Water means life. More than half of our body is made up of water, and it is an indispensable resource for the production of food and other goods. It is fundamental for societies as well as for ecosystems. While water covers approximately 70% of our planet’s surface, only 0.5% is fresh water readily available in lakes and river systems. In recent decades, these freshwater resources have come under increasing pressure due to population growth, climate change and unsustainable production and consumption patterns.
According to United Nations World Water Development Report 2020, global water demand has been increasing by 1% per year since the 1980s, and more than 25% of the world’s population already lives in areas of water stress. Considering projections of a 40% gap between global water demand and supply by 2030, and the potential displacement of over 700 million people due to lack of access to water, it is becoming clear that the water crisis is a global crisis – even if water-related risks are inherently local. Water is also a key part of the UN program Sustainable Development Goals (SDGs)with Goal 6 focused on access to drinking water and sanitation for all by 2030.
Beyond the humanitarian and environmental impacts, the water crisis constitutes an economic risk with implications for the business world and its investors. In the words of Kirsten James, Ceres Water Program Director: “The global water crisis is a global risk. Investors really need to be key players.
Understanding water risk from an investor’s perspective
Institutional investors can mitigate water-related risks in their investment portfolio by identifying industries and business activities that depend on water resources or have a significant impact, and actively engage in management decisions to reduce negative water impacts and associated risks.
THE source of water-related risk can be divided into two broad categories:
- Basin Condition Risk: Physical risks that arise from the broader basin context in which a company and/or its suppliers operate.
- Business risk: Risks that arise from the activities of a business, including its products and services, that could harm the environment and impact communities’ access to water.
All of these risks can have financial implications such as reduced business revenue, increased operating costs, or damage to the long-term viability of the business due to water-related issues. For example, some business models depend on large quantities of water of a specific quality, while others may face reputational risk stemming from poor management of water-related impacts. Understanding and identifying companies based on these risks can therefore be a powerful resource for portfolio allocation.
Determination of exposure to water risks at company level
Baseline water stress measures the ratio of total water withdrawal to available renewable supplies of surface and groundwater. Based on World Resources Institute (WRI) Aqueduct Water Hazard Atlas, countries such as Qatar, Israel and India rank among countries with “extremely high” baseline water stress levels, where irrigated agriculture, industries and municipalities withdraw on average more than 80% of their supply available each year. Forty-four countries are rated as having “high” levels of water stress, with more than 40% of their water supply being withdrawn each year. This narrow gap between supply and demand could make businesses vulnerable to fluctuations such as droughts or increased water withdrawals.
Figure 1. Aqueduct Water Risk Atlas