The water challenge for semiconductor manufacturing: What needs to be done?

The technology we rely on – from cell phones and computers to LED bulbs and cars – cannot function without semiconductors. And semiconductors cannot exist without water – a lot of it.

Water is crucial at all stages of semiconductor manufacturing. This heavy reliance – and impact on water – is becoming a critical vulnerability for the fast-growing global chip industry. And that, in turn, exposes the tech companies that need semiconductors to make electronic devices and increasingly, advance their artificial intelligence (AI) technology to significant financial risk.

This burgeoning demand for chips in the tech industry puts more pressure on already stressed water systems.

Semiconductor factories rely on water to cool systems and generate electricity – globally, they are already consuming as much water as Hong Kong, a city of 7.5 million, according to an S&P Global report.

But what really drives most of the industry's thirst for water is its need for ultrapure water that is used to rinse residue from silicon chips during the fabrication process.

Ultrapure water, which is thousands of times cleaner than drinking water, is treated through processes such as deionization and reverse osmosis to remove pollutants, minerals and other impurities that can damage chips. It takes roughly 1,400 to 1,600 gallons of municipal water to make 1,000 gallons of ultrapure water.

An average chip manufacturing facility today can use 10 million gallons of ultrapure water per day—as much water as is used by 33,000 US households every day.

Potential water-related disruptions to operations for TSMC, the world's largest contract chipmaker, could impact the entire global semiconductor supply chain and raise buyers’ prices.

In addition to its enormous use of water, chip manufacturing also produces wastewater that contains pollutants – including heavy metals – that can be toxic to aquatic ecosystems and humans.

Some manufacturers are committing to offset the impact of their rising water use. A new chip facility being built by TSMC in Phoenix, Arizona, for instance, says it will reclaim about 65% of the water it uses, reducing its dependence on city water. The region is grappling with population growth and increasing water scarcity due to historic water shortages in the Colorado River, which feeds water supplies.

Meanwhile, Intel, which is building two new chip factories in the Phoenix suburb of Chandler, has partnered with the city to create a reclaimed water facility. The water produced will supplement groundwater supplies and provide Intel with more water for its cooling systems.

But the problem isn’t going away anytime soon. Escalating demand for semiconductors is coming up against persistent drought and extreme weather in chip manufacturing hot spots – including regions in the Western United States and China. In a 2023 survey of 100 senior decision makers in semiconductor companies, 73% cited natural resources, including water, among environmental factors posing the greatest risk to their business.

Companies may also face regulatory risks. For example, high levels of pollution in water systems surrounding semiconductor manufacturing facilities, including in eastern China and South Korea, have resulted in environmental violations.

Water risk in the semiconductor supply chain is among the many concerns motivating investors to engage with large tech companies on water sustainability through efforts such as Ceres’ Valuing Water Finance Initiative. Investors who are part of the initiative encourage and support companies on the initiative’s focus list as they work to address their broad impacts on the water resources they rely on in their value chains.

There is a need to fully recognize the water risk factor in supply chains, especially regarding chip manufacturing and metals mining, as showcased by the findings of a recent benchmark report that evaluated the water stewardship practices of 72 companies on the initiative’s list.

Sony, one of the tech companies studied, discusses in public disclosures how semiconductor production impacts water resources and says it is working to reduce the reliance on freshwater in its own semiconductor manufacturing plants.

For example, Nagasaki Technology Centre, a production centre owned by Sony Semiconductor Manufacturing Corporation, reuses about 80% of its manufacturing wastewater. The company also plans to build a wastewater recycling facility outside the site.

According to the company, water recycling and reduction activities have helped keep wastewater discharges from chip production at almost the same level even as production increases. However, more transparency is needed to understand if the company is mitigating water risk in its own manufacturing and from the semiconductors it purchases.

In addition to reusing and recycling water, semiconductor manufacturers can improve water efficiency by upgrading water monitoring systems to identify lost water and employ new technological advances that require less water. Importantly, companies should consider water risk in business planning, such as facility siting decisions.

Tech companies buying chips can promote these strategies with sourcing policies that ensure they buy chips from manufacturers using best practices for managing water. Large tech companies that make their own chips should disclose related water risks and the plans or practices they have in place to mitigate those risks.

Further down the supply chain, mining the precious metals and rare earth elements needed for producing semiconductors also consumes and pollutes water resources. Four of the five companies assessed in the benchmark have disclosed efforts to source minerals responsibly or work towards better mineral traceability but specific water-related impacts from mining activities are not discussed.

Manufacturers need freshwater to make semiconductors and freshwater is in short supply. This is a problem for tech companies, which should openly disclose water risks associated with chip manufacturing in their supply chains and their measures to protect their business.

In addition to incorporating water risk into valuation models and investment decisions, investors can take an active ownership approach, engaging with tech companies on their water-related financial risks. Specifically, investors can ask companies to assess water risk in their direct operations and supply chains and use that information to set targets around water use, pollution and fresh water supplies for communities and ecosystems.

Investors can encourage companies to leverage leading practices and opportunities to work with peers and other stakeholders on solutions that will strengthen their value chains and help ensure they can meet the growing demand for semiconductors and the products they power.