ESSENTIAL ESG SPECIAL EDITION - The hidden infrastructure of AI: navigating ESG risk in Australia’s data centre boom

Speakers:

• Dr Phoebe Wynn-Pope, Head of Responsible Business and ESG, Corrs Chambers Westgarth
• Dr Louise Camenzuli, Head of Environment and Planning, Corrs Chambers Westgarth

Phoebe: Welcome to a new edition of the Essential ESG podcast coming to you from the lands of the Gadigal people of the Eora Nation. My name is Phoebe Wynn-Pope, and I'm the Head of Responsible Business and ESG at Corrs. And today joining me is Dr Louise Camenzuli, the Head of Environment and Planning. Hi, Louise.

Louise: Hi, Phoebe.

Phoebe: Louise is a specialist in planning and environment law with a strong focus on climate change and sustainability legislation with deep expertise across energy transition, critical infrastructure and land use planning, Louise regularly advises government and private sector clients on the legal and regulatory dimensions of Australia's most significant development projects. So it's really great to have you here today to discuss the intersection of ESG and Australia's data centre boom. The energy demands, the water, the planning challenges, and what the evolving legal and regulatory landscape means for corporates looking to invest in or rely upon this critical infrastructure. Can you set the scene for our listeners - what actually is the current state of play of the data centre market in Australia?

Louise: Sure, Phoebe. As is widely reported, Australia is experiencing a massive data centre boom and is now the world's fifth largest data centre market with capacity forecasts to more than double by 2030. That means roughly 175 new facilities and over $70 billion in infrastructure investment.

Phoebe: That's absolutely massive.

Louise: It is. So the sheer scale of that growth will plainly place enormous pressure on an already constrained power system. As you can imagine, AI workloads in particular are driving up power density requirements while cooling demands of these facilities are giving rise to real concerns regarding the strain on local electricity networks.

Phoebe: Earlier in the year, in your article in The Australian, you say that Australia's data centre boom needs an energy plan. That the question isn't whether more data centres will be built, but whether it's that they can be achieved and delivered cleanly, quickly and in the right places.

Where is the gap right now between the ambition and the reality on the energy side?

Louise: Yeah, look, in my view, the core environmental concern is that without a clear energy plan, this expansion risks locking in fossil fuel dependence, especially through the use of diesel backup generators and peaking gas, rather than accelerating the transition to cleaner energy sources such as battery energy storage systems. International experience really underscores this urgency. Parts of Scandinavia have already slowed or restricted new data centre connections to protect grid stability, and as you might have read, US operators are contracting firm supply - this includes nuclear - just to guarantee capacity. Australia obviously can't rely on those models, so it needs a domestic solution built around renewables, battery storage and smarter site selection. And you know, this inevitability, Phoebe, is apparent from the proposals presently being drafted by the Australian Energy Market Commission as announced very recently to require data centres to fully offset all of their power requirements using renewable energy, and this is building on the high level expectations of data centres that was released by the Federal Industry Minister, Tim Ayres, in March. Other options that are being presently considered include requiring data centres to adjust their power use when there is stress on the electricity grid, which is expected to be met with much resistance given the often critical nature of the services running through data centres. There was nothing in the recent budget about specific infrastructure funding for water or energy augmentation to support data centres.

Phoebe: So we've got these massive data centres coming and requirements for the renewable energy. There's a lot of work to be done in making sure that those things are all aligned.

Louise: Exactly.

Phoebe: As you just talked about, in late March, the Australian government released their publication on the expectations of data centres. They noted in the paper that meeting their expectations will be the foundation of their social licence to operate in Australia.

Given that, how should corporations actually be navigating that space in line with the federal government's strategy, and what does that social licence look like?

Louise: So the National AI Plan outlines, as you said, the government's ambition to capture the opportunities of AI and to ensure its benefits are really shared by all Australians. The expectations aim to incentivise investment consistent with our national interests. Corporates navigating this new landscape really need to treat these guidelines not just as voluntary, but as really a critical, non-mandatory framework that dictates the speed of regulatory approvals and engagement. Frankly, in my view, proposals that do not align risk really do risk being deprioritised in regulatory assessments.  You know, resilience and national security will continue to be considered as part of the prioritisation. The expectations published by the government are around prioritisation of Australia's national interest, active support of the energy transition, demonstration of sustainable water management, building of social licence, investment in Australian skills and jobs, and fostering local innovation and capability. So as you said, Phoebe, all these things are really directed to social licence. Now, federal government is working with the states and in particular in New South Wales and Victoria to incorporate these expectations into planning and approvals, aiming for faster approvals for compliant projects. You know, Phoebe, proponents of data centre projects really need to be engaging with relevant state and planning bodies at this time to really better understand the expectations at a state level.

