Longer term investments Water scarcity: Risk and opportunity

Water may seem like an abundant resource on our planet. Yet, freshwater used for human activity, makes up only 2.5% of global water resources, of that only 1% is available for consumption.¹

Water impacts large swaths of the economy, cutting across apparel, food and beverage, energy, chemicals, pharmaceuticals, and mining. In 2016, these sectors accounted for about 70% of global water use, and they continue to rely on it as an input.² Even technology companies intersect with water security; data centers consume significant water for cooling purposes. In the US, data centers rank among the top 10 consumers of water, and a mid-sized center uses up as much water as about 1,000 households, according to research from the University of California, Berkeley.³

Water use is a critical societal question, and one which has come sharply into focus last month with droughts ravaging the United States, large parts of Europe and the Horn of Africa. It is also a financially relevant issue across sectors. According to a CDP survey of 2,000 global companies, the total projected cost of inaction to water risk might be 5x higher than expected cost of managing this risk.⁴ In our view, there are two ways in which investors can consider water risk in their portfolios. They can look to understand the water intensity—measured in cubic tons of water per USD million dollars of revenue—for companies where water is financially material, and position in names that are better at managing their consumption.

Innovation is underway on this front, as investors increase pressure and companies commit to acting. In August, a group of investors representing nearly USD 10 trillion AUM launched the Valuing Water Finance Initiative, aiming to engage with 72 companies to act on water as a financial risk.

The second way to position is by investing in the companies exposed to our “Water scarcity” Longer Term Investment theme. This market comprises several subsectors, and broadly is exposed across industrials and utilities. According to RBC Capital Markets, the value of the market is more than USD 655bn as of 2021, and the largest category at 29% is wastewater treatment. The rest consists of water equipment suppliers that provide equipment for water exploration, distribution, and treatment.

This is an excerpt from the recent Sustainable Investing Perspectives report (published 6 September 2022) by CIO's Amantia Muhedini, Michelle Laliberte and Stephanie Choi. For more on the “Water scarcity” theme, please refer to our longer term investments report (24 January 2022).

1 IEA, “World Energy Outlook 2016”.
2 IEA, “World Energy Outlook 2016”, as aggregated by CDP in “A wave of change: The role of companies in building a water-secure world”, CDP Global Water Report, 2022.
3 Copley, Michael, “Data centers, backbone of the digital economy, face water scarcity and climate risk”, npr.com, August 30, 2022.
4 CDP, “A wave of change: The role of companies in building a water-secure world”, CDP Global Water Report, 2022.