(Oct 28): JPMorgan Chase & Co says the US is facing significant strains on its water supply that have the potential to harm the world’s largest economy and eat into corporate valuations.

The water resources of the US, already overstretched, are being further stressed by the boom in artificial intelligence, according to a report published on Monday by JPMorgan and sustainability consultancy ERM, titled “The Future of Water Resilience in the US”.

The research shows how the growth of AI, which requires vast amounts of water to cool power-hungry data centres and for semiconductor manufacturing, is bumping up against the reality of climate change. The upshot is that a surge in demand is colliding with less reliable precipitation patterns, leading to dangerous water shortages.

“AI and data centres are increasing the scale of the challenge, but also putting a spotlight on the issue,” Rama Variankaval, global head of corporate advisory at JPMorgan and a lead contributor to the report, wrote in an emailed comment to Bloomberg.

Large data centres can use as much as five million gallons of water a day, which is roughly the same amount as is used by a town of up to 50,000 people. That’s on top of the billions of gallons of water needed to enable the manufacture of semiconductor chips.

A mishandling of water risk could cause “real disruptions to global supply chains, with particular implications emerging from the rapid growth of AI,” the report’s authors wrote. Water is “essential” to both semiconductor manufacturing and data-centre cooling operations, two “crucial AI-related business activities.”

The research also found that increased migration to warmer, water-stressed areas like Arizona, as well as the re-shoring of manufacturing tasks once outsourced to other countries, is adding to the water crisis in the US.

Water’s “influence on strategic decisions could reach a level of significance that impacts corporate valuations,” according to JPMorgan and ERM.

The development is forcing an ever larger group of investors to monitor how water scarcity is impacting their portfolios. The report points to a growing cohort of asset managers and pension funds recognising water stress as a financial risk. The World Bank estimates that continued pressure on the water supply may translate into a slowdown in gross domestic product of as much as 6% in some corners of the globe.

“The increased scale of the challenge, the availability of a set of solutions — each applicable in different situations — and the public attention to the issue are bringing in various stakeholders, including investors, to focus on the water space,” Variankaval said.

JPMorgan and ERM say water represents a sizable investment opportunity. As a sector, water faces an annual shortfall in public spending of US$91 billion (RM396.9 billion), they estimate. Potential investment areas include in flood-control infrastructure, water treatment facilities and new technologies. For now, however, private investment in water “comprises a marginal amount of what is needed,” they said.

A key hurdle remains coming up with an appropriate monetary value. Markets need to put a price on water in much the same way as many have tried to do with carbon dioxide, JPMorgan and ERM said.

Pricing in the US currently “does not reflect the true value of water,” they wrote.

Uploaded by Magessan Varatharaja