“If climate change is a shark, then water is its teeth.” That analogy, coined by climate expert James P. Bruce, is increasingly apt. Higher temperatures are straining H2O availability at the same time as demographics and economic growth increase its usage. By 2030, it’s predicted that there’ll be a 40% gap between freshwater supply and demand. Investors need to be alert to the risks posed by such shortages to the companies and industries they allocate capital to.
Our most vital commodity is already flashing warning signs in some locations as we enter another climate-altered summer. French Environment Minister Christophe Béchu raised “serious concerns” about water supplies in France on Wednesday, as the country launched a conservation campaign. Most of Scotland, not typically a country that’s thought of as being dry, is now under an early warning for water scarcity after experiencing less than half of its usual May rainfall. Parts of a Lake District river, in an area famous for being the wettest part of England, have run almost completely dry. Spain is still struggling with long-term aridity; and while heavy rainfall has relieved Taiwan of its worst drought in decades, there’s concern that the dry conditions will return.
Access to fresh water is both a human right and a business necessity. Some industries, such as agriculture and mining, have been thinking about water-supply issues for decades. But increasingly, as stresses become more pronounced, other businesses are sounding the alarm.
This March saw the first United Nations Water conference in nearly 50 years. Businesses showed up – not only water-intensive industries, but also financial institutions and fund managers. It’s evidence of water’s growing conspicuousness as a business and financial risk, says Alex Money, director of the Innovative Infrastructure Investment program at the University of Oxford’s Smith School and chief executive officer of Oxford Earth Observation, a startup focused on water risk. “When you think about climate change and where you feel the effects, it’s generally in dry periods, droughts, flash floods – all water-related things,” he told me.
Water permeates, literally: It’s hard to think of an industry that isn’t vulnerable. Diageo Plc, the world’s biggest spirits company, said recently that it sees water security as its most significant climate-change related risk. A pair of Levi Strauss & Co. jeans can absorb 3,800 liters of water, including growing the cotton to make the denim, the factory processes used to fabricate the garment and the ensuing lifetime of laundering. Water is essential in the production of pharmaceuticals, with about 23% of the world’s supply used to manufacture medicines. Even the least tactile elements of our daily lives – the products we consume on the internet – require water: Alphabet Inc.’s Google consumed 4.6 billion gallons of water in 2021, mostly to cool data centers, and Meta Platforms Inc., aka Facebook, used 678 million gallons.
While technology companies can locate the water-intensive elements of their businesses in places where it’s plentiful, the likes of Diageo, Levis and others can’t be as flexible because they’re more tied to where their raw materials grow and where their products can be manufactured with cheaper labor. As a result, they’re reviewing their practices, including setting location-based targets to reduce usage more in stressed areas.
But there are some laggards – big companies such as Apple Inc., Tesla Inc. and Shell Plc still don’t provide in-depth information about their water consumption. Oxford’s Money explains that, because there’s no pricing mechanism to discourage inefficient water use, commitments so far have been driven mostly by reputational risk. Water as an operational risk has also not always been very visible: Investors scanning the financial performance of companies won’t be able to detect when water scarcity has been salient to an earnings downgrade or a revenue miss.
But now climate issues are affecting investor portfolios in real time, says Vicki Kalb, head of ESG research at UBS Group AG. The cascading effects of a drought, for example, may mean goods can’t be transported, facilities can’t be cooled and may interrupt energy production.
Ahead of the UN Water Conference, a group of 30 investors organized by CDP, a non-profit that runs a global environmental disclosure system, signed an open letter asking governments for more action on water — but corporate investment is also vital for achieving water security. Based on data from 3,909 companies, a 2022 report from CDP put the potential cost of water risk at $392 billion, the mitigation costs at just $79 billion, and the financial opportunities of early action at $436 billion. All of society’s stakeholders would benefit from early action to avert more of the world running out of H2O.
So, unless they want to feel climate’s sharp bite, all investors, not just those focused on ESG, should incorporate water security into their decisions — and demand better data and disclosure from companies.
Lara Williams is a Bloomberg Opinion columnist covering climate change.