2025 Sustainable Investing Trends
First Quarter
Key Takeaways
The high demand for water to cool data centers means AI competes with consumers, communities, agriculture and other industries for freshwater resources.
On the positive side, AI technologies have the potential to improve water management practices significantly.
AI and Water Resources: Sustainable Innovation and Water Management
The start of a new year brings a sense of new possibilities. This year, much of that optimism comes from the promise of artificial intelligence (AI). While we’re excited by the opportunities AI represents, we also acknowledge its significant use of limited resources, especially water.
AI technologies are advancing rapidly, offering innovative solutions across virtually every sector. However, only some now using this powerful tool understand that a single prompt to a chatbot like ChatGPT uses about 16 ounces of water at the data centers that house AI systems.1
Water is a finite resource essential to life, but it’s increasingly under pressure due to population growth, climate change and industrial activities. In the U.S., the average per capita water use is 132 gallons per day (representing all water needs, including irrigation, industrial uses and personal activities like drinking, bathing and washing).2 A large data center can consume as much water as 4,200 people daily.3 Understanding the interplay between AI and water resources is crucial for sustainable development.
AI’s High Water Consumption: Challenges and Possible Solutions
AI is poised to challenge the limits of the earth’s water resources. Data centers require significant cooling, and traditional air-cooled data centers use approximately 2.1 million liters of water daily, most of which must be potable. This high demand puts data centers in direct competition with consumers, local communities, agriculture and other industries for freshwater resources.
Roughly 20% of U.S. data centers are in areas with moderate to high water stress.4 Companies seeking to build in lower-cost locations with “cheap” (increasingly renewable) electric power often confront limited water availability. Moving data centers to Sunbelt locations like Texas and Phoenix, now the second largest data center market in the U.S., boosts water stress and can lead to competition with residents for water.
Technological limitations contribute to the AI-water challenge. The dominant air-cooling technology, which uses large volumes of water, needs improvement in dissipating heat from high-performance AI chips.
In September, Google announced it would halt construction of a data center in Chile. The local community — already struggling with water scarcity — had raised concerns about the additional strain the data center would place on its water resources. After a Chilean court partially reversed Google’s building authorization due to these concerns, Google said it would revise the project to change its water-intensive cooling system and comply with more stringent environmental requirements. This presents an opportunity to pursue technological advancements that support environmental sustainability and meet community needs.5
AI for Water Conservation: Smart Technologies and Sustainable Practices
AI technologies have the potential to improve water management practices significantly. For example, smart irrigation systems use data from sensors and weather forecasts to optimize water use in agriculture (accounting for nearly 70% of all water used globally).6 AI-powered biosensors provide real-time water quality data, helping detect and address contamination more effectively.
AI models improve predictions of extreme weather events such as floods and droughts, helping governments, farmers, businesses and individuals be better prepared and optimally allocate resources. AI algorithms also enhance how water distribution networks are managed, reducing losses and ensuring equitable access.
Investors should be aware of AI’s insatiable thirst for water (along with electricity) and the resulting environmental impacts, as well as the impressive benefits it could offer for water management. Sustainable practices, like using renewable energy sources and improving the efficiency of AI chips and servers, could help mitigate AI's water-related impacts.
In our view, policymakers, researchers and industry leaders must collaborate to ensure that AI’s positive contribution to improving water sustainability outweighs the burden it imposes. Innovative solutions that reduce AI's water footprint and enhance its contributions to sustainable water use could reduce costs for everyone and provide innovative companies with opportunities to shine.
¹ Andrew Collier, “Artificial Intelligence Is Using a Ton of Water. Here’s How to Be More Resourceful,” Veolia Water Technologies & Solutions Blog, August 22, 2024.
² Ana Pinheiro Privette, “AI’s Challenging Waters,” University of Illinois Center for Secure Water, October 11, 2024.
³ Ana Pinheiro Privette, “AI’s Challenging Waters,” University of Illinois Center for Secure Water, October 11, 2024.
⁴ Michael Copley, “Data Centers, Backbone of the Digital Economy, Face Water Scarcity and Climate Risk,” NPR, August 30, 2022.
⁵ Associated Press, “Google Says It Will Rethink Its Plans for a Big Data Center in Chile over Water Worries,” September 17, 2024.
⁶ Truke Smoor, “6 Facts You Should Know About Water Use in Agriculture,” Our Stories – Cargill, August 27, 2024.
Many of American Century’s investment strategies incorporate sustainability factors, using environmental, social, and/or governance (ESG) data, into their investment processes in addition to traditional financial analysis. However, when doing so, the portfolio managers may not consider sustainability-related factors with respect to every investment decision and, even when such factors are considered, they may conclude that other attributes of an investment outweigh sustainability factors when making decisions for the portfolio. The incorporation of sustainability factors may limit the investment opportunities available to a portfolio, and the portfolio may or may not outperform those investment strategies that do not incorporate sustainability factors. ESG data used by the portfolio managers often lacks standardization, consistency, and transparency, and for certain companies such data may not be available, complete, or accurate.
Sustainable Investing Definitions:
Integrated: An investment strategy that integrates sustainability-related factors aims to make investment decisions through the analysis of sustainability factors alongside other financial variables in an effort to make more informed investment decisions. A portfolio that incorporates sustainability factors may or may not outperform those investment strategies that do not incorporate sustainability factors. Portfolio managers have ultimate discretion in how sustainability factors may impact a portfolio’s holdings, and depending on their analysis, investment decisions may not be affected by sustainability factors.
Sustainability Focused: A sustainability-focused investment strategy seeks to invest, under normal market conditions, in securities that meet certain sustainability-related criteria or standards in an effort to promote sustainable characteristics, in addition to seeking superior, long-term, risk-adjusted returns. Alternatively, or in addition to traditional financial analysis, the investment strategy may filter its investment universe by excluding certain securities, industry, or sectors based on sustainability factors and/or business activities that do not meet specific values or norms. A sustainability focus may limit the investment opportunities available to a portfolio. Therefore, the portfolio may underperform or perform differently than other portfolios that do not have a sustainability investment focus. Sustainability-focused investment strategies include but are not limited to exclusionary, positive screening, best-in-class, improvers, thematic, and impact approaches.
Sustainability focuses on meeting the needs of the present without compromising the ability of future generations to meet their needs. There are many different approaches to Sustainability, with motives varying from positive societal impact, to wanting to achieve competitive financial results, or both. Methods of sustainable investing include active share ownership, integration of ESG factors, thematic investing, impact investing and exclusion among others.
References to specific securities are for illustrative purposes only and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.
International investing involves special risks, such as political instability and currency fluctuations. Investing in emerging markets may accentuate these risks.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
Historically, small- and/or mid-cap stocks have been more volatile than the stock of larger, more-established companies. Smaller companies may have limited resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies.
Diversification does not assure a profit nor does it protect against loss of principal.
Generally, as interest rates rise, bond prices fall. The opposite is true when interest rates decline.
Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.