The rising adoption of artificial intelligence is indirectly driving water consumption by datacentres, while local scarcity could present material risks to operators. For investors, there are opportunities in the technological solutions that can help the industry manage its water intensity. Lisa Beauvilain, Matthew Wright and Johan Florén at Impax Asset Management explain.
The tension between soaring water consumption by datacentres and finite water resources is rapidly growing. Left unabated, this increases risks for operators, clients and ultimately investors in both.
Better disclosure is an important step towards managing these risks. We believe investors should encourage more transparency as well as the adoption of existing and emerging technologies that can reduce datacentres’ dependency on water. Companies behind these solutions stand to benefit from the long-term need to align the AI revolution and the transition to a more sustainable economy.
The water intensity of data
The energy intensity of datacentre operations is well understood: their share of global electricity consumption is expected to have tripled from roughly 1% in 2022 to 3% by the end of 2026. This means the industry will roughly consume the equivalent of the power generated by the US’s 50 or so nuclear power stations.
Awareness of the industry’s water intensity is lower. Yet a 100MW hyperscale data centre can directly consume around 2.5bn litres of water each year to cool servers. This is equivalent to the needs of about 80,000 people.
The rapid adoption of AI is driving higher water use by the datacentres that it runs on. For example, generating a 100-word email using Open AI’s GPT-4 model – a task that involves thousands of calculations to determine the most appropriate set of words – uses an estimated 500ml of water.
Based on projected demand growth, AI tools could indirectly lead to global water withdrawals estimated at 4.2bn-6.6bn cubic metres by 2027, equivalent to roughly half of the UK’s water consumption.
The risks of datacentres’ thirst
Surging consumption is a particular concern in regions grappling with scarcity. Many datacentre clusters are located in water-stressed areas such as the southwestern US and parts of China.
This not only exacerbates local water stress, but can also expose datacentre operators to significant operational risks such as costly shutdowns in periods of drought.
Operators may face reputational risks. There has been growing opposition to new datacentres on environmental grounds. Heavy corporate consumers can face a backlash from local communities.
Despite these risks, and rising awareness, only a trickle of information flows to investors.
Identifying opportunities to decouple data from water
As major water consumers, efficiencies can deliver meaningful financial savings for datacentres.
- Within datacentres that use traditional air-based cooling, more efficient heating, ventilation and air conditioning (HVAC) systems can indirectly reduce water used in the power generation process.
- In datacentres that use evaporative cooling, water recycling solutions – which use media filtration, ion exchange and membrane filtration to return pure water for re-use can reduce water consumption by as much as 70%.
- Innovative closed-loop liquid cooling systems can go further: by continually circulating water between servers and chillers to dissipate heat, they can reduce or even remove the need for a fresh water supply.
Alongside investment in water-saving technologies, conservation measures taken by leading operators show how the industry can act to better manage risks. The likes of Microsoft* have developed predictive models to anticipate water requirements, based on real-time weather and operational data, and more efficiently manage AI-related workloads (and so manage their cooling requirements).
Datacentres can also harvest rainwater to reduce the pressure they place on local water infrastructure.
Where conservation measures are not being taken, we believe investors should engage with companies to monitor water risk management and encourage companies to manage these risks appropriately.
Transparency can help manage risks
Reporting on water consumption remains patchy and inconsistent across the industry. Only two-fifths of datacentre operators actively track water usage metrics. This limits understanding of the issue and hinders effective risk management.
Given the materiality of these risks, we believe investors must engage with the industry to encourage more detailed reporting. Cloud service companies should be encouraged to demand disclosures from the datacentres they partner with, so their water-related dependencies and risks can be identified and evaluated.
An emerging metric for standardised disclosures exists in the shape of Water Usage Effectiveness (WUE), which quantifies how efficiently a datacentre directly consumes water in its cooling operations.
Encouragingly, major operators including Equinix* and Microsoft have started disclosing WUE for certain regions. Several have set goals to reduce their water intensity and even – as in the case of Microsoft and Google* – to replenish more water than they consume by 2030.
Given the limited resources, more emphasis should be placed on WUE in datacentre building certifications. Datacentres with higher certification standards should command a rent premium, creating an incentive for better water management within the industry.
More data, less water
It looks certain the future will involve more AI, and so more data. Unless the water intensity of datacentres is addressed, both operators and customers will face growing risks arising from scarcity of a finite resource.
However, proven technologies can quench the industry’s thirst, reducing these risks and lowering the water footprint of data. We see growing opportunities for companies that can meet the needs of a rapidly expanding sector.
As well as identifying these opportunities, we believe investors can help portfolio companies navigate their water-related risks by advocating for better disclosure and risk management.
*References to specific securities are for illustrative purposes only and should not be considered as a recommendation to buy or sell or investment advice. Impax Asset Management and/or BNP Paribas Asset Management may or may not have invested in these securities. Information presented herein reflects Impax Asset Management’s views at a particular time.
