The water crisis should be a major concern for governments, companies, and financial institutions (FIs). This was one of the key messages to come out of a recent gathering of investors in the City of London.
For their part, financial firms are becoming increasingly aware of the material risks and opportunities presented by nature. Water is of central importance to the global economy, but it has often been overlooked.
As we enter another round of climate negotiations at COP 28 in Dubai, it is essential that member states raise the profile and ambition for water security. An estimated four billion people experience water scarcity for at least one month each year. On top of that, water demand is growing and supplies plummeting. The UN estimates that 50% of countries will experience a shortfall in water availability by 2030.
CDP’s own research has found that FIs are starting to grasp the scale of the problem and the implications for business. Last year, 275 FIs responded to a request to disclose data on water issues. This group included some of the world’s largest banks, asset owners, asset managers and insurers. The data shows that 42% have board-level oversight of water issues and about one-quarter went as far as setting water-related requirements for their clients.
Despite this, the data also indicates much room for improvement. Water impacts and risks are often under-prioritized by FIs. For example, only one-third of respondents undertake water-related risk assessments and just 48 firms reported exposure to such risks.
The recent breakfast briefing in London was hosted in the offices of Janus Henderson Investors, an asset management group. Analysis from the firm shows that water issues are a material concern to some of the world’s most important economic sectors. The companies in these sectors can only grow with long-term financial backing and so FIs have both a huge amount of influence and a considerable stake in seeing these risks identified and managed.
Mining is one sector where water is a critical part of every stage of the process. Analysts from Janus Henderson explained that demand for critical minerals is growing to support the net-zero transition, in particular across renewable energy and electric vehicles. However, one-fifth of mines are located in areas where there is a critical shortage of water, highlighting how water risk is often site-specific. This is an issue that investors need to be acutely aware of when allocating capital. CDP research from 2022 found that the mining sector was deeply exposed to water issues, which was already leading to stranded assets.
The semiconductor industry is also vital to the global economy and requires high levels of consistent water supplies. The sector is projected to grow by 8% year-on-year over the next decade. Its unique technological requirements mean that only ultra-pure water can be used in a manufacturing process that subsequently leads to highly contaminated water. This combination makes the industry vulnerable to disruptions in water availability. For example, one of the world’s largest semiconductor companies, TSMC, consumes thousands of litres of water each day; but its manufacturing activities have been repeatedly halted in recent years due to prolonged drought in Taiwan, China.
Water issues in Asia were another theme of the meeting. CWR, a non-profit, explained that 2.3% of China’s GDP has been lost due to water scarcity and a further US$4 trillion is at risk from the region’s dependence on 10 crucial river basins. The emphasis again is on the locational nature of this crisis. From the Mekong to the Indus, water’s role as a guarantor of prosperity cannot be underestimated.
Water security will have its own day at COP28 this year and these themes need to be fully appreciated by policymakers as they assess the delicate interplay between climate and nature. All parties stand to gain from a clear understanding of which sectors and companies are most exposed to water risk. Investors need to disclose data and demand the same from their stakeholders. Armed with this information they can challenge and change how water-intensive companies do business.
Find out more about what financial institutions are doing on water.