Water Scarcity: Hidden Risks to Business

A new report points to the potential dangers of water shortages caused by global warming and quickly increasing demand

If there weren't enough for businesses to worry about these days, here is another threat: water scarcity. Companies in industries from technology to agriculture to apparel are vulnerable to the risks posed by a falling supply of available water, according to a report released Feb. 26 by the Boston-based investor coalition Ceres and the Oakland (Calif.)-based Pacific Institute.

Decreasing water availability, declining water quality, and increasing water demand are creating major new challenges for businesses and investors who have historically taken clean cheap water for granted, says the report. It warns of water shortages in many areas of the world in the coming decades and urges companies and investors to examine business's exposure to water scarcity risks to prevent them from eating into revenues and harming corporate reputations.

"This report makes clear that companies and investors can no longer take water for granted," says Anne Stausboll, chief executive of the California Public Employees' Retirement System (CalPERS), the largest U.S. public pension fund, with approximately $170 billion in assets. CalPERS is a member of Ceres. "For many years, CalPERS has advocated for corporate disclosure of environmental risks, and it's clear that this disclosure must include water-related risks and opportunities."

According to the report, as the global population grows by 50 million people each year and climate change makes areas such as California and northern China more prone to drought, water will become an increasingly scarce resource. Freshwater consumption worldwide has more than doubled since World War II and is expected to rise another 25% by 2030. By that year nearly half of the world's population will inhabit areas with severe water stress, according to the Organization for Economic Cooperation & Development.

The problem of water scarcity is not new, but has been garnering more attention in the past several years. That's because China, India, and the Western U.S. have experienced declining water supplies from shrinking glaciers and melting snowcaps that sustain large rivers, according to the report. Meanwhile, agricultural and power plant production have been cut back due to more frequent and intense heat waves and droughts in large parts of Australia, California, and the Southeastern U.S.

Industries at Risk

"A scarcity of clean, fresh water presents increasing risks to companies in many countries and in many economic sectors," concludes JPMorgan (JPM) in a March 2008 report. "These risks are difficult for investors to assess, due both to poor information about the underlying supply conditions and to fragmentary or inadequate reporting by individual companies."

The report identifies water-related risks specific to eight key industries, including:

Electric power. The power industry depends heavily on water and accounts for almost 40% of freshwater withdrawals in the U.S. Drought-induced water shortages have already caused power plant shutdowns in Europe, Brazil, and the Southeastern U.S. that led to price spikes and reduced economic growth, according to the report.

Tech. IT firms require vast amounts of clean water to operate. A water-related shutdown at a fabrication facility operated by a large tech company could result in $100 million to $200 million in missed revenue during a quarter, according to the report. Eleven of the world's 14 largest semiconductor factories are in the Asia-Pacific region, where water scarcity risks are especially severe.

Beverage companies. Coca-Cola (KO) and PepsiCo (PEP) bottlers lost their operating licenses in parts of India due to water shortages, and beverage firms are facing stiff public opposition to new bottling plants and to buying bottled drinking water altogether. Nestlé (NESR) has been fighting for five years, for example, to build the country's largest bottling plant in McCloud, Calif.

Agriculture. Agriculture, which accounts for about 70% of water consumed globally, is an especially vulnerable industry. Reduced water availability already has contributed to rising food commodity prices; the report points to last year's sharp increase in global rice prices triggered in part by a drought-induced collapse of rice production in Australia.

Others. The report also identified specific water-related risks for apparel, biotechnology and pharmaceutical, forest products, and metals and mining companies.

Your Water Footprint

The report urges companies in these sectors to take a number of steps to assess and minimize risk. For example, a company should measure its water "footprint" (i.e., water use and wastewater discharge) throughout its value chain, including suppliers and product use. Using this information, the company can analyze physical, regulatory, and branding risks and plan accordingly.

The report also urges companies to disclose their water performance and risks associated with it. CalPERS' Stausboll says that a "gross minority" of companies disclose their water risk in their SEC filings. Coca-Cola and Intel (INTC) are among the few who "do it and do it well," she says.

Other companies are taking steps to use different types of water, such as wastewater. Arizona Public Service, a subsidiary of Pinnacle West Capital (PNW), has been stepping up water conservation in the last several years, prompted by the state's arid climate. Currently more than 60% of the total power plant water in its Palo Verde Nuclear Generating Station and Redhawk natural gas-powered facility comes from treated wastewater—what's called "effluent" water.

"We could choose to just get groundwater, but we think groundwater has better uses," says Ed Fox, vice-president of Arizona Public Service. "There's another way to achieve our business need and benefit the overall economy and community, so we're doing that."

Shareholders are becoming more active on water issues. The number of shareholder resolutions focusing on water issues has grown from about four in 2000 to 18 in 2008. Most of these resolutions were in the food, beverage, oil, and chemical industries.

The question is, in this economic environment, can companies afford to take all these measures? "Companies can't afford not to," says CalPERS' Stausboll.

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