Data centers are the technological hubs that serve as the backbone for storing, transmitting, and refining digitized knowledge. In 2023, worldwide data center capital expenditure reached $260 billion, ~50% greater than the previous decade. The amount of data created and stored globally is expected to reach 175 zettabytes by 2025 — a six-fold increase from 2018.

However, the growth of data centers comes at a substantial energy cost: data centers and related data transmission networks account for ~3% of total greenhouse gases, exceeding total emissions from the entire commercial aviation sector (2.4%). Such environmental impacts are only poised to increase with the rapid surge in artificial intelligence (AI) applications and the widespread adoption of graphics processing units (GPUs). A single AI model can require tens of thousands of GPU hours to train, resulting in steep energy costs. ChatGPT’s GPT-3 model required an energy supply equivalent to the yearly demands of 120 American homes. GPT-4 contains six times more parameters than the previous iteration, and energy demand is expected only to grow further. Indeed, fueled by insatiable demand, the AI sector alone may reach energy consumption levels rivaling that of the entirety of the Netherlands by 2027. Microsoft, meanwhile, signed a 20-year power purchase agreement with Constellation (Nasdaq: CEG), to help match the power its data centers use with carbon-free energy.

Given the current energy requirements, companies’ usage of data centers is a uniquely ripe area for incorporating environmental, social, and governance (ESG) principles – defined in Exhibit 1. This is due to the inherent ability to optimize data operations — 71% of organizations say their network assets are “mostly aging or obsolete” and, thus, not operating at full efficiency — and the capacity to measure impacts with greater precision than more traditional business functions, from the reduction of carbon footprint to recouped energy costs.

In the following sections, we will explore data centers’ environmental, social, and governance-related impacts before examining the benefits corporations can reap by optimizing IT operations in alignment with ESG principles.

ESG efforts can benefit companies in numerous ways, from boosting their reputation and mitigating risk to significant cost reduction. By addressing inefficiencies, companies cannot only improve their sustainability but also their bottom line, offering a promising financial outlook.
Nearly two-thirds of public companies in the US disclose sustainability information. Gartner reports that 9% of CEOs place sustainability among their top three business priorities, and almost 70% of CEOs plan to invest in new sustainable products and make existing products more sustainable.
The benefits of ESG-aligned optimization are tangible: in 2023, the Dutch government streamlined its data operations to employ energy-efficient hardware and next-gen cooling systems, reducing energy consumption by a substantial 45%. The primary digital infrastructure company Equinix retooled their data operations to cut emissions by 24% and employ 96% renewable energy — earning them the highest-ranking score for the prestigious CDP climate change ranking as a result. Exhibit 2 presents an overview of ESG-oriented considerations.

Data centers have notable environmental and operational downsides that become more pronounced as the scale of their use has continued to increase. Given their near-exponential growth, addressing the data centers’ negative impacts will only become a more pressing priority for companies in the near future. ESG-aligned impact mitigation can augment broader IT strategies around cost-cutting and optimization and bolster companies’ ESG ratings and perception in the eyes of the public and investors.

E: Environmental Impacts of Data Centers
Energy Use & Carbon Emissions

Electricity consumption is inherently cost-intensive and should be minimized wherever possible for an enterprise’s bottom line. This is even more prudent in the data center space: CBRE reports that coinciding with record demand, North American data center pricing is reaching all-time highs, with kW/month pricing growing 18.6% YoY into 2023.
Data centers consume remarkable amounts of electricity. Servers require around-the-clock energy to power computing and a host of resource-thirsty supporting functions like cooling, which necessitate tremendous amounts of air, water, and electricity to function — on which the average data center expends 40% of its power.
Across combined functions, the average data center can be 40 times as energy-intensive as an office building. US data center demand is forecasted to grow by 10% each year until 2030 (see Exhibit 3), ballooning from a current consumption rate of 20 GW to almost 35 GW over the same timeline — a notable rate when one GW can power up to 750,000 homes in the US.
Further, greenhouse gas emissions can factor heavily into a company’s ESG ratings, especially as data center-related emissions often result from core business operations. MSCI, an ESG rating provider, notes that “carbon emissions are highly correlated with E-pillar scores where they are financially relevant,” emphasizing the pertinence of reducing carbon emissions for companies with data center operations.

