The term ESG emerged in the 2000s as investors began examining the role of environmental, social, and governance value drivers in asset management and financial research. Since then, ESG has evolved into one of the most significant agendas across all economic sectors, with implications extending well beyond asset value and financial impact. Major commitments are being made in company boardrooms, but embracing the ESG mandate poses challenges from both reporting/technical and commercial/strategic perspectives.
While holistic ESG data capture and reporting has gained prominence relatively recently, initiatives focused on corporate social responsibility and sustainability have been pursued for decades, albeit with varying levels of enthusiasm. As companies work to capture and share data showcasing their broader ESG commitments and progress, investors, consumers, technology buyers, end users, and suppliers are increasingly considering ESG variables in their decision-making. This trend confers a competitive advantage to companies with more attractive ESG and sustainability metrics.
The Take
Organizations are increasingly focusing on their environmental impact and how environmental factors influence their business activities. S&P Global ESG Scores evaluate sustainability based on the risks and opportunities highlighted in key environmental, social, and governance/economy public disclosures. 451 Research's Market Monitor used S&P Global Sustainable1 ESG metrics to score IT infrastructure providers. The data shows that cloud infrastructure vendors have higher environmental scores compared to their hosting and colocation counterparts, as cloud servers are generally more efficient and highly utilized than enterprise servers. For many organizations, IT infrastructure is not a core business competency, and cloud service providers can significantly enhance energy efficiency and reduce waste. As more jurisdictions mandate ESG reporting, S&P Global ESG Scores can provide valuable insights into an organization's environmental impact when assessing ESG performance.
Importance of ESG initiatives
Organizations worldwide are increasingly concentrating on the mutual impact between their business activities and the environment. The commercial importance of ESG variables is underscored in our Voice of the Enterprise: Digital Pulse, Environmental Impact 2022 study, where 76% of respondents stated that the environmental impact of potential technology purchases is very important or somewhat important to their organization's decisions. This sentiment is especially strong among businesses in the financial and software IT services sectors, as well as among digital transformation leaders.
Further survey data highlights the significance of ESG initiatives in assessing infrastructure and platform-as-a-service (IaaS/PaaS) public cloud providers. According to our Voice of the Enterprise: Cloud, Hosting & Managed Services study, over 40% of public cloud IaaS/PaaS buyers noted that ESG outcomes were a "very important" factor in choosing a cloud service provider.
Cloud infrastructure ESG performance to date
Cloud infrastructure providers, particularly hyperscalers, have been actively developing plans and initiatives to address the environmental impact of their services. These efforts primarily focus on improving data center efficiency, reducing greenhouse gas emissions, minimizing power consumption, and increasing the use of renewable energy. Specific initiatives include aggregating workloads to boost server utilization and achieve economies of scale, incorporating newer, more efficient servers, and using recycled or reclaimed water for cooling cloud data centers.
Using S&P Global Sustainable1 ESG metrics, we can illustrate the impact of these initiatives on the overall scores for public companies in the sector. Sustainable1 is a centralized division within S&P Global that offers comprehensive sustainability views and metrics, covering key ESG and climate topics. It integrates S&P Global’s resources and full suite of benchmarking, analytics, evaluations, and indices to provide a 360-degree view of ESG metrics across industries. ESG Scores range from 0 to 100, with 100 representing the highest score.
Out of the 306 cloud infrastructure providers tracked by 451 Research's Market Monitor service, 98 are included in the S&P Global Sustainable1 database. The average 2021 ESG score for these 98 providers shows notable progress in the industry, with significantly higher scores for environmental metrics compared to governance, economic, and social variables. The stronger performance in the "E" (environmental) component relative to the "SG" (social and governance) components reflects the industry's emphasis on environmental factors but also highlights areas where ESG initiatives may be lacking across the sector.
Cloud infrastructure ESG scores by dimension
Analyzing the vendor count by ESG Score range, both overall and by dimension, reveals a clearer dispersion in scores, particularly for environmental metrics compared to governance and economic and social variables. This discrepancy highlights the influence of public commitments and investments in environmental initiatives, such as data center efficiency and sustainable energy, while underscoring the need for more progress in governance and economic and social areas across the industry.
In the cloud infrastructure market, 42% of vendors have environmental ESG scores of 60 or higher, whereas another 42% have scores of 40 or lower. For social variables—such as labor practices, talent attraction and retention, and social reporting—only 22% of vendors score 60 or above, with 54% scoring 40 or lower. Regarding governance and economic variables—including corporate governance, privacy protection, and risk and crisis management—61% of vendors score 40 or below, while just 24% achieve scores of 60 or higher.
Cloud infrastructure providers vs. leased data centers, managed hosting providers
Cloud infrastructure vendors are achieving higher environmental scores compared to their counterparts in the leased data center and managed hosting sectors. According to 451 Research's data center team, cloud servers generally offer greater efficiency and utilization compared to enterprise servers. Consequently, moving workloads to the cloud can significantly cut energy consumption by up to 60%. In terms of governance and economic dimensions, the scores across these sectors are nearly comparable to those of cloud infrastructure. However, cloud infrastructure vendors have somewhat higher scores in the social dimensions compared to leased data centers and managed hosting providers.
Sustainable1 methodology
S&P Global ESG scores offer comprehensive ESG insights derived from data intelligence collected through the S&P Global Corporate Sustainability Assessment (CSA). Sustainable1 ensures transparency by allowing users to delve into material ESG criteria scores across up to 30 focus areas within sub-industries, question-level scores covering 130 sustainability topics, and up to 1,000 additional underlying data points per company. Further information is available for a more in-depth discussion of S&P Global's ESG evaluation process.