Vauban: A technology-enabled transition

This article is sponsored by Vauban Capital Partners

Digitalisation and decarbonisation both appear to be inexorable movements but, even so, for investors they can present a quandary. On the surface, at least, it is difficult to see where and how the resource consumption and emissions output of digital infrastructure fit within a world committed to the energy transition. How can investors pledge funds to much-needed digital assets without damaging the planet and ensuring fair access to digital infrastructure for all?

Elie Nammar, senior investment director and partner at Vauban Infrastructure Partners, notes that, far from acting in opposition to one another, digitalisation can actually help support the energy transition. To promote sustainability, both environmentally and socially, investors need to know which digital infrastructure assets they should channel their backing towards.

What is digital’s role in the energy transition?

Digital plays a role in the energy transition on two fronts. Of course, improving energy efficiency and lowering resource consumption for digital technologies is at the heart of digital infrastructure’s transition. But it can also help other sectors get better in their transition by providing the resources for data collection, storage and computing to enable the identification of the right levers to deploy and the validation of the transition’s progress.

It can’t be denied that digital infrastructure has a carbon footprint but there are ways of limiting this, such as by moving from copper broadband to fibre, operating more efficient data centres in terms of energy use and power usage effectiveness (PUE), or adopting renewable energy sources.

With digital infrastructure, you have to consume less energy or consume better. This implies reusing existing infrastructure where possible, prioritising local procurement and consuming less energy for the same output.

In addition to the direct environmental impact digital infrastructure has, it is important to remember digital’s role as an enabler of the energy transition for other sectors. Digital technologies allow you to measure and calculate impact in greater detail than ever before. If you want to move from point A to point B, the first thing you need to be able to do is to measure and assess your starting point so you can identify the best way forward.

With digital infrastructure that is becoming more and more available via higher coverage and capacity and lower latency, we are able to collect data and share it instantly, which allows for more efficient ways of working (eg, water distribution, public lighting, garbage collection, etc). We also need data centres to store and compute this data to use it efficiently.

Within the context of the transition, how have digital assets been performing?

Overall, digital assets have been performing well but that doesn’t mean that they haven’t faced challenges as a result of the energy transition. If you look at digital infrastructure in more detail, you typically have three asset types: fixed broadband, data centres and towercos. The environmental impact of these asset types can vary substantially.

Towercos are typically passive infrastructure assets that don’t have a lot of impact from an energy consumption perspective. They do require the consumption of resources for construction, of course, but many of the towers have already been built, so it is simply a case of maximising the lifetime of a towerco asset while optimising energy usage.

Similarly, fibre has a limited impact on the transition, so long as you reuse existing infrastructure to deploy your network and maximise local procurement. Fibre is also the most energy efficient broadband technology.

Then we get to data centres, and it is here where digital has the biggest impact on the transition. As an example, Microsoft recently reported that its carbon footprint increased by 30 percent since 2020, essentially driven by data centres needed for its AI investments.

Indeed, data centres consume a lot of energy and this is growing at a rapid pace, driven by people consuming more data than ever as more people are connected and each person on average consumes more content, that is of higher quality hence requires higher bandwidth (for example, when you move from HD to 4K and then to 8K, this involves the consumption of more and more data).

Another type of consumption stems from connected objects. While each object consumes very little data, the sheer amount of current and projected connected objects drives large amounts of data sets.

On top of that, you have artificial intelligence, which has emerged as a massive driver for data centres given the amount of data that is stored and, more importantly, the required horsepower to run the models that have and are being developed – for example, a ChatGPT query requires around 10x as much electricity to process as a Google search. This is likely to be further augmented with quantum computing.

All of this means data centres are set to become more relevant and prevalent in our lives, meaning a need for more energy to power them.

Then it becomes a question of what energy you are using and how efficiently. What is the PUE of your data centre? Is the necessary renewable energy infrastructure available to you? We have made the choice of investing in data centres in Iceland with a very efficient PUE and where energy is 100 percent renewable, making them highly sustainable for the future.

What are the key challenges for investors?

