Understanding the impact of water scarcity

10 September 2018

Water Scarcity

Water risk may have once been considered a peripheral issue, but it now presents a real danger for shareholders.

Water stress is one of the most serious, yet underappreciated, challenges the world faces, with direct impacts for businesses – and therefore investors. Companies (and their shareholders) need to be aware of the operational, regulatory and reputational risks water scarcity brings:

The scale of the challenge

Water scarcity is a global problem. In Cape Town for example, residents in recent months have had to prepare for a potential ‘Day Zero’ – when the city’s taps run dry. While only last year, California emerged from a historic multi-year drought. By 2025, two-thirds of the world’s population could see their water supplies restricted by drought or lack of access.

Water Scarcity - 20,000 litres required

Who is most at risk?

No business is immune, but one of the most exposed sectors to water risk is agriculture, consuming around 70% of the world’s fresh water. This also has serious knock-on effects for several industries which depend on its produce.

Apparel companies are a notable example, with a heavy reliance on cotton, making them very sensitive to changes in the water supply. Higher cotton prices can translate into reduced profit margins for clothing producers, if they are unable to pass on these costs to the end consumer.

Water is also critical to extractive industries and we know from our own company research the direct financial impact it has. For example, a major copper miner invested a significant amount in a desalination plant, to avoid depleting already scarce water resources used by local communities. The competition over water access is only going to rise in the future.

Source: Gassert, F., P. Reig, T. Luo, and A. Maddocks. 2013. ‘Aqueduct country and river basin rankings: a weighted aggregation of spatially distinct hydrological indicators.’ Working paper. Washington, DC: World Resources Institute, December 2013. Available online at World Resources Institute website.

Firms showing the way forward

Our assessment of a company’s approach centres on three interconnected areas: awareness of the issue; how well it is disclosed to shareholders; and evidence of a mitigation strategy. Some businesses are showing real leadership: consumer staples giant Unilever’s ‘Sustainable Living Plan’ for example, takes a genuinely holistic approach to water disclosure, measuring both direct and indirect impacts, including at the consumer level (when its products are being used).

Meanwhile, Intel, the semiconductor manufacturer, has a comprehensive water policy, considering the water footprint across all stages its operations – for example, building water conservation features into the design of its facilities and using sustainable water sources as a criterion when siting them.

Measuring the impact for investors

For us, assessing and successfully managing water risk is a sign of good corporate governance and an important part of our company engagement efforts, both one-to-one and at a collaborative level.

Regarding the latter, we recently joined the second phase of a PRI initiative on water risk in the agricultural supply chain, having been part of the initial two-year effort. This has been a great opportunity for us to explore this material topic more in depth, providing useful frameworks for future engagement and very good ideas around how to integrate water data into company analysis and valuations.

Water risk may have once been considered a peripheral issue, but it now presents a real danger for shareholders. However, businesses which act most prudently should be able to widen their competitive moats and improve long-term performance.

This article has been taken from our 2018 Stewardship Annual Report. Please see the links to the full report.

The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were, or will prove to be, profitable.
*Source: Food and Agriculture Organisation of the UN (FAO), 2015.

Important information

This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’). It does not constitute investment advice. It has been complied with considerable care to ensure its accuracy. However, no representation or warranty, express or implied, is made to its accuracy or completeness. Martin Currie has procured any research or analysis contained in this presentation for its own use. It is provided to you only incidentally and any opinions expressed are subject to change without notice.