Phoebe: Yeah. We've talked a lot about the energy side, but water is the other big resource challenge, isn't it? And the Commonwealth expectations, as I understand it, specifically call out sustainable and efficient water usage, and operators are expected to cover their share of water infrastructure costs. From an environment and planning law perspective, where are the real legal risks around water for data centre developers, or what are the opportunities for businesses to get ahead of this?

Louise: When it comes to water, the real legal risks for data centre developers in Australia probably cluster around four key themes. The first is planning approvals, most particularly that they are being granted on the basis of fairly vague and non-measurable water commitments, which plainly creates exposure for corporates around future tightening or refusal as cumulative impacts materialise. The second is around the water licensing requirements. These simply do not guarantee long-term allocations, particularly in drought-prone catchments. Third, the absence of data centre-specific water governance is readily apparently creating latent regulatory risk as governments are now moving to fill that gap. And then fourth is the growing community opposition, certainly in New South Wales, can escalate projects to the Independent Planning Commission or otherwise trigger legislative reforms. So for these reasons, businesses that are investing now in closed loop, or water-free cooling, or otherwise secure alternative water sources and engage water utilities early, along with building transparent reporting frameworks, would not merely be managing risks, but they are really building a material competitive advantage in a market where water is rapidly becoming as constrained and as contested as grid capacity.

Phoebe: I think it's nice to know that there are ways of managing those water demands and capacity because it's a big concern to the community, I think, in terms of what that looks like in the future going forwards.

Louise: Yes, and the supporting infrastructure for all of that is still very much in question.

Phoebe: So the data centres sit right at the intersection in many ways of the E, the S and the G. So there's the energy and emissions piece, there's the water consumption piece, and community impact and workforce issues. So for businesses thinking about this through an ESG lens, how should ESG-conscious investors and operators think about all of this during the transition period?

Louise: Operators will need to commit to time-bound decarbonisation pathways with clear emissions glide paths and reporting aligned with market expectations. So, that will mean pairing renewables and large-scale battery storage with transitional gas generation, and setting measurable targets for reducing reliance on gas and other traditional firming sources.

For investors, this approach balances the commercial reality of needing reliable power today with the environmental imperative of reaching net zero. Credibility in this space will depend on whether operators actually publish and adhere then to those glide paths.

Phoebe: Is there a greenwashing dimension as well? If a company is making net zero commitments, but its cloud and AI usage is growing rapidly, where does that leave them?

I know that the government of Ireland was sort of saying no more data centres because it was going to spoil their Paris target alignment and so it's obviously a massive issue. How does that work?

Louise: Yeah, look, there's absolutely a greenwashing dimension to this issue.

Where a company is publicly committing to net zero targets, whether it is under the Paris Agreement framework or otherwise in response to mandatory climate disclosure regimes, but simultaneously they are scaling their cloud computing and AI usage without adequately accounting for the associated energy consumption, this plainly risks a material disconnect between its stated climate ambitions and its operational reality. So for example, if a company's scope 2 and scope 3 emissions are rising as a consequence of increased digital infrastructure reliance, yet its public disclosures and marketing materials continue to assert progress toward net zero, this creates potential greenwashing exposure. And as you well know, Phoebe, in Australia, ASIC has made clear through its enforcement priorities that greenwashing and misleading conduct involving ESG claims is a focus area. And then really from a legal risk perspective, this leaves companies exposed on multiple fronts. So, potential greenwashing enforcement by regulators, shareholder and activist litigation challenging the adequacy of climate disclosures, and then reputational harm as stakeholders become more sophisticated in identifying this gap between digital growth and emissions reduction. So, the prudent approach is for companies to transparently disclose the energy and emissions implications of their cloud and AI strategies within their climate transition plans, and to avoid unqualified net zero claims unless those plans are credibly accounting for the growing digital demand.

Phoebe: What practical steps then can be taken to ensure that data centre growth in Australia delivers genuine sustainability outcomes rather than just simply adding to emissions?

