Insights

Due Diligence for Renewable-Powered Data Center Investment

Based on our investment team experience in renewable energy and data centers, we would like to share our due diligence perspective.

Part 1: Investment Drivers on Grid Investment and Infrastructure Modernization

Demand Driver - Data Center Expansion

The rapid growth of data centers, fueled by advancements in cloud computing, artificial intelligence, and e-commerce, has significantly increased electricity consumption. This surge in demand is driving substantial investment in transmission infrastructure to ensure grid reliability. Additionally, high-performance computing, including AI workloads and cryptocurrency mining, requires stable and scalable power solutions, reinforcing the shift toward renewable energy adoption to reduce environmental impact and meet sustainability targets.

Supply Driver - Aging Infrastructure

With nearly 70% of transmission lines in the U.S. nearing the end of their lifecycle, the demand for grid modernization is more urgent than ever. The increasing need for high-performance computing and digital transformation is pushing the energy grid to its limits. Upgrading transmission lines is essential to ensuring a reliable and resilient power supply.

IPO Exits Driver - Regulatory Compliance & Climate Policies

Recent state-level mandates are enforcing stricter emissions disclosure requirements, particularly in California, New York, and Colorado. Climate-driven mandates—including Scope 1, 2, and 3 emissions disclosure requirements—are accelerating the need for cleaner and more sustainable grid investments. California's SB 253 mandates Scope 1, 2, and 3 emissions reporting for large businesses starting in 2026. New York and Colorado have introduced similar phased disclosure regulations, requiring emissions transparency from corporations over the next decade. These policies not only push companies toward carbon accountability and sustainability, but they also enhance attractiveness for IPO exits, as public market investors increasingly prioritize ESG-aligned businesses with strong climate compliance and governance structures.

M&A Exits Driver - Premium for ESG Performance

According to Deloitte’s 2024 ESG in M&A Trends Survey, 83% of M&A leaders are willing to pay a premium for companies demonstrating strong ESG performance. This premium strengthens the investment exit strategy by enhancing valuation potential, making ESG-aligned businesses more attractive to buyers. ESG considerations are now a key component of M&A deal structures, influencing risk management, due diligence, and long-term investment strategies, thereby driving greater financial returns upon exit.

Part 2: Due Diligence on Renewable Energy-powered Data Center Projects

1. Traditional Investment Due Diligence on Operational, Financial, and Commercial Factors

Technology Due Diligence

Cybersecurity Resilience: The shift to digital power grids increases exposure to cyber threats, requiring enhanced security measures to protect critical infrastructure.
Grid Connectivity & Reliability: Evaluating transmission infrastructure compatibility to ensure a consistent and stable power supply.
Renewable Energy Integration: Assessing whether energy is sourced from on-site generation or acquired through Power Purchase Agreements (PPA) to minimize fossil fuel reliance.

Operational Due Diligence

Energy Consumption & Sustainability: Data centers consume immense amounts of energy, necessitating efficiency measures to reduce environmental impact and operational costs.
Resilience to Natural Disasters: Assessing a facility’s ability to maintain operations during extreme weather events and disruptions.
Worker Health & Labor Compliance: Evaluating adherence to human rights standards and workplace safety regulations to mitigate reputational and legal risks.
Supply Chain Stability: Addressing potential risks from geopolitical tensions, tariffs, and forced labor concerns in procurement processes.

Financial Due Diligence

Tax Equity Scenario Analysis: Comparing financial viability with and without tax equity incentives.
Insurance Risk Assessment: Identifying risks associated with renewable energy projects under development and securing appropriate coverage.
Investor Preferences for ESG Financing: Structuring tax equity financing to align with sustainability and responsible investment standards.

2. ESG Due Diligence Metrics

The EDCI has introduced standardized metrics for private investors to assess sustainability in infrastructure projects. The core seven key performance indicators (KPIs) include:

GHG Emissions – Scope 1, Scope 2, and optional Scope 3 reporting.
Net Zero Commitment – Strategy, target, and ambition for decarbonization.
Renewable Energy Usage – Percentage of energy sourced from renewables.
Workplace Safety – Tracking work-related injuries, fatalities, and lost days due to accidents.
Employee Growth – Monitoring net new hires, turnover rates, and workforce expansion.
Diversity & Inclusion – Representation of women and underrepresented groups in leadership roles.
Employee Engagement – Measuring workforce satisfaction through surveys and feedback mechanisms

Conclusion: ESG as a Fundamental Component of Investment Due Diligence

With global energy demand escalating, ESG due diligence is integral to the due diligence checklist for clean energy investment. Companies that proactively embrace ESG strategies will not only reduce their environmental footprint but also unlock greater investment potential, operational resilience, and long-term value creation. The modernization of the power grid, coupled with sustainable investment practices, is essential for a resilient, secure, and efficient energy future.

Thanks for the insights shared by University of California, Berkeley, Haas School of Business; University of California, Berkeley, School of Law; GI Partners; Weil, Gotshal & Manges LLP; and Alpine Investors.

The Impact Venture Team

References:

Paris Aligned Investment Initiative. (2024). Net Zero Investment Framework Component for the Private Equity Industry.
CDP Worldwide. (2024). The State of Play 2023: Climate Transition Plan Disclosure.
Boston Consulting Group. (2024). Sustainability in Private Equity, 2024.
EDCI. (2024). Overview of Initiative for Limited Partners.
Deloitte. (2024). ESG in M&A Trends Survey 2024.