The global data center industry is facing a critical challenge: nearly 80% of its capacity is vulnerable to severe climate hazards, including flooding, extreme winds, and wildfires. This alarming statistic, revealed by a recent study by First Street, a climate risk analytics firm, highlights the urgent need for data center operators and investors to reconsider their strategies in light of the changing climate. The study analyzed 97 global data center markets, emphasizing the growing risk posed by climate-induced events. While acute hazards like strong hurricanes can cause immediate disruptions, it's the chronic effects of climate change that pose the most significant long-term threats. The report underscores the limitations of traditional underwriting models that rely on historical data, which may not accurately reflect the evolving climate risks. Matthew Eby, CEO of First Street, warns that these outdated models fail to provide a comprehensive view of risk, especially as heat, drought, and water stress intensify. The study also found that over half of all data centers globally are in markets exposed to chronic climate stress, such as extreme heat and drought, which can significantly impact energy efficiency and operational costs. This chronic stress, combined with the acute hazards, can lead to increased downtime, higher insurance premiums, and substantial repair costs. The study's findings raise concerns about investors' approach to data center development. Many investors still rely on traditional metrics that do not account for the potential long-term impact of climate change on operating conditions. Data centers, designed to operate for 20 to 30 years, may face challenges that traditional models cannot predict. Eby suggests that investors who integrate climate factors into their underwriting and capital allocation decisions will be better equipped to identify resilient markets and manage risk effectively. However, some developers and operators are already taking proactive steps to address climate risks. Digital Realty, for instance, is implementing waterless or closed-loop water systems in its data centers worldwide, ensuring sufficient water for cooling even in water-scarce regions. While building adaptation measures can mitigate acute climate risks, the study emphasizes the importance of systems-level thinking. Developers must consider infrastructure, community demographics, and power access to fully understand and manage climate-related vulnerabilities. The Asia-Pacific region, with 89% of its data center capacity at risk, is the most vulnerable geographic area, according to the study. This is followed by the Americas (50% exposure) and Europe, the Middle East, and Africa (46% exposure). Some of the industry's fastest-growing markets, such as Northern Virginia, Johor in Malaysia, and Marseille, France, are also among the most exposed. In contrast, Nordic markets exhibit the lowest climate risk. The study's findings highlight the need for a comprehensive approach to climate risk management in the data center industry. By incorporating climate factors into underwriting and design, developers and investors can build resilience and mitigate the potential financial and operational impacts of climate change. As the climate continues to change, the industry must adapt to ensure the long-term sustainability and reliability of data centers.
