Over the past five years, enterprises have grown increasingly interested in decarbonization and sustainability as part of their broader environmental, social and governance (ESG) objectives. Many have set new goals reflecting greater ambition, for which the most common drivers include:
- Preparing for more stringent ESG reporting requirements
- Responding to specific cost pressures arising from changing global dynamics (such as the increase of energy costs resulting from the war in Ukraine)
- Pursuing the premium that customers and investors are prepared to pay for more ESG-centric products and services.
For enterprises with environmental goals, one of the questions most asked is: How should we track and achieve our decarbonisation goals?
The subsequent questions for CIOs and technology executives are: What role should our digital transformation play in achieving these goals? And what are the trade-offs within the business case?
In general, studies show that when companies take the right actions on ESG, investors will support it. But investors require transparency on the benefits and the costs of these investments. Leaders need to be clear on the prospects for short- and long-term ESG value creation, and how they are managing risks. And they should spend time communicating how a digital transformation agenda serves as a cornerstone of innovation and progress, with investments in cloud computing acting as the foundation for advanced technologies that can unleash high value for customers.
When it comes to addressing the specifics of the questions above, it can be hard for technology leaders to know where to start. There are typically two focus areas for their sustainability-related goals:
- Decarbonize business operations
- Decarbonize the core IT services in the “digital backbone,” including compute, storage, network, data platforms, etc.
How Accelerating Cloud Adoption Can Help Achieve Sustainability Goals
For most organizations, the volume of carbon emissions is much greater from business operations than it is from core IT services; however, business operations are incredibly complex and rarely in the CIO’s control. The nature of core IT services provides a much easier way to show progress and build momentum for educating employees and making the cultural shifts required to tackle the decarbonization of business operations.
Fortunately, more enterprises are on the path to cloud adoption than ever. ISG’s 2022 Index research found annual contract value for Infrastructure-as-a-Service increased more than 50% year-on-year. Besides the many business and customer benefits, adopting cloud compute and storage solutions can reduce the emissions of running applications – by 90%+ for smaller deployments – when compared with use of on-premises infrastructure.
The three cloud hyperscalers have conducted research on this theme:
- According to Microsoft’s report on the carbon benefits of cloud computing, “Microsoft cloud is between 22 and 93% more energy efficient than traditional enterprise datacenters, depending on the specific comparison being made. When taking into account our renewable energy purchases, the Microsoft cloud is between 72 and 98% more carbon efficient.” Note: the larger the deployment, the lesser the benefit.
- AWS meanwhile claims that “running business applications on AWS, rather than on-premises enterprise datacenters in Europe, could reduce associated energy usage by nearly 80% and carbon emissions by up to 96% for many businesses when AWS purchases 100% of its energy from renewable sources.”
- Google states that its datacenters are “2x more efficient than a typical enterprise datacenter.”
How Does Using the Cloud Reduce Emissions?
At the simplest level, cloud datacenters save energy because they achieve very high virtualization ratios, typically on newer, more efficient equipment than used in on-premises set ups. And they increasingly use very high (in some cases 100%) renewable energy.
In fact, the hyperscalers have helped drive the rise of “power purchase agreements” (PPAs) that fund and secure their supply of renewable energy from a range of global sources. Amazon, for example, has “13.9 GW of contracted PPA power, the 12th largest PPA portfolio in the world, and bigger than many major generating companies”, while Microsoft and Google have contracted 8.9 GW of PPA and 8 GW PPA respectively.
While the exact benefit achievable for an individual enterprise will depend on its current infrastructure, its application profile/usage patterns and its energy source (among other factors), the imperative to take advantage of any sustainability benefit is clear. Once applications are in the cloud, the hyperscalers offer tools to help optimize the ongoing efficiency of those applications.
On a global scale, cloud solutions are being challenged to accommodate rapid growth in demand while buying time for the planet’s energy infrastructure to catch up. As the International Energy Agency (IEA) notes, “Global datacenter electricity use in 2020 was 200-250 TWh, or around 1% of global final electricity demand.” This excludes 100 TWh of crypto mining, as well as the electricity used for networking and other technology devices like laptops and phones. The IEA also notes, “Global internet traffic surged by more than 40% in 2020 as a result of increased video streaming, video conferencing, online gaming and social networking. This growth comes on top of rising demand for digital services over the past decade: since 2010, the number of internet users worldwide has doubled, while global internet traffic has expanded 15-fold.”
While cloud service providers, equipment manufacturers and other solution providers have historically managed to offset this growth through improved energy efficiency, the challenge of maintaining this rate of improvement will be put to the test both in the short and long term. Questions on the table today are:
- Will datacenters continue to have cost-effective access to renewable energy at scale?
- How will the disruption to supply chains (e.g., semiconductors) impact efficiency improvements?
- How will widespread adoption of the metaverse, non-fungible tokens (NFTs) and crypto currencies (including the associated crypto mining) be handled?
- How will datacenters cope when new capabilities like quantum computing enter the equation?
Conversely, growth of edge and neuromorphic computing may offer alternative means of satisfying demand aside from the datacenter, with improved energy efficiency by design.
While the longer-term role of cloud computing in decarbonizing our planet remains complex and uncertain, the path for enterprises to start decarbonizing is much clearer.
Action Plan for Enterprises to Begin Reducing Carbon Emissions with the Cloud
- Define, evaluate and select carbon management tools that can assess the current and potential emissions of moving specific applications to the cloud. Ideally, this is performed in conjunction with the creation of a broader emissions inventory for an enterprise and calculates the associated sustainability benefits within business operations.
- Include these sustainability benefits together with other benefit categories in the cloud and digital transformation business cases, linking back to enterprise sustainability goals.
- Accelerate cloud adoption plans and use optimization and reporting tools to bring visibility of the sustainability benefits for executive management, boards, investors, employees and customers.
- Support your supply chain in adopting similar strategies, enabling reduction of their emissions, which form part of your “scope 3” emissions. (Refer to the Greenhouse Gas Protocol for further details).
This action plan must be integrated with an organization’s broader cloud adoption and digital transformation strategies and business cases. Be sure to address two key questions as you integrate your plan into the larger strategies:
- Can we migrate core legacy applications to the cloud without degradation of functionality?
- Do we have the skills and money to modernize our applications and workforce?
ISG helps enterprises plan for and effectively source their cloud and broader technology transformation strategies to realize real benefits in customer value, service quality, cost containment and environmental impact. Contact us to discuss further.
About the authors
Matt Warburton is a Principal Consultant and ANZ Sustainability Lead at ISG. He joined in 2020 to drive the creation and growth of ISG’s ESG strategy and services, across all aspects of ISG’s existing services and the broader ecosystem of technology suppliers. He specialises in environmental sustainability and works with clients to embed sustainability into their technology strategies, digital transformations, operating model designs and sourcing strategies.
Bernie Hoecker joined ISG in September 2021. His role is to leverage ISG’s core competencies to expand and grow ISG’s presence in the cloud market. His focus will be to implement a cohesive cloud strategy across the ISG firm that results in incremental revenue and EBITDA growth. This also includes fostering strong relationships with service providers, hyper-scalers, and additional firms in the cloud ecosystem.