Water Consumption
Beyond their electricity and material needs, data centers are also
notoriously water-thirsty operations due to cooling needs, wastewater processing, and climate controls (e.g., humidity controls). Large data centers can require up to 5 million gallons of water a day — equivalent to the daily needs of a 50,000-person U.S. town. In 2022, Microsoft’s water usage jumped 34% YoY due to the demand for data center operations (see Exhibit 4).
In addition to financial costs, data center water use incurs significant negative ESG impacts in their operating areas. Data centers use more water than usual from regions with limited water supply. This overuse of water harms locally reliant communities and creates significant challenges for data center operators around managing resources, reducing risks, and upholding social responsibilities.
The determination of corporate ESG ratings considers data centers’ water consumption and impacts on regional water supply. Sustainalytics, an independent ESG ratings provider, evaluates multiple water-related factors in generating ESG ratings, including water management programs, water usage intensity, and physical climate risk management, all of which factor into a company’s public sustainability score.

Material Consumption & E-Waste Generation
Throughout the data center lifecycle (i.e., from raw material extraction to end-of-life disposal), data centers consume vast amounts of metals, plastics, and rare earth elements, creating waste every step and resulting in habitat destruction, resource depletion, and pollution.
Once constructed, the rapid turnover of technology in data centers leads to the generation of immense amounts of electronic waste (e-waste), including outdated servers, storage devices, and networking equipment. Yearly, this adds up to around 2 million tons or about 4% of all global e-waste; the UN reports that only 20% is formally recycled.
IT Asset Disposition (ITAD) is widely recognized as an area where company decisions can significantly impact ESG scores — not only on the environmental and e-waste front but also in the context of social pillars such as data security. Companies that minimize e-waste while simultaneously destroying sensitive data stored on old IT assets can realize benefits in their ESG ratings.

S: Social Impacts of Data Centers
Safeguarding user data within data centers is not only a technical concern but a significant social issue with tangible ESG rating impacts.
At the core of their operations, data centers must ensure the protection of user data. Risks of unauthorized access, breaches, and data misuse are rife, exposing sensitive user information to the public. As recently as 2022, researchers found over 20,000 data center management systems (e.g., infrastructure management, monitoring software, HVAC control
systems) publicly exposed to hackers — opening them up to potentially catastrophic data breaches and related lawsuits. The Sustainability Accounting Standards Board (SASB) lists several social KPIs relevant to the software and IT services industry, including several data breaches and users affected by them, the percentage of data breaches involving personally identifiable information, and the number of users whose information is appropriated for secondary purposes.
Companies with data center operations looking to develop and maintain strong ESG ratings will benefit by scoring well in these metrics.

G: Governance Impacts of Data Centers
Regulatory compliance, transparency, and risk management all impact a company’s ESG strategy and resulting ratings. Though the protection of user data is ultimately a social impact under the pillars of ESG, the regulatory ramifications of data breaches and similar violations can extend far beyond a mere public relations risk, exposing companies to tangible financial consequences. In 2019, Facebook notoriously
experienced a massive user data breach that exposed the information of some 530 million users, resulting in serious regulatory ramifications to the tune of a $5 billion settlement paid to the Federal Trade Commission for violations of risk disclosure.
Beyond data protection and associated laws and guidelines,
corporations must contend with an ever-evolving ESG regulatory environment. As regulations like the SEC’s recently proposed climate disclosure rules become increasingly more complex and stringent, adherence to principles of adroit governance is a highly important tenet of broader alignment with ESG principles and will reflect well when companies receive ESG ratings and scores.

