choose a data centre provider that is more efficient than a smaller data centre that does not have the same sustainable technology.

However, there are cheaper techniques that are being promoted as energy efficient alternatives for data centres. One potential option relates to the location of the data centres. Some organisations are considering locating their data centres in cooler locations, for example there has been an influx recently of data centres opening in Oregon which has a cooler climate, and this cooler air from outside can be brought into cool servers rather than requiring air conditioning. Google has taken this one step further, adding weight to the argument of the wealth of resources available to such giant companies, as it has put together an AI research team that is exploring ways of using AI to assist in reducing energy consumption in data centres. The team are trialling AI algorithm technology which allows data centres’ cooling systems to match the weather, with tests showing a reduction of 40% in energy use.

Companies in hotter climates that require data centres to be located within their region (Eg, in Asia, North Africa and the Middle East) have tried an alternative method of using chilled water to act as a coolant. While this is effective in reducing energy consumption, it may have the consequence of putting a strain on local water resources.

A natural consequence of using cloud technologies and data centres is the waste heat that is produced. In order to demonstrate the pledge to assisting with the climate crisis, companies are not only trying to reduce energy consumption but look into sustainable ways to reuse waste products such as heat. Sweden is leading in its efforts to reuse the wasted heat and is developing ways to utilise this waste as a way to heat Stockholm, with the intention to be able to heat 10% of the city solely from wasted heat from its data centres by 2035.

Conclusion

It is clear that data centres that are built and managed with the most robust set of ESG practices in place will have a distinct competitive advantage over those with less of a focus on sustainability. Consumers are not only looking to demonstrate their own ESG capabilities, but there is a financial incentive due to the cost savings generated from lower energy consumption or the use of renewables. There is also a clear and increasing regulatory requirement for large companies to report on their ESG impact.

Although the only way to fully tackle this issue would be to use less data, in this current climate, with the introduction of new technologies such as AI, 5G and driverless cars, the use of data will only increase. The shift in focus of the cloud giants is therefore clear, and there are innovative solutions being produced. Although it may take some time for smaller scale companies to catch up, the importance of ESG in cloud technologies and demand for more sustainable solution means that it is a worthwhile investment.