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Supplements » ESG Report October 2021

ESG talking heads: Future risk - Pricing in water scarcity

Under_waterWater demand is likely to exceed supply by 40% by 2030, according to the UN – but many asset managers still don’t price in water scarcity as a risk. Alex Rolandi asks thought leaders what the implications of water shortages are for society and business.


A pressing issue
Climate change is one of the most pressing issues of our time, with potential impacts on the economy, markets, and society. Rising greenhouse gas emissions are leading to increasing global temperatures, resulting in more extreme weather events, and changing climate patterns. These physical climate impacts have a significant impact on the both the availability and quality of water in many regions – such as the 2021 drought in California. Water scarcity directly impacts hydroelectric power generation, food production, fisheries and aquaculture, and tourism industries – not to mention the impacts on human health and communities. Environmental, social and governance (ESG) factors, such as climate change and water scarcity should be integrated into investment decisions when they are financially material to a business. Investors require consistent and comparable data and information from corporations on water usage and quality impacts in order to inform the investment decision-making process.


Water demand versus supply
By 2030, water demand will probably exceed supply by 40%. This scenario is caused by two major factors: climate change and the global growth of population.

The global rise of temperatures is changing weather patterns, increasing the number and intensity of extreme weather events, leading to unpredictable water availability and contamination of water supplies.

Water is not only a vital component in our diet but also a key component in the production of almost all products: 2,500 litres of water are needed for a kilogramme of rice, 2,700 litres for a cotton T-shirt, 15,000 litres for 1 kilogramme of beef.

We can easily understand how the growth of the global population, 10.9 billion people by the end of this century, according to projections, will strongly impact water consumption.

Water scarcity is an issue in developing nations as well, where poor quality and inadequate sanitation negatively impact food security, livelihood choices and educational opportunities.

Some indicative figures of the issues at hand include:

  • The World Economic Forum ranks water crisis as the fourth top risk by impact, behind weapons of mass destruction, climate change, and extreme weather events.
  • Three in ten people lack access to safe drinking water.
  • 2.4 billion people lack access to basic sanitation services.
  • Nearly 1,000 children die every day due to preventable water and sanitation-related diarrheal diseases.

Risk and opportunity
Water scarcity is a risk and an opportunity. It is a risk for companies in sectors such as food, beverages or textiles, where water consumption is high and water scarcity can cause severe interruptions in the supply chain. These companies will have to improve on water management and take into account water scarcity projections when they will have to choose where to set up manufacturing plants.

But water scarcity can be an opportunity as well, for companies deriving a large percentage of their revenue from water-related products and services such as water meters, water supplies, water efficiency systems and water desalination plants.

Unfortunately, not all asset managers are pricing in the risks and opportunities related to water. They should, as water scarcity can be a risk or an opportunity for companies, for the reasons already mentioned.