The SEC’s final climate risk disclosure rule, published this week, requires covered listed U.S. companies to inform investors of their spending to mitigate material financial risks to their businesses from, for example, drought.
Some 50,000 companies in the EU are now also required to report on their water risk management strategies under the Environmental Sustainability Reporting Standards.
Water management is one of the most pressing challenges associated with climate change. Drought and flooding are already among the most commonly experienced impacts and are likely to become more so, highlighting the vulnerability of agriculture and corporate supply chains worldwide.
Droughts threaten knock-on effects for areas without direct water scarcity challenges, such as higher food prices, increased irregular migration from displaced communities, and disruption to water-intensive services such as cloud-based computing.
Companies operating in the world's most at-risk water basins are scrambling to adopt innovations to manage water insecurity. New technology deployment has focused on North America, Europe, India, and Southeast Asia, although the Middle East and North Africa have the most acute water stress.
Challenges
Water scarcity has always been a problem of distribution rather than sufficiency. Freshwater is abundant but highly localized, creating supply-and-demand mismatches. In 2023, around 25% of the world's population experienced drought for at least one month.
Efforts to address water scarcity have had mixed success. They tend to focus on improving infrastructure to import or trap stores of water.
Successful water stewardship, however, generally requires delicate coordination among multiple parties. Governments in less-developed, water-poor regions struggle to source the infrastructure finance needed to meet increasing water demand from economic and population growth. At the same time, corporate-led water stewardship schemes have yet to achieve more than piecemeal success.
This is not due to a lack of ambition. Several leading companies have recently set ambitious 2030 targets in line with the 2015 UN Sustainable Development Goals.
Microsoft, Coca-Cola and PepsiCo have all announced plans to be “water positive” across their operations by 2030. This would mean they put more water into water basins than they remove.
The extra water added can come from wastewater treatment or the introduction of new freshwater to stressed areas via desalination and rerouting.
Each company has undertaken research to understand why water stewardship schemes have struggled so much to date:
• One reason is a lack of data sharing. High-quality hydrological surveys take time and money. Many companies refuse to share their proprietary research with competitors or the public sector. Public-sector bodies, too, have been reluctant to share data at the scale necessary to inform decision-making.
• Another is the lack of high-quality, affordable options for increasing the water supply.
In both areas, potentially transformative technologies are emerging.
Monitoring
Global hydrological models, which became available in the early 2010s, were the first generation of tools to bypass the need for costly proprietary and ground-based research.
The two most widely adopted of these have been the World Resources Institute's Aqueduct Water Risk Atlas and the World Wide Fund for Nature's Water Risk Filter. Each allows a user to find an indexed water scarcity risk for any given location at present and projected into the future.
Companies and, to a lesser extent, governments have widely adopted these free tools. A drawback is that they do not integrate real-world water data. Their ability to predict seasonal droughts, for example, is limited.
A second generation of tools is coming onto the market that address this problem using geospatial imagery. A relatively simple analysis of images from Landsat and Sentinel satellites already in orbit allows a crude calculation of water surface area in lakes, rivers and reservoirs.
Start-ups deploying such tools, such as San Francisco-based Waterplan and UK-based Watermarq, are exploiting advances in artificial intelligence (AI) and space technology.
NASA, for example, launched its Surface Water and Ocean Topography (SWOT) mission in late 2022, aiming to achieve the first global survey of Earth's surface water. Altimeter sensors on the satellites will improve users' ability to calculate water volumes.
This will significantly improve companies' ability to monitor water stress in real time and allow stakeholders equal access to data—a crucial ingredient for negotiating collective action.
Replenishment
Better data should assist efforts to achieve a more positive balance between supply and demand in water-stressed areas. Companies that have made pledges to achieve net-positive water balances by 2030 are leading investments in innovations to achieve this.
Microsoft, for example, faces the challenge of increasing its foothold in the AI and data center market while meeting its water goals. The company has traditionally used freshwater for data center cooling but is now experimenting with adiabatic (air-based) cooling at its data centers in Mexico, achieving over 50% water use reductions.
Similarly, Coca-Cola has invested in deploying new leak detection technology to reduce the loss of non-revenue water (water that is pumped and then lost or unaccounted for—an annual loss of more than USD3 billion, according to the World Bank).
Providers such as NYSE-listed Xylem are developing digital platforms for utilities to reduce non-revenue water loss.
Bottom Line
Water replenishment goes beyond lowering water use and loss—it involves restoring ecosystems, which will eventually be necessary to reach net-positive water balances. Large food companies such as Cargill are investing heavily in regenerative agriculture to solve this challenge.