Data centres’ expansion fuels climate dilemma for investors amid AI-driven growth

Institutional investors face escalating challenges as the rapid growth of data centres driven by AI and cloud computing threatens to undermine global sustainability goals, prompting urgent debates on decarbonisation strategies and energy security.

Institutional investors are confronting an escalating dilemma as they seek to balance ambitious climate commitments with growing exposure to energy-intensive data centres, a rapidly expanding asset class fuelled by the AI revolution and cloud computing boom. According to a recent study, the tension arises because data centres, critical to digital infrastructure, consume vast amounts of electricity and generate substantial carbon emissions, complicating investors’ efforts to maintain sustainable portfolios while taking advantage of the lucrative opportunities in this sector.

A Morgan Stanley report projects that the global data centre industry will emit roughly 2.5 billion metric tons of CO₂-equivalent emissions by 2030, driven primarily by tech giants scaling their data-processing capabilities for AI and cloud services. This surge in emissions threatens to undermine overall corporate greenhouse gas reduction goals despite these companies’ pledges to achieve net-zero targets within the decade. The report emphasises the urgent need for increased investment in decarbonisation technologies, including renewable energy sources and enhanced energy efficiency, if climate goals are to be met.

The environmental footprint of data centres is evident on a national scale in countries such as Ireland, where the rapid proliferation of these facilities has led to electricity consumption surpassing that of all urban households combined. In 2023, data centres accounted for 21% of Ireland’s total electricity use, prompting grid operators to halt new developments near Dublin until at least 2028 to avoid blackouts. This highlights broader concerns regarding energy security and reliance on fossil fuels, as well as the significant environmental challenges posed by unrestricted data centre growth.

Institutional investors face a profound carbon dilemma, according to analysis by MSCI. Despite the strong financial appeal of data centre assets, their expansion is tightly linked to rising carbon footprints, complicating alignment with sustainability goals. Investors committed to environmental, social, and governance (ESG) standards must now navigate this tension between opportunity and responsibility, exploring how to integrate decarbonisation strategies without foregoing exposure to an essential component of the modern economy.

The implications of climate change further exacerbate the challenges faced by data centres. The World Economic Forum forecasts that climate-related hazards, including extreme heat and drought, could add $81 billion in annual costs to the sector by 2035, rising to $168 billion by 2065. This outlook stresses the need for data centres to prioritise energy-efficient, climate-resilient infrastructure when deciding on location and design, factors that will increasingly influence operational costs and viability.

The expansion of AI-driven infrastructure notably escalates these environmental concerns. Microsoft, for example, has seen its carbon emissions rise by nearly 30% since 2020 due to the growth of its AI data centres. Large-scale investments such as the Stargate joint venture, which aims to invest $500 billion into US data centre infrastructure over four years, potentially consuming over 1 gigawatt of electricity annually, signal a significant intensification of energy demand in the sector. Such developments underscore the pressing need for sustainability to be embedded in data centre planning and operations.

A recent US study of over 2,100 data centres reveals that they consume more than 4% of the nation’s electricity, with 56% of that energy coming from fossil fuels. These facilities generate over 105 million tons of CO₂-equivalent emissions annually, with a carbon intensity nearly 50% higher than the US average. This evidence further stresses the importance of robust carbon mitigation measures for data centres, which remain a major contributor to national and global emissions despite growing awareness and pledges.

In summary, as data centres become indispensable to modern digital economies, their carbon footprint presents a crucial challenge for investors and policymakers alike. Balancing the imperative to support technological advancement with the urgent need to meet climate commitments demands heightened focus on cleaner energy, greater efficiency, and resilient infrastructure. Without decisive action, the very assets powering the AI revolution may undermine broader sustainability goals, forcing a difficult reckoning for those invested in both technology and the planet’s future.

📌 Reference Map:

• ^[1] Carbon Pulse – Paragraph 1
• ^[2] Reuters (Morgan Stanley report) – Paragraph 2
• ^[3] AP News (Ireland data centres) – Paragraph 3
• ^[4] MSCI – Paragraph 4
• ^[5] World Economic Forum – Paragraph 5
• ^[6] Comgest investment letter – Paragraph 6
• ^[7] arXiv study – Paragraph 7

Source: Fuse Wire Services