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Climate Risk Significantly Impacts Global Data Center Investment Performance

A detailed analysis by First Street has revealed that an alarming 79% of global data center capacity is currently at risk due to elevated climate hazards. As digital infrastructure continues to grow rapidly, it is vital for investors and stakeholders in the tech industry to understand how climate-related challenges can influence investment decisions and performance metrics in the data center domain.

The Growing Importance of Climate Risk in Data Centers

Traditionally, investors in data centers primarily focused on factors like power availability, connectivity, and demand growth. However, climate risk has become a critical but often overlooked component of this landscape. In their comprehensive study, First Street examined 97 global data center markets and discovered that many of the top-performing areas are positioned in regions vulnerable to various environmental threats such as flooding, extreme heat, wildfires, wind events, and droughts.

The analysis highlights significant findings regarding climate exposure:

• - 54% of the global data center capacity operates in markets exposed to ongoing climate stress, which includes challenges such as extreme heat and drought. These conditions subsequently lead to increased cooling costs and lower operational efficiency, ultimately squeezing profit margins.
• - 79% of total data center capacity is under elevated acute risks from environmental threats like catastrophic flooding, wind, and wildfires. These factors can disrupt business operations, increase downtime risks, and inflate insurance and repair expenses.
• - Exposure to chronic climate challenges varies drastically by region. For instance, the Asia-Pacific (APAC) market reports that 89% of its data center capacity is at risk, compared to 50% in the Americas and just 46% in Europe, the Middle East, and Africa (EMEA).

Insights on Data Center Investment Potential

The report further emphasizes that not all data center markets are created equal when it comes to climate risks. Investable regions such as Northern Virginia, Johor, and Marseille are part of the highest climate-risk tier globally, raising concerns about the sustainability of these locations for future data center investments. Meanwhile, Nordic countries, which are characterized by lower climate risks, present a stark contrast and could be seen as more stable investment landscapes.

Dr. Jeremy Porter, Chief Economist at First Street, stated, “Location significantly determines operational costs for data centers over the long term. Factors such as cooling, water supply, and reliability heavily depend on geographical settings.” He emphasized that valuing a data center based solely on historical growth metrics without incorporating climate considerations would misguide investors.

Matthew Eby, the Founder and CEO of First Street, added, “Most traditional asset underwriting relies on historical performance data. However, climatic conditions are evolving, and outdated models fail to capture the complete risk narrative.” He urged investors to adapt and account for these new variables when assessing market potential to identify resilient areas and avoid mispriced vulnerabilities.

Conclusion

As the digital infrastructure sector continues its expansion—with projections nearly doubling by 2030—the imperative to integrate climate risk into valuation and underwriting processes has never been clearer. The findings from First Street serve as a wake-up call for stakeholders to reassess their strategies in light of climate realities, which not only impact immediate investment returns but also determine long-term sustainability in an increasingly volatile environment.

For further information and detailed insights, the complete report can be accessed at firststreet.org/research.