Semiconductor Industry's Water Risk Underpriced, Warn Fund Managers

Investors in semiconductor stocks are facing a growing threat to industry valuations due to a chronic shortage of water, claim fund managers. The semiconductor manufacturing process is among the most water-intensive, consuming about 1,869 cubic meters per dollar. This water usage is significantly more than that of textiles and data centers. David Smith, a senior investment director for Asian equities at Abrdn Plc, stated that water management has become a pressing issue for the sector. He added that water could potentially become more material in terms of operational costs and pose a threat to the continuation of businesses. Despite this, water shortage as a risk category doesn't receive the attention it deserves. Abrdn, which holds stakes in Taiwan Semiconductor Manufacturing Co. (TSMC) and ASML Holding NV, isn't alone in its view. Morgan Stanley analysts have also warned of impending shortages and tensions due to technologies like artificial intelligence requiring vast amounts of water. Climate change and extreme heat are making access to water more precarious than ever. TSMC, the world's biggest producer of semiconductors, has set targets but fell short of its 2019 water consumption goal. It is now aiming for a 30% cut in unit water consumption by 2030 relative to 2010. However, achieving such goals is becoming increasingly challenging as the planet heats up. Despite the water risk, TSMC remains a popular company among investors targeting environmental, social, and governance metrics. Yet, some significant funds, like the world's biggest climate fund managed by Nordea Asset Management, did not hold TSMC at the end of July. Vicki Chi, a portfolio manager at Robeco in Hong Kong, revealed that her team has already adjusted the valuations of semiconductor assets to reflect water scarcity. She believes that screening for such risks gives investors a head start. The goal is to catch everything from the rising cost of maintaining access to water as a basic resource to the potential for litigation if local communities fight corporations tapping their water supply. However, many semiconductor companies, including ASML, Nvidia Corp., and Broadcom Inc., are not publishing quantifiable water targets. This lack of transparency leaves investors often in the dark about the true extent of the water risk.