Louise: No doubt minds will differ on the response to this question, but in my view, there are several practical measures that taken together could be a roadmap for responsible digital infrastructure. First, I think we need to see large batteries deployed near major metropolitan load centres, places like Sydney and Melbourne, where most data centre capacity is concentrated. These batteries can absorb excess renewable generation during low demand periods and discharge during peaks, and that reduces reliance on peaking gas and diesel backup without waiting years and years for the transmission infrastructure. Second would probably be fast tracking regional co-location. I think that is essential. Where data centres are built alongside renewable generation assets in these areas. These facilities can then anchor new clean energy projects, support local industries such as agriculture and mining automation, and relieve pressure on metropolitan grids. Thirdly, I think streamlined planning and grid connection processes with robust environmental safeguards is going to be critical - and by that I mean not lowering standards, but faster, better aligned approvals that incorporate measurable sustainability outcomes from the outset, and that will help with the social licence piece that you talked about earlier, Phoebe. And then finally, I think there needs to be a single published framework for clarifying foreign investment settings, critical infrastructure obligations and localisation requirements so that capital flows more predictably into cleaner bills. The overarching message is that energy stewardship can become a competitive advantage for Australia, but only if government and industry plan deliberately for both grid stability and growth.

Phoebe: Where do you see the regulatory and ESG landscape for data centres heading over the next two or three years? Do you think we're getting the balance right between attracting investment and protecting the national interest going forwards?

Louise: I think over the next two to three years, the regulatory and ESG landscape for data centres is likely to intensify significantly across several dimensions. Firstly, in the context of energy and emissions regulation. So we've already talked briefly about potential changes relating to offsetting of energy use. Also, I think in the context of moving towards more granular reporting requirements for data centre energy consumption. For example, the European Union's Energy Efficiency Directive already imposes specific reporting obligations on data centre operators, and in Australia, the National Greenhouse and Energy Reporting Scheme captures large data centre operators. Second, in the context of water usage and the resource constraints issue that we discussed earlier, I think data centres’ consumption of water for cooling is plainly attracting increasing regulatory attention - so this is particularly the case in water stressed regions. As Australia experiences continued climate variability, planning and environmental approvals for new data centre developments are likely to face heightened scrutiny. Regarding water consumption, I'm already seeing conditions being imposed under state environmental planning instruments and Commonwealth environmental approvals, and this is particularly likely where developments intersect, obviously, with matters of national environmental significance under our Commonwealth environmental legislation, which you might know is presently also under reform so you can expect more from the Commonwealth government. And then thirdly, in the context of planning and land use, state and territory planning frameworks are grappling with the rapid pace of data centre development. New South Wales and Victoria in particular, are seeing significant investment and planning authorities, are beginning to develop specific policy guidance for data centre precincts. This is all directed at addressing these issues that we've been talking about relating to grid capacity, noise, visual amenity, and community impact. So, are we getting the balance right in Australia? I'd say the position is probably mixed.

On the investment attraction side, Australia offers political stability for sure, a strong rule of law, growing demand from domestic and Asia-Pacific markets, and really an increasingly supportive policy environment, particularly when we start talking about fast tracking of approvals and streamlining some of the Commonwealth environmental legislation. However, our regulatory framework still remains somewhat fragmented because it is multi-layered across Commonwealth, state and local government levels, and this creates complexity and uncertainty for investors. On the ESG side, Australia is arguably behind the EU in imposing sector-specific sustainability requirements on data centres, and this is creating a short-term competitive advantage and attracting investment. But it also might create reputational and transition risk if Australian-hosted facilities are perceived as less sustainable than alternatives in jurisdictions with more rigorous standards. Similarly, if our planning approvals process is too slow, this will obviously be a deterrent to investment. So, I guess to wrap up, Phoebe, I think the challenge for policymakers is to provide regulatory certainty, streamline approvals processes and ensure grid capacity keeps pace with demand, while progressively aligning the sector with Australia's broader climate commitment. So, you know, no small ask.

Phoebe: No small ask. Well, it's all so new. I mean, I don't think we were even talking about data centres 18 months ago, really.

Louise: No, that's right.

Phoebe: So the AI drive that is really forcing all of this development so quickly is challenging.

Louise: It absolutely is.

Phoebe: Louise, thank you so much. It's been really great to hear from you about the whole environment around these data centres and what that's looking like, and thank you very much for joining us again on the podcast.

Louise: A total pleasure. Thanks, Phoebe.

This podcast is for reference purposes only. It does not constitute legal or other advice and should not be relied upon as such. You should always obtain legal advice about your specific circumstances. 

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