Water means life. More than half of our bodies consist of water, and it is an indispensable resource for production of food and other goods. It is fundamental for societies and ecosystems alike. While water covers approximately 70% of our planet’s surface, only 0.5% is freshwater that is readily available in lakes and river systems. Over the last few decades these freshwater resources have come under increasing pressure due to population growth, climate change, and unsustainable production and consumption patterns.
According to the UN World Water Development Report 2020, global demand for water has been increasing by 1% annually since the 1980s, and over 25% of the world’s population already live in water-stressed areas. Considering projections of a 40% gap between water demand and supply worldwide by 2030, and the potential for more than 700 million people to be displaced due to lack of access to water, it becomes clear that the water crisis is a global crisis – even though water risks are inherently local in nature. Water is also a key part of the UN’s Sustainable Development Goals (SDGs), with Goal 6 focused on access to Clean 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 community and its investors. In the words of Kirsten James, director of Ceres’ water program: “The global water crisis is a global risk. Investors really need to be key players.”
Understanding Water Risk from an Investor Perspective
Institutional investors can mitigate water risks across their investment portfolio by identifying industries and business activities that depend on or greatly impact water resources, and actively engage in management decisions to reduce negative impacts on water and related risks.
The source of water risk can be broadly divided into two categories:
Risk due to basin conditions: Physical risks that are derived from the broader basin context in which a business and/or its suppliers operate.
Risk due to the company: Risks that stem from a business’ operations, including its products and services, which could harm the environment and impact communities’ access to water.
All these risks can have financial implications such as reduced company revenue, an increase in operating costs, or an impairment to long-term business viability due to water-related challenges. For instance, some business models depend on large quantities of water of a specific quality, while others can face reputational risk arising from poor management of water-related impacts. Understanding and identifying companies based on these risks can therefore be a powerful resource for portfolio allocation.
Determining Exposure to Water Risks at a Company Level
Baseline water stress measures the ratio of total water withdrawal to available renewable surface and groundwater supplies. Based on World Resources Institute (WRI)’s Aqueduct Water Risk Atlas, countries such as Qatar, Israel, and India rank among the countries with ’extremely high’ levels of baseline water stress, where irrigated agriculture, industries, and municipalities withdraw more than 80% of their available supply on average every year. Forty-four countries are assessed as having ’high’ levels of water stress, with more than 40% of their water supply being withdrawn annually. This narrow gap between supply and demand could make businesses vulnerable to fluctuations such as droughts or increased water withdrawals.