1. Move Operations to a Cloud-Based “Hyperscale” Data Center:
Switching from on-prem operations to a “hyperscaler” — also known as a public-cloud data center provider — can reduce carbon footprint by up to 98%, among other benefits (see Exhibit 5). Hyperscalers offer a leg up regarding the efficiency of data center operations due to their singular focus on data center management and leverage of economies of scale.

2. Rethink On-Prem Data Centers:
For corporations continuing to utilize their on-prem data centers, restructuring operations can maximize efficiency and provide ESG-related benefits. Strategic actions include:

a. Conduct a Lifecycle Audit: Lifecycle audits are a first step towards rethinking on-prem operations, offering comprehensive
examinations that survey a data center’s environmental and
operational impacts throughout the entirety of its lifespan, from
planning to decommissioning. These analyses are conducted with the goal of identifying areas of improvement, resource utilization optimization, and reducing carbon footprint.

b. Move Towards Optimized, Efficient Equipment: To optimize an existing data center, companies can look to reshape their operations around efficiency and low environmental footprint.
Upgrading to modern equipment (e.g., server processors, storage, infrastructure) is a quick-win: for example, moving from 2017 Intel Xeon Gold processers to a 4th gen AMD EPYC 9334 processor would allow a data center to use 73% fewer servers and 65% less power.
Server virtualization and consolidation (i.e., running multiple
applications on one server, allowing fewer servers to run at higher utilization rates) are being increasingly employed to shrink physical compute needs and associated power consumption. Notably, the State Department underwent virtualization efforts to decrease costs and reach its environmental goals.
Companies can look beyond servers to implement automated storage provisioning, which reallocates unused storage to maximize utility by more than 95% through the elimination of redundant data. Data storage can be further improved by utilizing lower-speed hard drives that reduce energy consumption and solid-state drives that eschew the need for spinning disks.
Additional efficiency can be attained by improving infrastructure in cooling solutions, airflow management, water recycling, and more.

c. Source Renewable Energy for Data Center Operations: Data centers account for over half the global corporate renewable energy purchases. Whether collaborating with electricity utilities, regulators, or project developers, data center operators can further invest in renewable energy and prioritize the identification of projects that enhance the local grid and minimize carbon emissions.

3. Improve Reporting & Transparency to Assess Current State, Optimize Operations:
Increased reporting and transparency of sustainability metrics and ESG data can help alleviate many of the negative impacts of data centers and point companies toward a feasible target state. These improvements can be considered within the context of the objectives pursued by SASB — more specifically, the KPIs within the Software and Information Technology Services industry standards (see Exhibit 7).
Standardized industry-specific ESG KPIs benefit companies by allowing robust data collection and reporting to track environmental footprints. These KPIs measure emissions output, water consumption, and electricity usage, allowing corporations to create ESG-related benchmarks and track their progress.

Many companies operate data centers that are inefficient, outdated, and not fit for their needs. With a knowledge of ESG principles in mind, rethinking data center operating models can allow companies to unlock technology benefits while simultaneously achieving sustainability goals.
This shift not only leads to immediate benefits but also ensures a sustainable future. Of course, companies should not reconfigure their operations solely for ESG benefits; however, developing the “muscle” that seeks to minimize negative externalities and maximize efficiency and social benefit in the context of larger initiatives is conducive to reaping the rewards of ESG adherence.
Whether an enterprise chooses to engage a third-party cloud data center manager or optimize its own on-prem operations, incorporating an ESG mindset provides notable benefits to a company’s bottom line but also to its enhanced reputation, stricter risk mitigation, and higher efficiency.
Kepler Cannon specializes in providing comprehensive enterprise IT and data center solutions. We offer tailored strategies that help organizations design and construct efficient and scalable data centers and evaluate third-party data center options. By integrating energy-efficient design, green technologies, and responsible resource consumption, we assist organizations in aligning their data center initiatives with ESG goals, fostering environmental stewardship, and driving long-term sustainability.