Flood Risks in Listed Data Centers REITs
Data centers are vital to any organization’s operations. Organizations centralize IT operations and equipment, store, process, and disseminate data and applications and their proprietary assets in data centers.
While in the past, data centers were physical infrastructures of an organization, the public cloud has changed that model and most modern data center infrastructures have evolved from on-premises physical servers to virtualized infrastructure across multi-cloud environments.
Given data centers’ vital role, in this note we evaluate to what extent physical climate change risks might impact the sector within global listed REITs. Also, here we focus on flood risks from sea level rises, coastal and riverine floods (for a complete evaluation of the sector to a range of physical climate change risks, both acute and chronic, please contact info@kaniaadvisors.com). We use Klimetrics analytics to estimate the impact of projected future flood risks based on RCP 8.5 Business-As-Usual climate scenario and 100 year return period for the periods 2030 and 2050, which is in line with typical and longer term investment holding periods.
Klimetrics provides physical climate change risk information aligned with TCFD (Task Force on Climate-Related Financial Disclosures) framework and recommendations and is based on latest scientific climate models. The Coupled Model Intercomparison Project (CMIP) provides infrastructure for climate model diagnosis, validation, intercomparison, documentation and data. This framework enables scientists to analyze GCMs in a systematic fashion, a process which serves to facilitate model improvement. Coupled atmosphere-ocean general circulation models allow the simulated climate to adjust to changes in climate forcing, such as increasing atmospheric carbon dioxide.
Listed data center REITs hold in aggregate ca 500 data centers globally located as per image below.
We estimate each risk at each time horizon based on the distribution of that risk globally at that time. Klimetrics provides distributions of a range of physical climate change risks impacting real assets based on all geolocations globally where the specific risk is projected to happen (non-zero observations) and the magnitude of the projected severity.
In order to assess the severity of projected flood risks, we map the geolocation of each data center asset onto the risk distribution curves and assign a score based on the severity of the event. Our score is based on a scale from 1-10 to keep a more granular segmentation as flood risks are non-linear and present a relatively high degree of ‘tail-risk’ or skew, i.e. most of the areas projected to experience floods in the future are projected to experience limited floods and significant floods are limited geographically but with the magnitude of severity increasing exponentially.
We estimate that within the listed data center REIT universe approximately 5-7% of assets are in geolocations projected to experience some level of flood risks within the holding periods described. This figure drops to approximately 2-3% when considering more severe magnitude locations scoring 8 or higher which would likely result in meaningful financial damages, and only 0.5-1% of assets are in geolocations that are projected to experience the most severe flood risks which would likely result in full loss to operations and assets. The image below illustrates geolocation for data centers projected to be exposed to flood risks of level 8 or higher.
For further information and full assessment of a range of physical climate change risks projected to impact data centers and other sectors, please contact info@kaniaadvisors.com
About Kania Advisors
Kania Advisors is an independent research and advisory firm focused exclusively on institutional real assets allocations and investment programmes. We provide advice and solutions to improve outcomes in real assets investment programmes. We conduct detailed industry research and custom studies typically focused on quantitative analysis and provide insights which form a critical part of a client's decision process.