ESG reporting: Carbon in the cloud

Environment, social, and governance (ESG) concerns have become increasingly important for all organizations. Within the CIO domain, a key environmental concern is datacenter power consumption and the carbon emissions created to produce that electrical power. As many organizations shift services from in-house datacenters to external cloud services, the potential for reduced power consumption and reduced carbon emissions presents an opportunity to report improvements in ESG.

Carbon emissions for datacenters exceed the airline industry

Most people do not understand complex global datacenters. However, most people understand, and frequently use, airlines. An MIT report determined that the carbon footprint for all datacenters globally, about 0.3% of global carbon emissions, exceeds carbon produced by the airline industry globally. Of course, datacenters that rely on power from coal burning plants produce more carbon emissions than those that rely on hydro or nuclear plants. As organizations increasingly outsource to cloud service providers for many technical and financial benefits, the power consumed and carbon produced are now controlled by the provider, wherever its cloud datacenters may be.

Datacenter power consumption is growing rapidly because of increasing use of artificial intelligence (AI) and other services such as crypto assets. IDC predicts that AI datacenter power consumption will grow by a five-year CAGR of 40.5%, from 2022 to 2027 (AI Datacenter Capacity, Energy Consumption, and Carbon Emission Projections, May 2024). The Conference Board, meanwhile, reports that the rising demand for datacenters and computing power has the potential to overload the U.S. power grid, as that demand is expected to more than double over the next decade. The U.S. is home to approximately one-third of more than 8,000 global datacenters.

Cloud carbon need not be reported

International Financial Reporting Standards (IFRS) defines globally accepted accounting standards, including ESG reporting. IFRS now requires publicly traded organizations to report on ESG in their financial statements. ESG reporting requires that carbon emissions from three sources — referred to as Scope 1, 2, and 3 — be assessed.  Scope 1 emissions come directly from sources owned or controlled by an organization, such as emissions from an airline fleet. Scope 2 emissions come from indirect sources such as employee travel on airlines or electricity purchased to power an in-house datacenter. Scope 3 emissions are the result of activities from assets not owned or controlled by the reporting organization, such as a cloud datacenter. Mandatory ESG reporting covers Scopes 1 and 2; Scope 3 reporting is voluntary. (ESG for the CIO: An Organizational Perspective, September 2022).

An organization that needs to improve its ESG profile may be inclined to outsource more to a cloud service provider. Many of these providers are ESG leaders, acknowledging the importance of preserving the planet while also maintaining a cost-efficient datacenter environment. But not all cloud providers are on the same ESG level; some have better sustainability strategies than others, and some providers’ strategies are more effective. Importantly, the voluntary nature of Scope 3 emissions reporting allows clients to improve their ESG profile while becoming more technologically efficient with cloud services. Some clients, but not all, may choose to report cloud Scope 3 emissions. For an investor, or an ESG auditor, this gap could enable compute-intensive organizations to offload their Scope 3 carbon emissions to the cloud.  Some companies might choose to do Scope 3 reporting, thereby gaining an ESG advantage by virtue of their cloud provider’s sustainability practices. And some companies might choose to skip Scope 3 reporting, perhaps because their cloud provider has relatively poor sustainability practices. Rapid adoption of AI by many organizations will expand this opportunity.

CIOs: Be wary of greenwashing

CIOs are leaders in technology, but they may not be leaders in ESG ethics. Cloud services have proven to be a great advantage for most organizations with lower costs, improved efficiency, better reliability, etc. We suggest that CIOs must be cautious of greenwashing (i.e., inaccurate carbon reporting) from some cloud providers. CIOs must be aware of the carbon implications of moving from in-house to cloud datacenters for any corporate computing. CIOs should also understand a cloud provider’s carbon reputation, with global datacenters and local power sources.  Standard & Poor’s Global Sustainability Yearbook is one source of ESG information for public companies.  We advise CIOs to be skeptical and seek independent verification of carbon emissions for their cloud providers. For example, financial audit firms can provide an arm’s-length review of ESG carbon reporting. Investors and regulators will evaluate the ESG reputation of your organization, not the cloud provider.

CIOs evaluate and pursue cloud services for business and technical reasons.  Now they must also be fully aware of the ESG carbon reporting nuances related to cloud services.

International Data Corporation (IDC) is the premier global provider of market intelligence, advisory services, and events for the technology markets. IDC is a wholly owned subsidiary of International Data Group (IDG Inc.), the world’s leading tech media, data, and marketing services company. Recently voted Analyst Firm of the Year for the third consecutive time, IDC’s Technology Leader Solutions provide you with expert guidance backed by our industry-leading research and advisory services, robust leadership and development programs, and best-in-class benchmarking and sourcing intelligence data from the industry’s most experienced advisors. Contact us today to learn more.

Learn more about datacenter power consumption in these reports from IDC: AI Datacenter Capacity, Energy Consumption, and Carbon Emission Projections and Datacenter Dilemma: Balancing Capacity Demand With Environmental Responsibility.

Dr. Ron Babin, an adjunct research advisor for IDC, is a senior management consultant and professor who specializes in outsourcing and IT management (ITM) issues. Dr. Babin is a professor in IT management at the Ted Rogers School of Management at Ryerson University in Toronto, as well as its director of Corporate and Executive Education.

Babin has extensive experience as a senior management consultant at two global consulting firms. As a partner at Accenture, and prior to that at KPMG, he was responsible for IT management and strategy practices in Toronto. While at KPMG, he was a member of the Nolan Norton consulting group. His consulting activities focus on helping client executives improve the business value delivered by IT within their organizations. In his more than 20 years as a management consultant, Babin has worked with dozens of clients in most industry sectors, mainly in North America and Europe. Currently, Babin’s research is focused on outsourcing, with particular attention to the vendor/client relationship and social responsibility. He has written several papers and a book on these topics.