Talking about greenhouse gas emissions or diversity in conjunction with sustainability has become politicized and emotional. It might be possible to have a dispassionate discussion about water.
For the reasons discussed below, investors expect a tightening of the clean water market (independently from any global warming.) As a result, ‘water’ has become one of the biggest themes in sustainable finance and beyond, supported by the UN’s Sustainability Development Goal #6. Utilities and companies offering solutions in water treatment or efficiency have been big beneficiaries of this trend, especially as these so-called ‘water stocks’ are scarce.
Logically, it will not take long before investors who expect water shortages and invest in companies offering water risk-mitigating solutions ask all companies about their direct and indirect clean water dependency. Indeed, they can divert capital to firms actively dealing with water risk to ensure business continuity (or reduce their exposure to the companies that do not). It is a supply-chain play for investors who can invest not only in water stocks, but also in their best customers.
As illustrated in the table below, water risk impacts industries in their direct operations (apparel, luxury goods, natural resources extraction, pharma), along the supply chain (food and beverage), or at the product use level (plastic containers, chemicals). Overall, McKinsey estimates that two-thirds of businesses have substantial water-related risks.
Taking a step back, water is a big play for several reasons.
First, clean water is to human life what it is to all sorts of industrial processes, from food/agriculture (70% of water withdrawals) and the manufacturing of clothes and high-tech components to the cooling of industrial processes. In its latest global water assessment, Ceres provides various stats across industries. For example, it takes 15,000 liters of water to produce 1 kilo of beef (four times more than chicken), 10,000 liters to manufacture a pair of jeans, or 70 liters to produce half a liter of soda.*
Second, there is a structural market imbalance. Demand is growing with population and is further boosted by rising water consumption per person. Supply has been shrinking because of overconsumption (groundwater), water pollution due to eutrophication (agriculture), plastics (consumer products), or metals contamination (semis, batteries), and a failing infrastructure (leaks).
Third, water is way too cheap, with local regulators keeping prices artificially low. Due to this undervaluation, water scarcity is underestimated. With little incentive to deal with the issue, water will remain mismanaged until the mud hits the fan.
A 40% global shortfall in freshwater supply by 2030 is anticipated, including by McKinsey in an excellent report. With water stress on the rise and investors getting more sophisticated, water is set to become a standard due diligence question for asset managers seeking to efficiently allocate their capital.
Where water is a material sustainability driver, strategies, operations, disclosure (Carbon Disclosure Project, CSRD ESRS E3), and equity stories will evolve to capture risks and opportunities – either proactively or in reaction to financial market pressure.
Bon dimanche!
Laurent
* A bathtub can typically contain 300 liters
Source: Ceres, ‘Global Assessment of Private Sector Impacts on Water’, April 2022, Table 2 (page 7)