green bonds

Environmentally conscious investors push the need for data centre green bonds

16 March 2021 | Abigail Opiah

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There is a growing community of investors that have social and environmental priorities in their investment thesis, which is pushing the explosion of green bond issuances. 

But what exactly do companies mean when they say they have issued a green bond? A question some might wonder about, particularly if they are not in that space.

Aaron Binkley, senior director of sustainability at Digital Realty, tells Abigail Opiah that companies issue bonds regularly to finance and refinance the ongoing operations and growth of their business.

Green bonds are a flavour of a traditional corporate bond where the proceeds are earmarked to be allocated to eligible sustainability and green investments and expenditures.

“On the surface, it looks just like any other corporate bond, but there are additional requirements in terms of how that money is allocated after the company receives those funds,” Binkley explains.

“Those additional requirements are specific to meeting certain sustainability and environmental performance standards with the projects or the investments that are tied to it.”

Binkley heads up the environmental, social and governance (ESG) programmes for Digital Realty globally. He also coordinates with a number of the business units and functional areas to ensure that everyone is working in the same direction on the company’s ESG agenda. That includes green building certifications and working with the operations team for energy efficiency improvements and PUE reductions across the global data centre plate. That also includes renewable energy sourcing, which Binkley leads in partnership with the energy supply chain team. 

“My team coordinates the ESG reporting and supports green bond issuances from the sustainability perspective, and we handle most of the customer and investor-facing sustainability and ESG dialogue that takes place across Digital Realty,” Binkley adds.

Green bond benefits

Binkley reveals that the other element that provides a value-add is that green bonds allow data centre companies to reach out and engage with socially responsible investors. 

By default, those investors are the ones holding data centre operators accountable in regard to their sustainable builds, projects and deployments.

“We are able to reach those investors in a more direct and more effective way. It essentially expands the pool of eligible buyers for the bond and that increases liquidity for the bond, which is good for issuers,” he says.

“There has been a perception among the non-data centre industry stakeholders that the data centre industry cannot be green, with these stakeholders questioning the amount of energy data centres use coupled with the fact that they are on 24/7.

“Data centres are, in fact, driving a more sustainable future; and with green bonds, it allows us to tell our story, in the sense that we are able to show that data centres can be responsible in terms of their impact on the environment. 

“It also allows us to show that data centres can operate sustainably and can be built and powered in a sustainable manner. And being able to bring that to the investment community broadly, and socially responsible investors, is another benefit that we've seen over the years.”

Digital Realty has been in the green bond market for a number of years now. The company was the first data centre real estate investment trust (REIT) to issue a green bond.

The first green bond the data centre REIT issued was about $500 million of net proceeds, issued back in 2015.  Digital Realty was also one of the first REITs in the US to issue.

Like Binkley, David Doyle, chief financial officer at Global Switch, echoes the notion that there is an ever-expanding pool of interested investors who are keen to access green bonds.

“Typically, you’ll have real estate investors, technology infrastructure investors, but there is also a bigger pool of institutional investors who are interested in investing in green bonds. It is an attractive way of financing growth,” adds Doyle.

“Global Switch is also using the proceeds of those bonds to help the ongoing investments it is making to grow the business, building new energy-efficient data centres as well as redeveloping, in a more energy-efficient manner, existing data centres.

“Green bonds fit very nicely in demonstrating our commitment to sustainability and the wider ESG agenda.”

Bond sizing

The decision around the sizing of the bond would typically come out of a company’s CFO and their team in terms of what the business’s capital needs are. 

“There is a dialogue early on about what green projects we have in the pipeline and what renewable investments we have made or will make,” says Binkley.

“This is so that we can build a book of our sustainable efforts and the investments associated with those. We match that up with what the needs for funding are for the business and try to tie those out so that the number makes sense.”

In 2016, more than $87 billion in green bonds were issued worldwide, more than double the $42 billion in 2015, when Digital Realty first entered the market.

According to estimates by Bloomberg New Energy Finance in 2017, the volume of green bonds issued that year were expected to reach $123 billion.

In 2020, total green bond issuance passed $1 trillion since the market’s inception in 2007.

“All companies look at the appropriate means of financing our balance sheets and funding our growth. That is, as always, a mixture of debt and equity and any good company is doing its best to have the lowest overall cost of capital that it can have in order to generate the highest level of returns,” Doyle explains.

"Issuing green bonds won’t be easy for everyone to do but the data centre sector, as a general statement, is very focused on the energy efficiency of the data centre.

“Data centre end users are also deeply interested in data centre providers designing and building data centres that are using energy in an efficient manner because, ultimately, it becomes their cost.

“In terms of others following suit, I would absolutely expect that others would do so. However, there are companies that don’t have the same amount of balance sheet strength or size so it would be much harder for them to issue below investment grade bonds — there are much higher interest rates on them. 

“It would be harder for some of those companies to issue bonds in the first place, therefore harder for them to issue green bonds. It will be the data centre operators that have existing bond programmes who will go the extra step to take what was an existing bond programme to issue green bonds instead.”

In October last year, Global Switch announced its inaugural €700 million green bond issuance.

Doyle says that, in euros, €500 million is a typical benchmark bond size, and in this case Global Switch was successful in raising more than the benchmark size. Part of that was due to the fact that the bond was designated as a green bond.

The company’s green bonds have now been included in two of the lead metrics, Bloomberg Barclays MSCI Green Bond Index and CBI (Climate Bonds Initiative) Green Bond Database.

“There are market norms of what is called an industry benchmark issue — depending on which currency you are raising the debt in, there are different benchmark sizes of bond,” added Doyle.

“The size of the bond is about market norms and the company’s need to fund its growth.”

Predictions 

Both Binkley and Doyle predict that the data centre sector will continue to witness a growth in the number of green bond issuances as the push for sustainability remains a number one priority in the industry.

“We set a science-based target to reduce our global carbon footprint by 2030, so that's really driving us on a go-forward basis to have a company-wide, top-to-bottom approach and commitment to reduce the carbon footprint of our business,” Binkley concludes.

“You will see a long-term focus from us on all the elements that we need to bring significant change in reductions to our carbon footprint. 

“The data centre industry as a whole is talking a lot more about carbon and working toward identifying ways to holistically move the needle through the industry share of carbon reductions.

“We have seen, in the past few years, several other data centre players also issue some kind of green bonds and we would expect that others in the industry will take a look at the green bond market and potentially look to participate.”