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Water scarcity: A growing risk for companies and investors

Its increasing demand in the midst of plummeting supply spells trouble for businesses.

Water conservation


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In one of my favorite summer memories, my older brother and I run along our suburban Phoenix street during a monsoon. It’s after dark and the rain pours down warm and the wind blows wildly. When we reach the wide-open expanses of the schoolyard, we twirl like Dorothy, whisked away, and fall on the ground drenched and muddy and laughing.

Like much of life back in the day, we took the monsoon rains for granted. They came most every year, a long-term average of 5.37 inches across Arizona between June and September, bringing moments of sweet relief from the heat, and leaving behind the sweet, earthy scent of desert rain.

This summer, their arrival cannot be taken for granted. In my home state and across the American West, summer’s coming has so far brought only record-breaking heat, drought and wildfires. Forecasters can’t say whether the rains will arrive to offer respite, but if the last couple of years are any indication, they won’t. In 2020, Arizona experienced its driest monsoon season on record — otherwise known as just a lot of hot wind — with a statewide average of only 1.51 inches of rain. And with Lake Mead, the key reservoir on the Colorado River, at its lowest level, the state is preparing for "painful" water restrictions.

Water scarcity has become a global crisis, one that will only worsen as the planet continues to heat up.

Concerns about water are not limited to the American West, of course. Water scarcity has become a global crisis, one that will only worsen as the planet continues to heat up. Despite how crucial water is to business, and to life itself, the risks that come with not having enough of it have often been overlooked by investors, who’ve tended to focus more on carbon.

That is changing, though, as severe, long-term droughts in important agricultural hubs such as California give investors mounting reasons to worry. Just a couple of weeks ago, analysts at Barclays identified water scarcity as "the most important environmental concern" for the global consumer staples sector, which includes foods and beverages, household goods and hygiene products. In fact, the analysts estimate that average EBITDA impact from water is three times higher than that of carbon for the sector.

This is largely because of its dependence on agriculture, which consumes the most water by far, slurping up roughly 70 percent globally and wasting about 60 percent of that, largely through inefficient applications. Industries including energy and manufacturing use up 20 percent more, give or take. And demand from agriculture, industry and municipalities will only grow — the United Nations projects a 20 to 30 percent increase by 2050 — as the world’s population rises to somewhere around 9.7 billion.

Lagging disclosure

This increasing demand in the midst of plummeting supply spells trouble for businesses. In 2018, CDP analyzed a group of 296 companies that had consistently responded to its requests for water data. Of this group, 75 percent reported exposure to water risks — which include operational, regulatory, reputational and financial — compared to 70 percent in 2015. Data from a broader group of respondents that year, 783, showed that even though companies have wizened up to the risk, only 29 percent had set water-reduction targets.

Likewise, a recent report from Ceres on climate commitments from fast-food chains shows progress being made on setting emissions reductions targets, but not so much on water. While the companies acknowledge the materiality of water risks to their supply chains, they’re lagging on disclosing these risks and on efforts to address them.

Companies can expect to hear more from investors on water risk, the Barclays analysts note. A second edition of the bank’s 2030 Thematic Roadmap, released in March, names water as one of the topics most likely to dominate discussion with investors over the next decade. In fact, in analyzing corporate transcripts over time, the analysts found conversations around water — including both extreme weather and clean water and sanitation — already have increased, with mentions doubling over the last 15 years and jumping 43 percent from 2019 to 2020.

Given the amount of water companies and their supply chains require, the costs of inaction are high. Barclays estimated the risk at $200 billion for the consumer goods sector alone, compared with proactive management, which would cost an estimated $11 billion.

Both Barclays and CDP cite L’Oréal as a leader in reducing water waste. The French cosmetics manufacturer operates three "dry factories" — in Spain, Russia and Italy — where all the water used in its industrial processes, such as for cleaning and cooling, is purified and reused onsite. And the company plans to introduce the system elsewhere.

In some cases, regulations and price increases can force companies to take action.

Rising rates

Water prices are rising around the world. In Chennai, India, when the city ran out of water, private companies reported paying up to 30 percent higher costs for daily business operations. Meanwhile, in the United States, the average price of water increased by 60 percent in the 30 largest cities between 2010 and 2019, according to Barclays; California water futures have regularly jumped as much as 300 percent in recent years.

Following the extended drought conditions in the Colorado River basin, which includes parts of all of the southwestern states and all of Arizona, the Federal Bureau of Reclamation requires all states in the basin to reduce water withdrawals. Agricultural water users account for 80 percent of that use, the Barclays analysts note, and this requirement has a direct impact on food companies that source wheat, corn, berries and fresh vegetables from the region, such as Conagra Foods, General Mills, J.M. Smucker, Kellogg and Kraft Heinz.

Somewhat ironically, my native city of Phoenix may be better prepared than the rest of the region to face life with less water, in part because it gets the majority of its supply from sources other than the Colorado, and in part because the city has been planning for this moment for a long while. It has implemented a number of measures, including recycling almost all of its wastewater and charging more for water in the summer. This has encouraged residents to reduce the amount they use, largely by replacing lush green lawns with desert landscaping. In 2000, around 80 percent of Phoenix households had grass; now only 14 percent do.

Still, it may not be enough for a city that has been the fastest growing in the country for years while sitting in the epicenter of the climate crisis. I can’t help but find it crazy that people continue to brazenly disregard the ever-increasing temperatures and move there. Then again, Portland, Oregon, just hit 115 degrees and New York City, where I now live, has been hot and muggy as hell, so maybe it doesn’t matter in the end.

At least with all that desert landscaping, Phoenix now has more creosote plants. Creosotes grow only in the arid regions of North America — the Mojave, Sonoran and Chihuahuan deserts — and are the source of that sweet, earthy desert rain smell. A magical scent the thousands of new Phoenix residents will get to enjoy, if the monsoon rains come.

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