INSIGHT by Florence Arke, Jr. Manager Regulatory Risk, Deloitte Netherlands
With a technological revolution unfolding, there’s a global growing demand for microchips. These tiny piece of silicon are known as semiconductors. They go into our smartphones, are part of air conditioners, are used for medical equipment and wind turbines, enabling our energy transition. However, beneath this promising future lies a vulnerability that is not immediately obvious. Water is a vital resource for this ‘thirsty business’. Is the industry and its investors managing these water scarcity risks?
1. Water: A Physical Risk Unveiled
Chip-making factories need huge amounts of water to etch and deposit tiny bits of metals and chemicals on silicon wafers. It’s needed for cooling the computers and machinery, cleaning used equipment or to facilitate and be part of important chemical reactions. The industry’s dependence on water makes it vulnerable to shortages or disruptions in water supply. Unlike silicon, freshwater is a resource that is scarce.
The heavy dependency of the industry on water results in a threat to its stability. Firstly, there’s an overexploitation, facilitated by the market failure of not pricing water. Secondly, the scarcity risks are exacerbated by increasing droughts due to climate change. This is a perfect example of a nature-related physical risk amplified by climate change, that if not managed could threaten the long-term sustainability of the business.
2. Taiwans Wake-Up Call: A Glimpse into the Future?
The consequences of this perilous dependency manifested over the past few years, is most profoundly in the Taiwan region. Taiwan is considered the central hub for semiconductor manufacturing, with the Taiwan Semiconductor Manufacturing Company (TSMC) accounting for more than half of the industry’s global revenue. However, this success story has become a double-edged sword. Taiwan is facing a severe water crisis. The usual spring typhoons have not taken place the past three years, resulting its water reservoirs reaching alarmingly low levels. This also disrupted other manufacturing and agricultural activities. The government even restricted its residents to limit water use. What is more, researchers found that the water quality in the reservoir is negatively affected by extreme weather, further increasing social challenges.
The consequence for the chip-industry? Production delays, disruptions, and a stark reminder that it should ramp up efforts to manage its physical nature-related risks.
3. Managing a Water-Resilient Future
To manage the looming risks, the industry should take proactive measures to limit its water use, such as implementing water-efficient technologies, recycling processes, and sustainable sourcing. TSMC set up its own water recycling plant in 2021 and sourcing water from nearby rivers and water infrastructure. Many of its biggest semiconductor plants are also cutting down water use by 10 -15%. A challenging time with TSMC also opening up a plant in Arizona an area that too is facing severe droughts. Including also geographical physical elements in choosing the location for new chip-making plants could be a wise advice.
Let this also be a wake-up call for the financial sector. Integrating industries’ physical nature-related risks into risk management strategies becomes paramount for longer-term economic growth. Since, our economy, even the blooming business of tech, is not so far detached from nature as we might think.
Florence is striving for a more transparent and greener financial sector. She does this by assisting financial clients in managing their ESG disclosure demands as Junior Manager Regulatory Risk at Deloitte-Netherlands. Additionally, she supports the further development of Taskforce on Nature-related Financial Disclosures (TNFD) framework as alternate to Deloitte’s global TNFD representative. She makes this experience practical by supporting first-movers organisations with comprehensive biodiversity heatmapping and impact analysis to identify and prioritize nature-related risks and opportunities.
| All opinions expressed are those of the author and/or quoted sources. investESG.eu is an independent and neutral platform dedicated to generating debate around ESG investing topics.
