AI Needs More Than Chips. It Also Needs Water.
The investment theme of artificial intelligence could further intensify global water scarcity. Yet financial markets have so far barely priced in that potential. More than two-thirds of the Earth’s surface is covered by water. But only 2.5 percent of it is freshwater, and only a small proportion of that is readily accessible through lakes and rivers.
Water is already a scarce resource for drinking and agriculture. The boom in artificial intelligence is adding another source of demand. Data centres require water to cool their processors.
There is also an indirect effect. Data centres consume enormous amounts of electricity, and significant volumes of water are used in power generation. For investors, this could create opportunities. So far, however, the scarcity of water is barely reflected in the share prices of companies operating in the water sector. The S&P Global Water Index, which includes 100 companies from the industry, is slightly negative over the past year. Its five-year performance is only modestly positive.
One reason is the composition of the index. Water funds do not contain the technology companies that have driven much of the broader market’s performance in recent years.
The water sector is more heavily weighted towards defensive industries such as utilities, infrastructure and industrial technology companies, says Simon Frank, investment adviser at Pictet Asset Management.
These companies also benefit from long-term structural growth drivers, but they respond less strongly to short-term market trends such as the AI boom.
Technology Companies Want To Reduce Water Use
Another reason is that water utilities in particular have suffered from higher global interest rates. These companies tend to carry substantial debt because they finance infrastructure over long periods. When interest rates rise, their financing costs increase, putting pressure on their share prices.
The problem of water scarcity itself is real, however, as the efforts of large technology companies demonstrate. Amazon aims to become “water positive” by 2030, returning more water to communities than it consumes. Microsoft and Google have set similar objectives. For investors, the more significant opportunity may therefore lie in the water infrastructure required to support AI-driven growth.
As artificial intelligence becomes more widespread, operators face increasing pressure to reduce water consumption and improve efficiency. After several years of relatively subdued market performance, experts now consider large parts of the water sector more attractively valued than they were a few years ago. Companies that could benefit from long-term investment in water infrastructure, water quality and efficiency improvements appear particularly relevant. Investors who prefer broad exposure to the theme can choose from numerous active and passive strategies. Pictet’s water fund is one of the largest actively managed strategies, while BNP Paribas and Robeco also offer dedicated products. Their recent performance, however, has remained relatively modest, reflecting the subdued performance of the wider water industry.
