- August 29, 2018
By Mindy Lubber
Record heatwaves and droughts across Europe and Asia are rippling across global wheat markets. Wheat futures are hitting three year highs as production levels plummet in Russia, Ukraine and other European countries. These dynamics will likely mean more expensive bread and flour for many global consumers, especially in net-importing countries like Egypt.
Closer to home, hotter drier conditions are pinching water-dependent sectors across the western United States. While West Texas cotton growers are seeing their plants shrivel, the entire U.S. Southwest is reeling from a two-decade-long drought that threatens far more than agriculture. Of particular concern is the ever-drier Colorado River, which irrigates more than 5 million acres of farmland that supplies most of the country’s winter lettuce and vegetables. This month, federal officials warned of unprecedented water shortages in the river that may require the first-ever cuts in water allocations for entire states, starting with ever-more-densely-populated Arizona, as early as 2020.
These events are not anomalies. They are the latest examples of how growing competition for water, poor water management, aging infrastructure and climate change are exacerbating water risks across the global economy.
From agriculture and mining to energy and entertainment, every business in the world relies on water. As population growth, water pollution and hotter, more volatile weather events strain the world’s freshwater supplies, companies and investors can no longer ignore the critical water issue.
Consider the following:
- Forty percent of global water demand is unlikely to be met as soon as 2030, according to a United Nations report, unless companies, investors and governments step up water management and stewardship efforts.
- At least 50 percent of the stocks listed in each of the four major U.S. stock indices are in industries with medium to high water risks, according to 2017 Ceres research. That’s akin to saying that roughly half the industries in our economy face significant water risks. Simply put, investor water risks are systemic and material.
The global food sector, which uses 70 percent of the world’s freshwater, faces the most immediate risks from the multiple challenges of water scarcity, water pollution and water demand pressures from other sectors. Hotter, more volatile extreme weather caused by climate change is compounding risks for this $5 trillion sector.
Recent HSBC research concluded that of all cereals it analyzed, wheat was the commodity most vulnerable to climate change. Moreover, it concluded that agriculturally-dependent and climate-vulnerable economies are likely to face structural economic risks in the long term, with countries such as Ukraine being the highest risk economies.
“We think countries will need to build resilience in their agricultural systems, achieved via agricultural technology, improved water infrastructure and new farming methods,” the HSBC report concludes.
Reflecting a core theme of SIWI World Water Week this week in Stockholm, hotter drier conditions also pose profound societal risks, especially in developing regions like Sub-Saharan Africa where food security can be an everyday concern.
Water risks are also being felt in the mining and energy sectors. This summer’s heat waves in France forced four nuclear plants to temporarily shut down when they were unable to withdraw cooling water from unusually warm rivers. Nuclear plant operations in Sweden, Germany and Finland were curtailed for the same reason.
Global beverage companies also face growing water risks, many of them reputational. Consider the case of Nestle, whose water bottling operations in California and Michigan have faced public opposition due to water availability concerns. Or Coca-Cola and PepsiCo, which have faced consumer boycotts in India due to similar concerns.
No doubt, investors and companies are paying more attention to water risks, although not yet at the level they need to. One indicator of this gap: while 81 percent of major U.S. companies in water-dependent sectors have water stewardship programs, only 37 percent have set qualitative targets to better manage water resources facing the biggest risks.
Investors are also boosting their attention. One positive indicator is the more than 100 investors, with $20 trillion in collective assets, who participate in the Ceres Investor Water Hub, a working group of the Ceres Investor Network. These investors put their competitive differences aside to engage companies on water issues and produce resources to help investor peers improve their water practices and understand their role in building resilient economies and businesses.
Investors have many options for managing their water vulnerabilities, the first being awareness that water-scarcity concerns can pose material risks. Among the other steps investors should consider, as outlined in the Ceres Investor Water Toolkit, are the following:
- Set clear priorities and goals from the top down. Investors can consider a wide range of options, from asking portfolio companies to improve their water disclosure, to elevating water as a priority for company board of directors, to aligning with international norms such as Sustainable Development Goal 6 and the Principles on Valuing Water.
- Conduct portfolio water footprinting to highlight potentially common geographic or systemic water risks (for example, agriculture related or social licenses).
- Integrate water-related research into buy/sell analysis decisions for equities, municipal water bonds and private equity projects by understanding where water risks lie in a company’s’ value chain and assessing if management is mitigating risks at the scale needed.
The takeaway is clear. Water risks are growing as global populations swell and weather patterns become more volatile and variable. Managing these risks should be a critical priority for those seeking to deliver strong financial returns for their businesses and their investors. The vibrancy of the global economy and the planet – and the health of billions who depend on both are at stake.