Data centres are a vital cog in today's digital world, vast warehouses that contain servers that host and distribute the cloud-based applications we rely on to work, learn and socialise. Whenever we click on a photo stored on the cloud, we are accessing a data centre based who knows where.
While data centres have become increasingly important in our digital lives in recent years, the coronavirus pandemic has accelerated this long-term trend as more and more people play online games, host virtual meetings, use cloud-based storage or stream videos. Hugo Machin, co-manager of the four-star rated Schroders Global Cities Real Estate fund, refers to data centres as “the backbone of our communication age”.
Key components of data centres are fibre cables for the information to come in and out and lots of power, for the servers themselves as well as the huge cooling systems that allow them to function all day along. “The centres are very expensive to build - you need critical components and specific locations, which are harder to combine than you think,” says Machin, who points out that diversification is another key element. "If your server goes down or there is a fire and you operated from just one location without back-ups, that would cripple your business," he says.
Machin invests in data centres in North America and China, where growth is particularly strong because of the large population and the number internet users. He likes companies such as Equinix (EQIX), a specialist data centre company which provides space to big customers such as Amazon.
Data Servers and ESG
Data centres consume roughly 3% of all electricity generated on the planet and their energy consumption is growing at a rate of about 4% a year. But the majority of the world’s data centres are located in deserts or in temperate zones such as Northern Virginia, which exacerbates the amount of energy required to operate. It is no wonder, then, that concerns have been raised about the ESG credentials of these centres.
But Machin says the efficiency of data centres in utilising power is getting much better:“We’ve been engaging with some companies on the usage of power. Some owners of data centres are very conscious of the level of power consumption.”
Anjali Bastianpillai, product specialist at Pictet Asset Management agrees, pointing to so-called “hyperscalers”, which run entirely on renewable energy, for example clean electricity brought directly from wind or solar farms close to the data centres, and also focus on achieving carbon neutrality. She says: “Google, for example uses highly efficient cooling systems and high-performance servers which are custom-designed to use as little energy as possible. We see this as a positive impact on the environment and carbon neutrality”.
Meanwhile, Guillaume Mascotto, head of ESG at American Century Investments, believes there are three key ways to reduce the CO2 emissions: “Firstly, servers should be located in remote areas where renewable energy sources are available,” he says. He highlights how some data centres have been successfully established in Nordic locations where hydroelectric power generates electricity and Arctic air cools servers. Visa achieved its goal of using 100% renewable electricity by 2020 by leveraging renewable energy options at four of its key operations in the US and UK.
“Secondly, using a small number of physical servers to run a host of virtual servers can improve operating efficiency and reduce energy and cooling costs,” he adds. Lastly, he advises a shift to large cloud-based centres: “Companies looking to reduce their carbon footprint can transition from smaller enterprise data centres to hyperscale providers such as Amazon Web Services."
Nowadays, there is a lot of choice in terms of data centre companies. From an investment perspective they can vary widely and investors should understand the sectors and the companies they invest in before making rushed investments. “There are good data centres and less good data centres,” says Machin. “We live in the information age, all we do is monetising ideas, there is very little manufacturing going on in terms of growth components of economy.”
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