Water impacts from data centers may expose companies to more risk than acknowledged, a new analysis shows

Case study of Phoenix, Arizona provides a comprehensive picture of potential water risks from direct water use and energy consumption tied to data centers   

A new Ceres analysis released today covers the full range of potential water risks facing data center companies, high-tech businesses, and investors due to compounding water demands from data centers, especially in areas where water is already scarce. 

Drained by Data: The Cumulative Impact of Data Centers on Regional Water Stress, uses Phoenix, Ariz., a booming data center hub, as an example of data center water impacts increasingly playing out in the United States—32% of data centers across the country are in areas of high or extremely high-water stress—and in data center hot spots across the globe. The analysis was developed in partnership with Cathay Financial Holdings and with research and analysis from Bluerisk. 

In addition to the substantial amounts of water used in data centers to cool systems, the analysis reveals that even more water is consumed to generate electricity to power data centers’ massive energy needs. In the coming years, annual water use from data center electricity demand is expected to increase by 400% in the Phoenix region. That’s enough water to supply the city of Scottsdale, Arizona—more than 240,000 people—for over 2 years. These water demands and the proliferation of data centers could increase water stress in some areas by as much as 32% if all currently planned data centers come online. 

“This analysis brings into sharp focus the growing potential for higher operating costs and disruptions, reputational damage, and regulatory risks for data center companies that rely heavily on shared and diminishing water supplies,” said Kirsten James, senior program director of water at Ceres and co-author of the report. “To protect their business, it’s critical for companies and investors to address the full suite of water risks stemming from existing and planned data centers, particularly in areas of high-water stress.” 

As artificial intelligence (AI) drives rapid growth in data centers, the analysis stresses that companies and investors need to assess water risks more broadly, including impacts from direct and indirect water consumption and the added strain from concentrated data center clusters. 

“Currently, most data center companies’ water strategies focus primarily on water used onsite. But some are beginning to look at other drivers of water scarcity, such as energy use, that could further impact their business,” said Shama Perveen, director of water research at Ceres and report co-author. “Other companies can follow suit, assessing water impacts from their data centers more holistically and addressing risks with innovative leading practices and partnerships.” 

Key recommendations for companies, include: 

• Enhanced disclosure of the full suite of water risks associated with data centers in their value chain so companies and their investors have a clearer understanding of financial risks and how to mitigate them. The investor Corporate Expectations for Valuing Water can serve as a guide for companies to better understand, disclose, and address the full suite of their water impacts including ecosystem health and water quality, in their value chains. 

• Accelerate the adoption of best practices such as advanced cooling technologies to optimize water and energy efficiency. 

• Continue to factor water risks into early business planning decisions, including site selection and infrastructure design, considering cumulative impacts on water availability as well as indirect water demands for electricity. 

• Undertake industry collaborations to share learnings and address shared risks, and work with other stakeholders—like water managers, energy providers, and local government—to create coordinated solutions. 

The analysis offers investors a much-needed view of how data center water risks can stack up in a region to better understand and take steps to mitigate these risks to their business. These include:  

• Engaging with high-tech and data center companies through efforts such as the Valuing Water Finance Initiative to support their work to develop more robust strategies.  

• Supporting companies' efforts to assess and disclose the full suite of water risks related to data centers. 

• Exploring innovative tools and strategies to assess companies’ water-related disclosures and mitigation efforts as part of their investment strategy and engagement priorities. 

“High-tech industries and data centers, which are central to the digital economy, have a significant reliance on water,” said Sophia Cheng, Chief Investment Officer, Cathay Financial Holdings. "As a member of the Ceres Valuing Water Finance Task Force, Cathay Financial Holdings emphasizes the importance of water stewardship and will continue to engage with companies on managing these risks, adopting best practices, identifying opportunities for improvement and taking into account the interests of stakeholders." 

“As more data centers are planned and come online around the globe, we need to understand the extent their water needs could impact their business and the cumulative impacts on communities and other industries in the area,” said Monika Freyman, Vice President, Sustainable Investment, Addenda Capital. “Information in this analysis, particularly related to data centers’ heavy reliance on water through energy use, helps build the context we need to assess and mitigate risk in our portfolios and engage with data center companies on how they are managing water basin level exposures to these risks, and what efforts they are undertaking to collaborate with stakeholders to mitigate these risks.” 

“This report underscores why water risk is a material issue for data center infrastructure and emphasizes the importance of local context,” said Jonathan Bey, Senior Analyst, Responsible Investing, NEI Investments. “By understanding both company exposure and cumulative regional water stress, investors can more effectively assess risk and engage in meaningful discussion with companies to ensure their growth strategies are resilient and demonstrate credible management of future water challenges.” 

While focused on the Phoenix region, findings and key recommendations from this analysis apply to many regions and stakeholders—including water managers, energy providers and policymakers—managing water stress amidst the global data center boom. 

“This analysis highlights the importance sound public water policy and robust corporate water programs to address the cumulative impacts, and associated business risks, stemming from developing data centers in water scarce areas,” said Paul Reig, CEO of Bluerisk. 

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About Ceres  
Ceres is a nonprofit advocacy organization working to accelerate the transition to a cleaner, more just, and resilient economy. With data-driven research and expert analysis, we inspire investors and companies to act on the world's sustainability challenges and advocate for market and policy solutions. Together, our efforts transform industries, unlock new business opportunities, and foster innovation and job growth – proving that sustainability is the bottom line. For more information, visit ceres.org.