Australian CIOs face an unprecedented challenge to cut data-based carbon emissions

Far-reaching compliance reform has now been passed in Australia, forcing many ASX listed companies to report for the first time on the carbon emissions generated across their entire value chains.

Referred to as the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024, this amendment to the Corporations Act might seem innocuous at first glance. However, now it has been incorporated into the statutory books during the recent September Parliamentary session, it will take effect on January 1, 2025.

In fact, it could be argued that starting January 1, the most significant impact of the new laws will be on the technology industry rather than on traditional sources of carbon emissions like mining and energy.

Why?
 
Beginning next year, large companies will be required to regularly report on all sources of their carbon emissions and detail their plans for mitigating them.

Some company directors and shareholders might view this as primarily affecting industries traditionally associated with high carbon emissions, such as manufacturing, mining, energy generation, and transportation. However, the legislation's scope extends far beyond these sectors. Under the new laws, emissions from these industries are classified as 'Scope 1,' referring to those directly generated by their production processes.

But this new legislation also requires reporting to account in detail, for Scope 2 AND critically, Scope 3 emissions. Scope 3 refers to emissions generated by their entire value chain – including from data, like artificial intelligence, which is housed in data centres. And it doesn't matter who owns the data centres or where they are located.

Why does Scope 3 reporting matter?

Simply put, data centres are significant generators of Scope 3 emissions. For any company or government agency that relies on data for their daily operations, data centres handle the heavy lifting of computing, storing, and managing that data. As a result, they are responsible for a sharply increasing level of Australia's carbon emissions. According to a range of reports, including from Morgan Stanley, data centre-based emissions are rising so sharply they are expected to contribute 8 percent of Australia's emissions by the end of the decade. Indeed, as noted in this newspaper last week, Moody's has estimated that data centre capacity in the Asia Pacific region (of which Australia is a large player) will surge by a compound annual growth (average) rate of almost 20 per cent by 2027.

The recent record $23.5 billion acquisition of data centre provider Air Trunk is the latest sign that capital markets view Australia as a promising growth opportunity for the industry. 

It's no surprise. Data centres are experiencing a surge in demand due to the explosive growth in artificial intelligence, which is revolutionising various sectors, from banking and retail to healthcare and professional services. AI is also seen as a significant boost for productivity when implemented correctly and ethically. Research released last week by Pure Storage and conducted by Vanson Bourne reveals that Australian CIOs are enthusiastically embracing AI's potential. According to the study, 96% of Australian IT leaders view AI as a crucial opportunity for business transformation, with nearly all organisations either planning, preparing for, or already adopting AI, many of them pursuing AI-first strategies.
 
Where can I store all that data?

The issue is that there is clear evidence showing Australian companies are still confused and worried about how to reduce or minimise emissions resulting from their growing dependence on massive data loads.

In the short term, artificial intelligence is exacerbating this problem rather than alleviating it.

While it absolutely highlighted the strategic importance of AI to Australian CIOs, the report also revealed that they are very concerned about how to manage the demand for AI, its impact on data centre capacity and, in turn, how to mitigate these impacts on the energy grid.

These are no trivial issues. They go to the heart of AI's place in the Australian economy and, in fact, should come as a warning to company directors and senior management who have hitherto embraced significant investment in AI projects and, therefore, increased data centre capacity.

Indeed, this concern isn't even new.

Another report commissioned by Pure Storage last year echoed a similarly concerning level of uncertainty in corporate Australia around how to include AI and data centre based emissions in company reporting. The report showed that Australian sustainability officers – the ones who should be coordinating strategy around company-wide emissions reduction – aren't being included in strategic technology decisions, including data centre investment and use.

So, we have a situation where business leaders are urging IT teams to fast-track AI adoption, fueling a surge in demand for data centres. Yet, there's widespread uncertainty about how to proceed, with concerns about data centre capacity and its effects on the energy grid.

All this at a time when the government is asking companies to start the process of preparation to report on their Scope 3 emissions from January 1.

Are we watching Ireland and Singapore?

As Australian companies and government agencies invest heavily in AI and expand data centres — some even housing the nation's most sensitive secrets — regulators are raising concerns about the strain on the electricity grid. Investors are likely watching other economies, like Ireland and Singapore, with cautious interest.

In Ireland, an economy with 'heavy' data centre use, the government was so concerned about the drag on its electricity grid in recent years that some local governments and electricity providers have disallowed new developments. For example, only last week, South Dublin County Council rejected a plan by Google to build a 72,400m2 data storage facility on the grounds that the building failed to outline its power usage plans to the council's satisfaction. Singapore's position is perhaps even more instructive economically – the highly competitive country recently lifted a four year moratorium on new data centre builds, based, some reports said, on a fear of missing out on the immense economic impetus the industry provides.
 
Australia may ultimately choose a middle ground between these two extremes, but the dilemma remains: how do we balance the clear advantages of adopting AI and expanding data centres with the growing urgency to reduce their carbon footprint?

Clearly, smart companies are likely already having their sustainability teams collaborate closely with IT leaders to navigate the energy demands of AI and other resource-intensive technologies. They will also be considering how to report data centre emissions in their annual disclosures and to national regulators.

Australia cannot afford a situation where data centres are being forced to close or even cease to operate – or even worse, lose access to power when there is a severe or ongoing weather event. Investors and regulators will be paying close attention.