Troubled waters? The investment case for stopping the AI cloud from draining the river

As Britons sweltered over their PCs during the summer drought of 2025, they received surprising advice from the UK government. People were encouraged to play their part in conserving water by deleting old emails and photos. The message explained that the data centres powering cloud storage require vast amounts of water for cooling.

Estimates vary, but a medium-sized centre can use up to 110m litres of water a year for cooling alone – roughly the annual consumption of 1,000 households. The UK already has more than 500 data centres – and there are likely to be many more in the future.

It’s getting hot in here

Without cooling, data centres can rapidly reach temperatures above 40°C. This can shut down servers and trigger system failures. In 2025, a cooling-system failure in the American Midwest caused an 11-hour outage for CME Group, the world’s largest derivatives exchange. That disrupted trading in equities, bonds, currencies, and commodities.

Data centres don’t just need cooling. They also need huge amounts of electricity. Generating that requires water as well. Water is also used heavily in manufacturing the semiconductors and other components that centres rely on.

The International Energy Agency estimates that globally, data centres already consume more than 560bn litres of water annually for cooling and electricity generation. This figure will grow even higher as computer power expands and the onward march of AI continues. Some analysts predict annual datacentre water use could reach 1.2tn litres by 2030. That matches the amount used by about 24m Britons.

Such an amount might seem manageable, but this rising demand for water is set to collide with a squeeze on supply as freshwater resources come under increasing strain in a world with more volatile weather patterns. The World Resources Institute, an environmental think-tank, predicts global freshwater demand will exceed supply by 40% by the end of this decade. Closing this gap could require damaging solutions, such as extracting environmentally unsustainable amounts of water.

Financial and economic risks

The World Economic Forum, a think-tank, warns that AI’s water needs could threaten water security – the ability of countries to meet demand without harming biodiversity. The risk is particularly acute in areas already facing water stress. If water shortages begin to constrain industrial activity, the effects could hit economies and company profits.

The impact is especially visible in regions with a high concentration of data centres. Ceres, a sustainability-focused non-profit organisation, has analysed the likely water needs of planned developments in the Phoenix area. It predicts indirect water use linked to data centres around Arizona’s capital could rise by 400% – even though the region already faces significant water stress.

Blocked revenue streams

Water risk has financial implications for companies as well as communities. In 2024, Google halted plans for a data centre in Chile because of local concerns about pressure on water supplies. The company later redesigned the project and restarted the permit process, increasing costs and delaying potential revenue generation. In 2025, Amazon abandoned plans for a data centre in Tucson, Arizona, largely for the same reason.

Traditional alternatives to water can be costly. Amazon noted that relying solely on air conditioning is less efficient, raises operating costs, and adds further strain to the energy grid. Combining air conditioning with water cooling can reduce a data centre’s energy use by 25–35% during peak summer periods, making water availability increasingly important.

Tech to the rescue

Unfortunately, traditional cooling systems often make recycling water difficult. But companies are working fast to improve efficiency and develop alternatives.

One option is direct-to-chip liquid cooling, which removes heat directly from high-power components using liquid coolant. Microsoft research suggests this technology could reduce water consumption across a data centre’s lifespan by 30–50%. This includes the water used in both the power generation and the component manufacturing.

Another approach is liquid immersion cooling, where entire servers are submerged in a specialised liquid that absorbs heat. Alongside reducing water consumption, this can remove the need for energy-intensive air conditioning and make waste heat easier to reuse. This technology is becoming increasingly necessary for systems using the latest semiconductor chips, such as Nvidia’s Blackwell, which traditional cooling systems struggle to support.

These approaches are highly efficient, but expensive. That calls for multiple solutions. Amazon is partnering with local authorities to use recycled water and already employs it at 24 data centres, with plans to expand this to 120 by 2030.

Switching to renewable energy can also help, as solar and wind generation require little or no water.and wind generation require little or no water.

You can’t manage what you can’t measure

There are signs these developments are helping, but building an accurate picture of progress remains difficult. One study found that fewer than one-third of data-centre operators track water consumption. Microsoft and Meta lead the way in reporting water use, but many others lag behind. Policymakers are trying to improve transparency, though reporting remains voluntary and inconsistent.

This is one reason why Rathbones continues to engage with technology companies on water consumption, particularly those exposed to data centres and semiconductor manufacturing. We encourage firms to measure and disclose their water use and to take steps to ensure adequate future supply.

Excitement over AI has reached fever pitch. That’s helping to power economic growth, particularly in the US, and data centres are central to this expansion. Amid this fever, we believe cool heads are needed. Companies must treat water availability not as an afterthought, but as a financial risk that warrants serious investment and oversight.

United States of data

The US has almost half the world’s data centres, but Germany and the UK already have more than 500 too.