Is water use priced in stock markets?

Yes (to provide one example that violates Betteridge’s law of headlines). Investors are increasingly pricing water risk across sectors and, in particular, within sectors.

A team of Dutch researchers analysed global stock return data for 14,650 firms in 75 countries and paired these companies with their self-reported water use where available. They then tried to find correlations between stock market returns and water use within an industry, as well as direct and indirect water use (throughout the supply chain) and the influence of water stress (water use relative to available water supply).

The chart below shows total water use by industry. No surprise that utility companies use the most water, followed by paper and forest products, mining companies and chemical companies. These are all industries that naturally use enormous amounts of water in their production processes. At the bottom end, we tend to have service companies and technology companies.

Direct water use by industry

Source: Alves et al. (2025)

However, in particular, the technology industry is increasingly using more and more water indirectly. The growth of data centres leads to a large increase in the need for electricity and cooling, both of which are highly water-intensive processes.

Consequently, the authors find that it is not the direct water use shown above that is relevant for share price performance, but the total water use (direct + indirect). Industries that use more water in total tend to have a higher risk premium than industries that use less water. And within each industry, companies that use more water have a higher risk premium. The authors estimate that investors demand an average annual risk premium of 2.15% for investing in companies with high water use.

This risk premium seems to be emerging because it has grown larger after the Paris Climate Accord was signed. To me, this is less about the Paris Climate Accords and more about the general increase in awareness of resource usage as ESG investing became more popular.

This also leaves one question open that I cannot answer. The data they use covers the period from 2013 to 2024. But since 2022, we have seen a relative decline in the importance of ESG for investors, after a steady increase from 2013 to about 2022. If the risk premium for water use increased as ESG investing became more popular, is it now declining again? I don’t know, and the study, unfortunately, cannot answer this either.