“World leaders now recognize that we face a global water crisis and that we need to reassess how we value and manage water.”

António Guterres, UN Secretary-General

Robust water stewardship and risk management are important considerations for almost all sectors and industries in the global economy. This is because water availability, quality, and cost are intrinsically linked to economic outcomes and growth. For sectors with high dependency on water, such as global technology industries, water stewardship and risk management are of heightened importance. These considerations are amplified for industries that are growing rapidly and located in regions of high water stress where any disruption to the manufacturing process can have global consequences.

Semiconductor manufacturing ticks all the boxes here: Semiconductors are used in almost every sector of electronics and, by association, in almost every global industry. Without reliable water supply, you can’t produce semiconductors. Boosted by the AI revolution, the industry is rapidly expanding, with planned production facilities often located in areas of higher water stress. For example, the United States is trying to incentivize the reshoring of semiconductor manufacturing and much of the expansion is taking place in Arizona, where the Colorado River is slowly drying up. 

The semiconductor manufacturing process is highly complex. In order to build up the chip circuitry for a smartphone application processor, for example, designs are patterned onto a silicon wafer and material is etched away. This process is repeated over and over again, with ultrapure water (UPW) used to rinse away impurities and the chemicals used in each step. This UPW is thousands of times purer than drinking water, and it takes roughly 1,400 to 1,600 gallons of municipal water to make 1,000 gallons of UPW.

A large semiconductor production facility can process approximately 40,000 wafers a month, requiring the consumption of 4.8 million gallons of water per day—roughly equivalent to the daily water consumption of a city of 60,000 people. 

Given that it costs around $20 billion to build a leading-edge semiconductor fabrication plant, having such facilities lie idle for lack of water has significant financial consequences. Therefore, the potential for disruptions in semiconductor production due to water-related issues poses a significant risk to both semiconductor manufacturers and the tech companies that rely on their products. This risk could manifest in the form of increased production costs, supply chain disruptions, or even a shortage of chips.

Water risk with global ramifications

Global companies design chips for use in everything from electric vehicles, AI data centers, and medical technology to mobile devices, energy grids, and streaming platforms. Almost all of these leading-edge chips are currently made in Taiwan, including by Taiwan Semiconductor Manufacturing Company (TSMC), the top producer of the world's most advanced processors (and Taiwan's largest company), with majority ownership by foreign investors. Taiwan's exports of integrated circuits amounted to $184 billion in 2022, which accounted for nearly 25% of Taiwan’s GDP. 

Any disruption to this industry would have global ramifications and, indeed, there was a risk of this happening in 2021 when Taiwan had a severe drought during which many of its reservoirs fell to below 5% capacity. One company alone was using 156,000 metric tons of water a day across Taiwan’s three science industrial parks in 2019—the equivalent of 60 Olympic-size swimming pools. 

The drought was one of the worst in the island’s history, and more than one million households and businesses had to ration water. Given the importance of chipmaking in Taiwan, government policy prioritized the semiconductor industry over farmers and municipalities, with some manufacturers mandated to cut back on up to 15% of industrial water use.

Water risk runs through the entire technology chain

Water scarcity isn't just an issue in the manufacture of semiconductors but extends downstream as well. Semiconductor chips are the vital components in the data centers that U.S. hyperscalers have been building and are planning to build in the coming years. AI has catalyzed a boom, with the combined spend of Amazon, Microsoft, Google, and Meta predicted to reach $300 billion in 2025, approximately double the amount of just a few years ago. These AI chips are extremely power hungry: With Nvidia's most advanced chips using as much power as a small kettle, the need for water to cool the increasing number of these data centers will only increase. In the United States, hyperscalers are estimated to be the tenth-largest water consumer, with both Microsoft and Google reporting that 42% and 15% of their respective global freshwater withdrawals are from areas experiencing water stress or scarcity.

What does good water stewardship look like?

Given the huge importance of semiconductors to Taiwan’s economy, the 2021 drought prompted a number of stewardship measures by TSMC that are designed to improve water security and mitigate the risk of future water shortages.

These include:

• Reducing water intensity (water used per product) by 30%
• Increasing water conservation by 30%
• A higher water recycling rate (now at 87%)
• Active monitoring of public reservoirs that supply its operations
• Maintaining water storage facilities in each fabrication plant with 2 days’ water usage capacity
• Water tankers that can provide 20% of water supplies during maximum water restrictions

Due to local opposition to building new reservoirs that could damage the environment, water recycling plants have been built in response.

These measures contribute to effective water stewardship, which means minimizing water consumption and reducing wastage by harnessing new technologies and best practices while communicating with peers to understand issues and potential solutions.

Investors need improved tools and methods to account for water

We invest within a global economy and a society dependent on water, but in an environment in which material water challenges and policy uncertainty exist, making informed investment decisions is more challenging. To enable more educated decisions that better account for water-related factors promoting a sustainable digital economy, investors need:

• Repeatable methodologies that appropriately value water and evaluate potential risks to identify the potential future value of water-related investments
• Robust data to identify, analyze, and mitigate these risks (and recognize areas of opportunity)
• Expertise to successfully navigate water-related policy, regulatory change, and their potential impact on assets and investments (asset value/income return)

By focusing on these factors, we believe there are potential opportunities for investors to more accurately calculate and value relevant water-related opportunities and risks. Given the key importance of water to investments and their management, we’ve boosted our extensive sustainability expertise of analyzing water-related risks and opportunities by building a dedicated in-house global water team to drive competitive insight, operational optimization, strategic investment targeting, and reputational management.

Approaching water in the investment process

When water is materially relevant to an investment, we believe it should be viewed through a lens of value protection and value creation.

• Value protection involves identifying water risk that could harm the underlying asset’s value over time or affect income and returns.
• Value creation involves identifying opportunities to capture future asset value appreciation, maximizing operating margins through water or contributing to resource stewardship. Where material, managing water-related risks and opportunities proactively and responsibly is important because these factors have the potential to affect investment outcomes, especially for real assets, but also far beyond.

Where material, water risk/opportunity should be factored into investment decisions, due diligence, risk assessment, and stewardship activities and, where possible, by exercising influence over water risks and the materiality of water-related factors.

Water is the X factor in the growth of the AI industry

Responsible technology innovation and implementation (RTII) demand that semiconductor production and data centers are more diversified and occur in less water-stressed regions, until which time we believe water will continue to be the X factor in the growth of the AI industry, where usage is projected to hit up to 6.6 billion m³ by 2027. With seemingly unlimited growth in the application of AI alongside demand for semiconductor manufacturing and cloud service providers, water is the looming shadow on the potential future upside of an industry that’s urgently required to tackle its impending water risk.