Why Sustainability-Linked Loans Will Influence the Data Center Industry

Better Business, Better World: Why Sustainability-Linked Financing Will Influence the Data Center Industry
Written by Publishing Team

A cooling wall for Delta-3 units inside an aligned data center. (Photo: Bias)

In this edition of Industry Voices, Aligned’s Chief Financial Officer Anubhav Raj explores how the use of sustainability-related loans has grown in recent years, and how it will impact the data center industry in the years to come.

Anubhav Raj, CFO of Compliant Data Centers

As pressure continues to grow on companies and governments to drive positive environmental and social change, sustainability-related financing has grown in recent years to impact virtually every industry sector, including the data center industry. According to a Bloomberg report, in the first half of 2021, sustainable debt issuance reached $825 billion, which is an eight percent increase over the $759 billion issued during the whole of 2020.

Sustainable finance refers to any form of financial services that integrates environmental, social and governance (ESG) criteria into business or investment decisions for the lasting benefit of both customers and society. These criteria can refer to mitigating the effects of climate change; issues surrounding diversity, inclusion and community investment; and ensuring social and environmental considerations in the management of both public and private institutions.

While a sustainability-linked loan can be used for any purpose, the hallmark of this debt instrument is that the borrower’s performance is measured against pre-set sustainability goals that affect the interest rate, motivating improved performance over time. This is in contrast to a green loan which is provided exclusively to finance or refinance new or existing green projects, but when pricing is not linked to any explicitly stated objectives. In the environmental field, sustainability-related syndication objectives could include reducing greenhouse gas emissions and water consumption, and increasing the amount of renewable energy the borrower generates or uses.

The first corporate market sustainability link loan to Amsterdam-based Philips was issued in 2017, with a group of 16 financial institutions. Although sustainability-linked financing is more popular in the European loan market, General Mills announced last spring that it had closed its first sustainability-linked loan facility to a US company for packaged goods. Emphasizing the ambition to put money where it is, the issuance of sustainability-related loans reached $350 billion in the first half of 2021, compared to $197 billion in the whole of last year.

With data centers accounting for a significant portion of global energy use and CO2 emissions, data center providers have a responsibility to manage their own environmental impact and other ESG risks in their business practices.

Environmental and social weight loss

To understand how sustainability-related financing works in practice, consider my company’s experience.

Last year, Aligned completed its first green data center securitization and first-ever sustainability-related financing.

At Aligned, a component of interest rates on our $1 billion credit facility is directly related to our core ESG objectives and how well we perform on renewable energy, sustainability reports and safety key performance indicators (KPIs). For example, we’ve pledged to match 100 percent of the company’s annual energy consumption with zero-carbon renewable energy. We have pledged to support transparency and continuous improvement across sustainability best practices, including reporting. This objective aligns the company’s ESG reporting efforts with a leading global standard, increasing consistency in ESG disclosure to compliant stakeholders. If we meet our obligations, we take advantage of reduced interest rates; If we don’t, the prices either stay the same or go up, depending on the actual performance.

Aligned was recently notified that we have met and successfully exceeded all of ESG’s core objectives and KPIs, which will be reflected in the upcoming GRESB Assessment, a global assessment that measures ESG’s performance of real assets, which we are strongly encouraged to undertake on an annual basis by our venture capital partner. The GRESB real estate standard covers more than 1,200 real estate companies, real estate investment trusts (REITs), developers and more than 540 infrastructure funds and assets, which collectively represent more than $5 trillion in real asset value.

It is undeniable to raise the concept and practice of environmentally and socially sustainable growth to the prevailing public consciousness. Not surprisingly, companies are increasingly competing over the relative goals of sustainability. Hence, data center providers will need to start demonstrating that they are gaining traction, both environmentally and socially, or risk falling out of favor with customers and investors alike.

Anubhav Raj is the Chief Financial Officer of Aligned. Anubhav is an expert in investment banking, public offerings, and financial and operational strategies. As Aligned’s Chief Financial Officer, Anubhav is responsible for the company’s financial and operational strategy.

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