AI demand means data centres are worsening drought in Mexico

Querétaro, Mexico, is emerging as a significant data center investment hub, projected to attract over $10 billion in the next decade, driven by its strategic location, supportive government, and lower operating costs compared to the U.S., alongside escalating AI demand. However, this rapid expansion, involving major players like Microsoft and AWS, faces increasing scrutiny due to the substantial water consumption of these facilities in a drought-prone region, raising significant environmental and social governance (ESG) concerns regarding water allocation and community impact. Despite these challenges, the industry anticipates continued robust growth.

Analysis

The data center sector is undergoing a significant geographic expansion into Mexico, with Querétaro emerging as a key hub poised to attract over $10 billion in investment over the next decade. This shift is driven by a confluence of factors: strong secular demand from AI workloads, supportive local and national government policies, and critical power grid capacity constraints in the United States pushing tech giants like Microsoft and Amazon to seek alternatives. However, this rapid growth introduces material Environmental, Social, and Governance (ESG) risks. The region is notably drought-prone, having recently experienced its worst drought in a century, creating a direct conflict between the industry's substantial water consumption and local community needs. Specific figures, such as Microsoft's 40 million litre water usage in FY25 for its Querétaro sites and Google's 28% increase in global water consumption, underscore the scale of the issue. This has fueled local activism and concerns over water rights prioritization, creating potential for regulatory and reputational headwinds despite official government statements defending the industry's presence. Furthermore, secondary concerns regarding air pollution from diesel backup generators add another layer of potential community friction and regulatory scrutiny.

Key Decisions for Investors

• Investors with exposure to Microsoft, Amazon, and Google should scrutinize the companies' water management strategies and community engagement disclosures, as operational stability in key growth regions like Querétaro is increasingly tied to mitigating these ESG risks.
• The expansion into Mexico presents a clear growth vector for the data center industry, but it is accompanied by tangible operational risks; monitor for any signs of escalating local opposition or new water-use regulations which could impact project costs and timelines.
• Consider overweighting data center operators or technology providers that deploy less water-intensive cooling systems, as they are better positioned to navigate the environmental and political challenges in water-stressed regions, potentially offering a more sustainable long-term investment.