New research from First Street finds that 79% of the world’s data center capacity is exposed to severe climate hazards, including flood, wind and wildfire risks that could disrupt operations, increase downtime and increase insurance and repair costs.
First Street’s analysis shows that climate risk is becoming a key factor in data center investment performance, with physical hazards increasingly impacting operating costs, infrastructure reliability, financing conditions and long-term asset values in global markets.
The study examined 97 data center markets around the world and found that many of the industry’s largest and fastest-growing data centers are concentrated in areas subject to flooding, heat, wildfires, wind and drought.
This is increasingly relevant to the insurance industry, which is increasingly interested in the opportunities presented by data center risks.
Ratings agencies have highlighted this trend, with a recent report from Standard & Poor’s indicating that growing demand for data center insurance coverage could generate $10 billion in new premiums by 2026.
At a virtual media briefing held by Moody’s Ratings last month, senior credit officer Brandan Holmes noted that data centers represent a significant opportunity for commercial insurers and reinsurers, but they also bring risks.
Meanwhile, a new report from AM Best describes data center projects as a “huge opportunity” for the U.S. property and casualty insurance industry to develop innovative new property and liability coverage amid growing demand.
First Street noted that global data center capacity has expanded rapidly over the past decade and is expected to nearly double again by 2030. However, while investors have traditionally focused on power availability, connectivity, land access and demand growth, climate risk remains largely absent from many underwriting and assessment frameworks, despite its impact on uptime, operating costs, insurance availability and infrastructure reliability.
First Street found that 54% of global data center capacity is located in markets experiencing chronic climate stresses, including extreme heat and drought, which can increase cooling costs, reduce efficiency and put pressure on operating margins.
Exposure varies widely across regions, with Asia Pacific reaching 89% of capacity, compared to 50% in the Americas and 46% in Europe, the Middle East and Africa, highlighting significant differences in operating conditions.
The industry’s largest growth market is also one of the most affected by climate impacts. Major hubs such as Northern Virginia, Johor and Marseille are among the highest climate-risk regions globally, while lower-risk Nordic markets are among the least affected.
A recent analysis by specialty insurer MS Amlin also highlighted weather-related risks for data centers, noting that more than half (51%) of $670 billion worth of planned U.S. data center projects are located in states with a high risk of severe convective storms (SCS).
“Where you build a data center largely determines the cost of running it over the next 20 or 30 years. Climate is a big part of that: cooling, water and reliability all depend on location,” said Dr. Jeremy Porter, chief economist at First Street. “But most valuations still focus on growth and treat climate as a secondary issue.”
First Street founder and CEO Matthew Eby added: “Most real asset underwriting still uses historical data, but the climate no longer behaves the way historical records predicted. As heat, drought and water stress intensify, outdated models simply can no longer provide a complete view of risk.
“Investors who incorporate these factors into underwriting and capital allocation decisions will be better able to identify resilient markets and avoid the risk of mispricing.”
