ESG Watch: New study sounds alarm about risk of stranded assets due to water scarcity

May 11 - For something that is so crucial to all aspects of life, including the most fundamental business operations, water risk is a blind spot for many investors and businesses.

There is little understanding of how overuse, pollution and increasingly frequent extreme weather events, such as the years-long drought in California, the recent heatwave in India and Pakistan, and last year’s floods in Europe, are affecting water availability, says Cate Lamb, global director of water security at disclosure not-for-profit CDP.

A third of listed financial institutions do not assess exposure to water risk in their financial activities, although 69% of listed equities told CDP in 2021 that they are exposed to water-related risks.

“A large proportion of businesses still have the mindset that water will always be available to them whenever and wherever they need it, and that they don’t need to manage it like other issues,” Lamb says.

Yet with the United Nations predicting a 40% global shortfall in water supply by 2030 if current consumption and production patterns do not change, it is a mindset that will increasingly open companies up to operational risk, according to a new report from CDP and UK-based non-profit financial think-tank Planet Tracker.

Businesses in key industries are already losing billions of dollars as a result of the global water crisis, CDP and Planet Tracker say in the report, which highlights how changes in regulation, high levels of pollution and community opposition have “stranded” assets, including the Keystone oil pipeline in Canada, a gold mine that straddles the border of Chile and Argentina, an Australian coal mine and a nuclear facility in the United States.

But a host of other sectors also face significant risks around water availability and quality, from fashion to agriculture to chip-making and data centres.

In Chennai, in India’s Tamil Nadu state, one of the world’s fastest growing cities, a devastating drought in 2019 caused it to run out of groundwater. This led to a number of the local tech companies having their licence to operate constrained, or rescinded altogether, Lamb says. In the recent heatwave, India’s largest tributary completely dried up for the first time ever, threatening agricultural production that feeds the vast majority of the country, and huge amounts of energy production, too.

“When events like this happen, we see governments having to make really difficult decisions to ensure water supplies for citizens and food production, at the expense of energy and other businesses,” she adds.

Earlier this week U.S. officials announced unprecedented measures to boost water levels at Lake Powell, an artificial reservoir on the Colorado River that is so low as to endanger the production of hydroelectric power for seven Western states., opens new tab The region has experienced the driest period on record over the past two decades. Las Vegas has banned watering of lawns, and similarly drastic measures are being considered in parts of California.

Lamb stresses that the water insecurity crisis would exist anyway, but the climate crisis has exacerbated it. “There is a finite amount of water on the planet and we are increasing our demands for it all the time. The amount of water required for producing energy is predicted to double by 2040, as is the amount for growing food, which already accounts for 75% of demand.

“Unlike fossil fuels, there is no replacement for water. And what water we have left, we are polluting – 80% of all wastewater leaves homes, factories or farms untreated, further degrading the freshwater we do have. There is enough water to meet our needs, but there has been a catastrophic failure of management.”

This is an issue for all businesses and their investors, she adds. Like climate, water risks include the physical risks of extreme weather events such as droughts and floods, as well as transition risks including water-hungry products being banned, zero-pollution laws such as those being introduced in the European Union, and litigation risks arising from community opposition.

The current situation on the subcontinent provides a stark reminder of physical risks and their consequences – to people and to business. Unilever analysed its water risk and found that using its range of products, for cleaning dishes, clothing and people, could account for more than 90% of a household's domestic water use. Without innovating to make them more water-efficient, water scarcity could cost the company around 300 million euros a year by 2030, it said.

“There is a massive business opportunity in addressing the water crisis, in areas ranging from infrastructure and reducing leakage to water treatment and efficiency measures,” says Justin Winter, who manages water strategy at Impax Asset Management. However, he adds, investors’ analysis of water risks is a long way behind their consideration of climate risks.

This is partly because water is more local and more complex, and partly due to a lack of data from companies. “Some companies don’t even know where the key to the meter room is,” Lamb says. There has been a growing push for mandatory reporting, with the EU looking to introduce this within the next couple of years, not just for companies but investors, too.

CDP has now asked 1,200 listed financial institutions to disclose data about the water usage in their portfolios. “Currently institutions don’t have to do due diligence of the implications of water issues for their investors, or to disclose what steps they are taking to manage those risks and harness the opportunities.”

When CDP first asked companies to disclose water risks in 2010, it was on behalf of 150 investors with $50 trillion under management. This has now increased to 680 investors managing $130 trillion, while the number of companies responding has risen from 140 to more than 3,500 in 2021.

Still, awareness levels are nowhere near where they need to be. Water is a business risk that companies and investors can no longer ignore.