Is water the new carbon?

Once again, World Water Day brought the urgent issue of water scarcity to the forefront of people’s minds. And rightly so … there are more than 2 billion people around the world who are affected by “water stress” (defined as being the ratio of fresh water used to renewable fresh water resources available).

That number is simply staggering.

And the problem is going to get worse, with water scarcity becoming increasingly urgent as the global population continues to grow and the impact of climate change intensifies, warns FAO Director-General José Graziano da Silva, going on to describe it as one of the leading challenges for sustainable development.

The issue is particularly significant in China. China Water Risk says the country’s water supply will not be able to meet demand by 2030 if changes are not implemented. And while the Chinese government is fully aware of the issue, having introduced usage caps and earmarked RMB4trn (USD580bn) to develop better water infrastructure, a water crisis could threaten economic growth and social stability not just at home but in many other parts of the world.

Farming in focus

Some industries are particularly vulnerable to the threat of water scarcity, with agriculture clearly at the top of the list.

The problem is expected to worsen as water demand increases with a growing world population that is consuming more food, along with changing weather patterns leading to more droughts and floods affecting agricultural land and production.

Are investors thinking about water?

Yes. The obvious silver lining is that water is finally receiving some much-needed attention by the investment industry. As was the case with carbon a few years ago, investors are starting to factor in water scarcity when assessing the long-term risks within their investment portfolios. Water is rapidly becoming the ‘new carbon’.

Many investors now demand data about companies’ vulnerability to water scarcity. In the effort to preserve the world’s water resources, they are also increasingly investing in companies that are responsible and efficient in their water consumption. As an example of this demand, take a look at BNP Paribas Investment Partners’ aqua fund, which recently announced it is approaching EUR2bn in assets under management.

Tools to support water-conscious investors

With investors seeking a better understanding of water usage and the water strategies of the companies in which they invest, the number of tools available to make investment decisions easier for water-conscious investors is also on the up.

Microsoft, environmental data firm Trucost and water technology company Ecolab, for example, have teamed up to create a publicly available financial modeling tool that monetizes water risks, enabling businesses to factor in these risks in decision-making. The Water Risk Monetizer is intended for businesses, but investors can looks at data on water-related costs from companies that use the tool and are willing to share the information. With more investors demanding transparency, more companies will be pressured into disclosing such data.

However, obtaining accurate data on companies’ vulnerability and contribution to water scarcity can be difficult, especially as some enterprises have multiple water-consuming facilities located in areas that may or may not have high water stress. Many companies still do not disclose water-related data despite global initiatives to change that and this is something that needs to change.

Putting the pressure on water

The need for investor participation in the global challenge to save our water resources cannot be overemphasized. In its Global Water Report 2016, CDP – the global environmental disclosure system – highlights that water risks are rapidly materializing for business.

More worryingly, year-on-year trends show that companies are not moving fast enough to address the sustainable management of water. While CDP found that there is a pivot toward better water stewardship (with more companies being listed on its ‘Water A List’ than in 2015), the number of companies lagging on sustainable water management remains a major concern. This is where the investor voice can have a real impact.