Risks Remain For Data Centers Despite Unexpectedly Lenient SEC Emissions Rules

The commercial real estate industry breathed a collective sigh of relief this month following the publication of federal emissions disclosure rules that are significantly less stringent than many expected.

But some leaders in the power-intensive data center sector warn these new requirements still carry major risks that firms are ignoring at their own peril. 

Earlier this month, the Securities and Exchange Commission published new rules requiring public companies to include a range of environmental impact metrics in their filings with the federal regulator starting in 2026.

Although the implementation of the SEC’s new rules was temporarily halted by a federal appeals court last week, the rules are expected to have a significant impact across the data center sector.

While the SEC’s mandated emissions reporting has implications across commercial real estate, data center firms and their tenants had been awaiting the publication of these rules with particular interest — and apprehension. After all, this is an asset class that measures size in megawatts of power rather than square footage. 

When the initial draft of the SEC’s reporting rules was released two years ago, it set off alarm bells across the data center sector, sparking widespread concern that the industry would not be able to collect the data required by the new regulations and that providers could face a wave of litigation.

But now, the final version of the SEC’s reporting mandate has been significantly scaled back from what the agency originally proposed. Requirements for tracking supply chain emissions that had generated the greatest concern within the data center industry, Scope 3 emissions, were eliminated entirely. 

Yet some industry leaders warn that even these scaled-back SEC rules still carry significant risk for data center providers. Some of the most basic ground rules about how colocation firms are supposed to report their greenhouse gas emissions remain murky or are being interpreted differently from company to company, and this uncertainty presents potential legal peril for the industry. 

“It’s a serious problem that the industry doesn’t have a standard way to deal with this,” said Jay Dietrich, research director for sustainability at the Uptime Institute. “This is critical, but I’m not sure the industry sees that yet.” 

The SEC’s green disclosure rules will have a significant impact across the data center sector, experts say. Although only publicly traded data center firms like REITs Equinix and Digital Realty need to file reports themselves, even private data center operators will have to help their publicly traded tenants collect data on the emissions from their hosted IT infrastructure. 

While it’s hardly surprising that an industry would push back on new government regulations, the initial draft of the SEC’s disclosure rules released in 2022 prompted a particularly strong outcry across the data center sector. The biggest concern for data centers at the time was the requirement that companies report what are known as Scope 3 emissions.

A company’s emissions are typically measured in three categories, with Scope 1 entailing greenhouse gasses produced directly by a company’s day-to-day operations, and Scope 2 referring to the carbon footprint of the electricity the company purchases.

Scope 3 is more complicated and harder to measure. It includes greenhouse gasses produced in a company’s supply chain and those created as a result of using the company’s products or services. For a data center, the emissions stemming from the manufacture and delivery of a generator, or a piece of cooling equipment, would fall clearly within Scope 3. 

Data center providers have been way behind the eight ball when it comes to being able to measure these kinds of emissions. An Uptime Institute survey of data center operators from 2023, a full year after the draft of the SEC rules was published, showed that only 14% of respondents were tracking Scope 3 emissions at all.

Adding to concerns about the data center industry’s ability to comply with these proposed rules was a lack of clarity around which scope the power used by colocation tenants, by far the largest source of emissions from a data center, should be classified as. It’s an issue that remains unresolved and that critics of the rule fear could lead to well-intentioned operators finding themselves accidentally out of compliance.

But Scope 3 reporting requirements are now out of the picture with the finalized SEC rules, and the data center industry has largely reacted to the release of the rules with a collective shrug.

“Backing off on Scope 3 gives us a little room to breathe. It’s a bit of a sigh of relief,” said Sean Farney, JLL’s vice president for data center strategy in the Americas.

He said he has heard none of the worry and backlash that accompanied the SEC draft proposal two years ago.

“It’s crickets. There’s zero discussion about it, and it really shows how nonplussed the industry is with the finalized rules now that Scope 3 was pulled out," he added.

But Farney and other industry leaders caution that while the scaled-back reporting requirements will make things easier for data centers, the reporting regime still carries significant legal risks for data center operators that the industry needs to be proactive about addressing.

Much of this stems from the significant confusion and inconsistency that remains around whether tenants or landlords need to report the emissions from the hundreds of megawatts of electricity powering IT equipment in colocation data centers. 

Some colocation providers like Equinix report every watt of energy used in their buildings as Scope 2, meaning they would have to report it to the SEC.

But many other similar firms consider the IT energy use in their data centers to be Scope 3, since tenants own and control the computing equipment and are responsible for the energy costs. This means the only emissions they would be responsible for under the SEC’s guidelines are from the power used to cool a facility and other building systems — a small fraction of a facility’s overall energy use.

Tenants’ reporting practices further complicate the already murky accounting landscape. The carbon from a megawatt of electricity used to power hosted IT equipment could potentially be counted twice or not counted at all, depending on the tenant and landlord’s separate decisions on whether to classify those emissions as Scope 2 or Scope 3. 

“If you’re hosting a Microsoft Teams meeting, that’s a Microsoft customer’s activity running out of a data center through Microsoft routers and servers over fiber owned by a host of connectivity providers. Whose carbon is that?” Farney said.

“It’s very difficult to determine where you draw the line on what fits with what. That accounting gets really fuzzy because the standards on this in the US aren’t fully cooked.”

This lack of a consistent emissions reporting standard is a major problem for the data center industry, Uptime’s Dietrich said. It doesn’t just make the data potentially meaningless, it can also lead to legal exposure for both data center providers and their tenants. 

Companies classifying their IT power as Scope 3 may be accused of underreporting their emissions, while reporting all power used in a facility as Scope 2 creates a new set of risks.

Dietrich points to the SEC’s requirement that firms demonstrate progress toward emission reduction goals. A firm classifying their tenants’ IT equipment as Scope 2 could therefore face consequences if they don’t reduce the emissions footprint of IT equipment that their tenants actually have full control over. 

Experts who spoke with Bisnow argued that the data center industry needs to take proactive steps to establish its own reporting standards for providers, tenants and other industry stakeholders, and create a standardized framework for sharing the data that all parties need to stay in compliance with these regulations. 

Uptime Institute is attempting to get the ball rolling on this front, according to Dietrich, with plans to publish proposed guidelines later this year. It’s an urgent task, he said, because the industry’s failure to create these standards on its own terms will lead to them being imposed by government regulators. 

“The industry needs to sit down at a table with cloud, colocation and enterprise IT operators and create a standard method for this and for the data exchange process,” Dietrich said. “It ensures consistency, but it also puts the industry in a position to go to regulators and legislators with an existing process that they’ll agree to work within that satisfies their need to assess how the industry is performing within this space.”