Insights
Regulatory and ESG challenges in the data centre sector: Building a sustainable future
Nov 28, 2025Summary
This is the fifth in a ten-part article series on the legal strategies shaping the future of data centre development in the UK.
The United Kingdom’s data centre sector is undergoing a profound transformation. Having established itself as a cornerstone of the nation's economy, the industry now faces its most complex challenge: adapting to an increasingly demanding regulatory and Environmental, Social, and Governance (ESG) landscape.
The sector's exponential growth, driven by the insatiable demand for data, has placed it under an intense spotlight. Its high power and water consumption, and the physical impact of large-scale facilities, have brought questions of sustainability and community impact to the forefront. Today, a data centre’s success is no longer measured solely by uptime or tenant covenant strength, but by its ability to maintain a social licence to operate. And this is granted not just by regulators, but by investors, tenants and local communities.
These issues are central to risk management, value creation and long-term commercial strategy. Neglecting them can jeopardise financing, erode asset value and cause operational and reputational damage.
This instalment of our Insight Series looks beyond individual transactions to the frameworks that shape the entire data centre lifecycle. We explore how leading developers and investors can turn regulatory and ESG pressures into opportunities to build more resilient, responsible and valuable assets.
The evolving UK regulatory framework: A multi-layered challenge
Securing planning consent and a grid connection are only the first hurdles. The UK’s data centre operators must then navigate a regulatory landscape that’s intricate, technical and constantly shifting. Understanding this framework holistically is essential to maintaining compliance and protecting operational continuity.
Carbon and emissions reporting: The mandate for transparency
The UK's legally-binding commitment to achieve net-zero carbon emissions by 2050 has profound implications for energy-intensive sectors such as data centres. These include:
- Mandatory reporting frameworks: Large organisations are required to report their energy consumption and carbon emissions under the Streamlined Energy and Carbon Reporting (SECR) framework. This is a statutory requirement for large organisations (whether listed or private) that exceed at least two of the following criteria: (1) £36m annual turnover; (2) £18m balance sheet total; or (3) 250 employees. But investor expectations now extend far beyond compliance. Institutional capital increasingly demands detailed disclosure of Scope 1, 2 and 3 emissions, making robust data collection and transparent reporting a critical component of corporate governance.
- Anticipating future carbon pricing: Although the UK Emissions Trading Scheme (ETS) does not directly affect many smaller data centres (those with a total net thermal input capacity equal to or less than 20MWth), the direction of policy is clear. As the government seeks to decarbonise the economy, carbon pricing or direct carbon taxes are likely to be applied to energy-intensive industries. Investors and operators that plan ahead by modelling potential financial impacts and securing renewable power over the long term will protect value and remain competitive.
Water regulation: The next environmental frontier
As the power density of data centres rises, driven by AI and high-performance computing, traditional air-cooling systems are reaching their limits. The shift towards direct-to-chip and other forms of liquid cooling has brought water use into sharp focus. In regions such as the South East, where water is already scarce, this is becoming a defining issue for the sector.
The Environment Agency has significantly tightened the criteria for granting new water abstraction licenses, making water rights a critical and potentially limiting factor in site selection and development. A proactive strategy is now essential. This includes investment in closed-loop cooling systems that minimise consumption, and early engagement with regulators to secure the necessary consents.
ESG: From compliance exercise to core value driver
ESG now sits at the centre of financial and operational strategy, directly influencing a data centre’s ability to attract capital, secure tenants and sustain long-term value.
Environmental: The pursuit of authentic sustainability
For years, many organisations claimed "100% renewable" status by simply purchasing Renewable Energy Guarantees of Origin (REGOs). But this approach is increasingly viewed as superficial. The emerging benchmark is the corporate Power Purchase Agreement (PPA), structured to demonstrate additionality – that is, proof that the data centre’s investment has directly enabled new renewable capacity to be built. Crafting such agreements demands sophisticated understanding of energy markets, regulation and contract law.
Data centres generate vast quantities of low-grade heat, which is typically vented into the atmosphere as a waste product. Developers are now finding ways to turn that waste into value, supplying district heating networks for homes, schools or public facilities. While technically and commercially complex, these schemes can deliver long-term benefits: new revenue streams, strengthened local partnerships and a credible story of circular economy principles in action.
Advances in cooling complement these efforts. Traditional air-based cooling is increasingly inefficient for high-density data centres, so developers are adopting liquid and direct-to-chip cooling, free cooling using outside air and AI-driven thermal management. These solutions reduce power consumption, cut emissions and enhance the sustainability credentials of the facility, making cooling strategy a tangible ESG differentiator.
Shaping and maintaining the social contract
The physical presence of a data centre – often large, windowless and secure – can be a source of concern for local communities. Managing this relationship proactively is essential, not only for securing planning consent, but also to maintaining long-term goodwill.
Strategic community engagement: Effective community engagement must be more than a pre-planning PR exercise. It should begin early and continue throughout the project’s life. Developers that explain the purpose and benefits of a facility clearly, listen to community concerns about noise, traffic and design, and take visible steps to address them are far more likely to earn trust and support.
The Sophisticated Section 106 Agreement: Section 106 agreements entered into under the Town and Country Planning Act 1990 upon the grant of planning permission, through which developers commit to community benefits, should be seen as opportunities for partnership, rather than obligations. The most forward-looking projects use them to deliver a tangible local legacy: funding digital skills training, creating apprenticeships, improving green spaces or improving local infrastructure. Approached creatively, these initiatives help make data centres valued parts of the communities that host them.
Governance: The bedrock of trust
Strong governance is the foundation that underpins the entire ESG strategy. Institutional investors demand clear evidence that ESG is embedded in a company's culture and decision-making processes, from the board level down. This means having clear, publicly stated ESG policies, transparently reporting on performance against measurable targets (PUE, WUE, carbon emissions, diversity metrics), and demonstrating clear accountability for achieving those targets.
From passive consumers to active participants in the energy system
The traditional view of a data centre as a passive consumer of energy is becoming outdated. With the integration of on-site BESS and sophisticated load management systems, data centres have a unique opportunity to become active, value-adding participants in the national energy system. By providing demand-side response (DSR) and other ancillary services to NESO, data centres can help to balance the grid, facilitate the integration of more intermittent renewables, and unlock new, diversified revenue streams.
How we can help
Realising this opportunity requires a deep understanding of the energy markets and the complex contracts that govern participation. Our market-leading expertise in the BESS sector provides our data centre clients with a unique competitive advantage in this area
Building a resilient and responsible digital future
The data centre lifecycle, from the initial acquisition of powered land to the development, financing and ultimate sale of the asset, is complex and demanding. Success at each stage requires a combination of deep commercial insight and precise legal execution.
Yet across all phases, a single truth applies: in the mature and highly scrutinised UK market, long-term, sustainable value can only be built on a foundation of regulatory compliance and authentic ESG leadership. These are the new, non-negotiable fundamentals of the sector.
How we can help
We provide the integrated, cross-practice expertise you need to navigate this new reality. Our global team of lawyers understands the intricate interplay of real estate, construction, finance, M&A, energy, environmental and technology. We partner with the world's leading developers, operators and investors not just to execute transactions, but to build resilient, responsible and highly valuable businesses. We help you transform the challenges of regulation and sustainability into sources of profound and lasting competitive advantage, so you can build the critical digital infrastructure of the future.
Related Capabilities
-
Data Centers & Digital Infrastructure
-
ESG & Energy Transition
-
Energy Transition