I think when you look at core digital infrastructure, there are few genuine challenges beyond the need to take into account market dynamics, mostly local and sometimes regional/global. Even the risk that comes from the fast pace of technological innovation is relatively limited for digital assets.

Fibre is very much future-proof and scalable, and it allows for the highest bandwidth at the highest service levels, so it is very hard to disrupt; typically new technology complements fibre where it cannot be deployed. There are fibre challenges of course, like overbuild and the regulatory landscape, but they are local and need to be managed on an asset-by-asset basis.

For data centre investments, on the other hand, it is important to have assets that are modular and can absorb innovations. Indeed, this is a space that is witnessing a lot of innovation to allow for higher output from the same infrastructure, be it via enhanced chips or optimised cooling systems that allow for higher efficiency and lower PUE. You also need to make the right investments in operations and maintenance to factor in disruption.

Regarding the macroeconomic climate, it has had a rationalisation impact on valuation (namely due to higher interest rates impacting debt), especially for fibercos and towercos where multiples had increased significantly in the past years. Data centres, on the other hand, similarly to renewable assets, have been more resilient with less of an impact.

This is essentially driven by the very high demand for such assets. Indeed, while fibre and towercos answer local demand, and the supply/demand gap is limited, data centres are in a global market and supply is significantly behind demand.

Overall, given that we are a long-term investor in core infrastructure that is essential for the functioning of our societies, our assets typically have downside protection and have their revenues linked to inflation, hence perform well in difficult times.

In relation to the energy transition, energy prices have had an impact on all sectors including digital, so your ability to secure long-term contracts and hedge fluctuation is key.

In the case of our data centres in Iceland, the fact that we have pass-through contracts – and also that the whole island relies on renewable energy – was an important protection against fluctuation and therefore a strong commercial argument for our customers.

Do regulations play a factor in investments?

Regulations are certainly important. On the digital front, a simple example can be seen regarding fibre connectivity in France.

It is one of the most advanced countries in Europe from a coverage perspective because there was a strategy from the regulator that allowed for concessions. This created the right conditions for a monopoly setup, so when incumbent operators weren’t interested in deploying assets in certain areas – usually more expensive rural ones – concessions drove investor interest. This has enabled the digital divide between rural and urban France to be reduced significantly.

Regulations also play a role in pushing assets in certain directions. This comes from both incentives and enforcements. For the energy transition, for example, this could mean mandating that certain KPIs are respected.

It may be difficult to predict exactly what impact emerging technologies like AI and quantum computing will have on our lives but, as they progress, we are also likely to see a greater role played by regulators. This will ensure these assets provide benefits for all, not just the few.

Whether you are ahead or behind the regulatory curve may vary but it undoubtedly plays a major role. Of course, regulations need to keep evolving as market conditions and technological conditions continue to shift.

What future role will digital infrastructure investments play within the energy transition?

The future of digital infrastructure is very positive. We are moving into a world that is increasingly connected, which drives a greater need for solid, resilient infrastructure, lower latency and higher service requirements. The demand for storage, transmission and computing capacity is only travelling in one direction.

Regarding the energy transition specifically, digital assets are set to play a fundamental role in minimising impact and maximising local resource use. They will prove key to improving an asset’s ability to meet its environmental and social goals.

This is similar to how digital infrastructure and the energy transition will dovetail in the future. The former will be help ensure the latter can be achieved.

We are very long-term in our thinking, taking a 25-year buy-and-hold approach which essentially allows us to make decisions that have longer-term impact, which is key in the energy transition that we are witnessing. When we invest, it is also important for us to build the right stakeholder relationships, whether with the public sector, private entities, management or other shareholders. You need to make sure that investments are a win-win for everyone.

Looking more broadly at ESG goals, how can digital infrastructure also help promote social sustainability?

If you consider fibre, for example, connecting remote regions in a more efficient manner means you can eliminate the digital divide between urban and rural areas you see in many countries. It is an enabler for people, allowing them to achieve their full potential – wherever they are located.

If you look back at the covid pandemic, you can see how important digital technologies are to social sustainability. They have allowed people to work remotely, something that is now part of our daily lives. Once you connect people, you reduce the distance and disparity between them.