Water worries hit the chip sector

Receive free Water scarcity updates

We’ll send you a myFT Daily Digest email rounding up the latest Water scarcity news every morning.

Today begins the UN’s Africa Climate Week in Nairobi. Kenyan president William Ruto will be among the big names speaking. But it comes at a difficult time for sustainable finance on the continent.

Gabon last week became the latest African country to suffer a presidential coup. Ousted president Ali Bongo was a committed environmentalist, keen to protect gorillas and elephants that inhabit Gabon’s forests, which cover some 90 per cent of the country. Now Gabon’s $500mn debt-for-nature swap could be in trouble as the country’s dollar-denominated bonds sold off after the coup. Sustainable bonds from Africa could also face difficulties following the coup, BNP Paribas said on Friday, according to Bloomberg.

We’ll continue to monitor the goings on of Africa climate week, but this week Simon and I will be in another corner of the world: Singapore, for the Asia edition of the Moral Money Summit. Please say hello if you are attending.

In today’s newsletter, I have a report on the water scarcity challenges that face the world’s biggest semiconductor companies, an issue that has resonance around the world. In the best of times, chipmaking is one of the hardest manufacturing processes in business. Now, investors are slowly recognising that the world’s insatiable appetite for semiconductors has run smack into the consequences of climate change. — Patrick Temple-West

Water scarcity is a growing risk for semiconductor businesses

The extreme heat across the world this summer has raised the temperature at semiconductor companies that need huge amounts of fresh water to fulfil increasing manufacturing demands for chips.

Last year, Taiwan Semiconductor Manufacturing Company said it would more than triple its investment in the US state of Arizona to $40bn. With the fresh investment, TSMC is scheduled to open a fabrication plant, or “fab”, in the state in 2024. Arizona was the fourth-largest exporting state for semiconductors in 2022, according to the US government.

But TSMC has picked a part of the US increasingly prone to drought. Just as TSMC announced its Arizona investment, the southwestern states were in the midst of a “megadrought” that depleted the region’s two-largest reservoirs to record lows. Farmers in parts of Arizona suffered cuts in the water they can use for irrigation.

Closer to home, drought conditions were even more serious. Earlier this year, Taiwan experienced significant water shortages — less than two years after overcoming its worst drought in a century. The Tsengwen Reservoir, Taiwan’s biggest, was filled to just 11 per cent of its effective capacity on March 17, according to government data. The level for the Nanhua Reservoir, which supplies the Taiwan manufacturing hubs in Tainan and Kaohsiung, stood at 41 per cent.

The water scarcity risks for semiconductor companies are the latest wake-up call to investors about the supply chain vulnerabilities brought on by global warming. FT climate editor Emiliya Mychasuk highlighted in July how extreme weather has injected supply chain risks into businesses such as grocery markets. Even in the best of times, manufacturing semiconductors is fraught with supply stresses. 

For the shareholders of semiconductor companies, drought risks have not been fully appreciated, Morgan Stanley warned in an August 27 report. “Investors should assess the long-term impacts of water supply amid climate change, especially when the production is concentrated in water-stressed areas” such as Taiwan. The country “relies heavily on seasonal rainfall to provide water supply, and climate change has made this a less reliable option”, Morgan Stanley said.

The chipmakers’ regulatory filings do not go into detail about the water scarcity threats they face. TMSC said in its 2022 annual report that it now requires suppliers to assess drought risks and implement responses. Nvidia this year said its operations could be harmed if they are hit by a range of natural disasters, including water shortages. Rivals made similar, catch-all statements about overall risks to their businesses. Micron, one of the dominant companies in the global DRam memory chip market, disclosed that in 2021 it issued $1bn of green bonds to help pay for water management investments among other environmental initiatives.

Some chip companies are also trying to recycle the fresh water they use in manufacturing. Intel has said it is almost water-neutral — returning to the ecosystem almost as much clean water as it consumes. In 2021, the company used 16bn gallons of freshwater, reclaimed water and desalinated water. And with water management practices, it was able to return more than 13bn gallons of water back to nearby communities.

TSMC has said it wants to reduce unit water consumption by 30 per cent, though its recycling efforts are less specific. The company has said it is working with the Taiwanese government on water recycling.

“People don’t realise that water recycling, on-site water treatment facilities and net zero water goals are now widely used in several industrial sectors, including the semiconductor industry,” Paul Westerhoff, a professor at Arizona State University, told me. “While the last few months in the central parts of Arizona have been relatively dry, last winter was quite wet in Arizona,” he said. “There is more than adequate water for the growing semiconductor manufacturing industry in Arizona.”

But water problems could get worse because of the rapid rise of artificial intelligence, Morgan Stanley said. “The rapid development of AI is likely to increase water demand even more — semiconductor companies and data centers are both water intensive,” Morgan Stanley said. Analysts cited 2023 research that found in the time it took to train ChatGPT-3 Microsoft’s US data centres directly consumed 700,000 litres of clean water — enough to produce 370 BMW cars or 320 Tesla electric vehicles.

Due to the growing demand for chips, “the current recycling rate doesn’t keep semiconductor manufacturers from adding more pressure to Arizona’s water supply”, Shaolei Ren, a professor at the University of California at Riverside, told me.

“Despite the recent emphasis on water sustainability, big techs still haven’t done as much for water as they do for their carbon footprints,” Ren said. 

Companies have been disclosing scope 2 carbon emissions from electricity usage for AI model training, he said. But direct water consumption for AI model training is not included, nor is the indirect water consumption for electricity usage.

“The lack of transparency about the water efficiency information, especially when compared to carbon, doesn’t align with recent [companies’] statements on water,” he said. (Patrick Temple-West)

Smart read

Our colleagues have an instructive Big Read on “climate engineering”: the idea that the Earth can be cooled by reflecting some of the sun’s rays back into space. Advocates say it is the “only” way to cool the planet in the short term, but opponents fear a devastating free-for-all.