Data Centres Add to Deluge of Water Risks
Local frictions loom large as potable water demands put tech sector at odds with household and agricultural needs.
AI-driven demand for data centres coupled with rising water stress worldwide is prompting investors to ask portfolio companies how they are navigating an increasing flow of operational, regulatory, and reputational risks.
A total 632 data centres owned by US tech giants Amazon, Google and Microsoft are either active or under development. The companies’ plans involve a 78% increase in the number of data centres they own worldwide. Plans for construction across all continents encompass many water-stressed areas.
In October, McKinsey projected that the global demand for data centre capacity could rise between 19% and 22% annually from 2023 to 2030. However, global demand for fresh water is projected to outstrip supply by 40% by 2030, most acutely effecting emerging and developing markets.
A combination of declining total water storage and a lack of access to clean water and sanitation could see high-income countries’ GDP decline by 8% by 2050, with lower-income countries facing a more severe decline of between 10% and 15%.
“The water risks associated with data centres and AI can be quite severe, especially as demand for AI workloads continues to rise and the number of data centres keeps growing,” Christian Zilien, Product Specialist Equity at AllianzGI, told ESG Investor.
“We’ve long acted as though our water resources were limitless. The risk of water stress remains underestimated by investors as water remains the most crucial resource on earth without any form of substitute.”
Non-profit environmental reporting platform CDP rates corporate water-related risks at a minimum of US$225 billion, with the potential financial impact of water risks to businesses estimated to be more than five times higher than the cost of addressing them.
A pervasive problem
According to some estimates, a data centre can use between 11 million and 19 million litres of water per day, approximately equivalent to the daily usage of a town of 30,000 to 50,000 people.
There is significant diversity across the sector with some data operators introducing water-positive commitments, but scrutiny by investors is in its early stages.
“Water ends up becoming a risk when data centres are built in regions that are already or are expected to experience increasing levels of water stress, meaning they will be competing for an increasingly strained supply of available water resources,” said Sondre Myge, Head of ESG at Norwegian fund management firm Skagen Funds.
This can cause community frictions, with local resistance to data centres growing globally, particularly in water scarce areas. “It’s not just any type of water, but potable water that is needed for data centres, meaning it’s a direct competitor with agricultural production and household consumption,” said Myge.
The UK confirmed this month that data centres and AI will be prioritised for electricity grid connections under reforms signed off by energy regulator Ofgem, enabling projects to skip the grid connections queue. Since July 2024, new commitments to investing in the UK have topped £38 billion (US$50.3 billion) for data centres alone.
Prime Minister Keir Starmer is aiming to make the UK a world leader in AI, but this ambition could put further strain on already stretched supplies of fresh water, particularly in the South of England which has been subject to hosepipe bans in recent years.
“The boom in AI is extremely water-intensive, and data centre growth is accelerating,” said Joe Ray, Head of Water at CDP. “Without transparency and steps to mitigate their impacts, companies operating or relying on data centres face serious operational and reputational risks, especially where water stress is already high.”
He added that while many data centres are owned and operated by well-known tech companies, it’s key for investors to understand that data centres are embedded in the supply chains of many industries, meaning they could be indirectly exposed.
Deepening disclosures
A US$21 trillion-strong group of 276 global investors, banks and insurers urged a record 1,029 high-impact companies to report data on their water-related impacts and risks as part of CDP’s most recent Non-Disclosure Campaign.
Tech giants Apple, Amazon, Nokia, LG and Roku were all approached last year, illustrating rising investor attention on corporate water-related risks.
Ray said that investors should encourage companies to disclose their direct and indirect water impacts, look for credible water accounting, comprehensive risk assessment and clear plans to reduce water intensity and engage with other water stakeholders in the areas where companies are operating.
Kirsten James, Senior Program Director for Water at Ceres, said that the investor network has observed increased member attention on water-related risks in the tech sector. This includes many investors being concerned by the water demands of data centres themselves and within supply chains, including semiconductor fabrication and mining of metals needed for chips.
“As AI continues to grow, investors are looking closer at companies’ disclosures to ensure water risks are considered throughout the high-tech value chain, including in data centres,” said James. “This can inform investment decisions and, if investors want to take this work a step further, engagements with companies on solutions through efforts such as the Valuing Water Finance Initiative.”
James stated that the initiative’s forthcoming benchmark will showcase how high-tech companies are addressing key water stewardship gaps highlighted in its previous edition launched in 2023.
She added that this year has seen an increase in the submission of shareholder proposals related to water risk strategies and data centres, underscoring investors’ growing concern about the issue.
“Water challenges pose operational, regulatory, and reputational risks to companies and threaten the long-term value of their business. With this writing on the wall, companies should incorporate responsible water management into business strategies,” said James.
“Investors with a stake in these companies play an increasingly critical role engaging with companies to help ensure they are advancing innovative solutions and leading industry practices to expand and accelerate water stewardship to meet the pace and scale of worsening water scarcity and pollution.”
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