Which businesses should keep an eye on water scarcity?

Which businesses should keep an eye on water scarcity?

Growing levels of water scarcity pose a significant risk to businesses and the broader economy – it has been estimated that business-as-usual levels of water productivity and economic growth will increase the likelihood of water-related production shortfalls and economic disruptions related to water shortages, putting nearly $63tn or 45% of global GDP at risk by 2050. However, adopting sustainable practices could allow $17tn of GDP to escape exposure to the risks from severe water scarcity.

Which businesses will be affected?

While certain services companies may not have direct connections to water usage, their suppliers likely will. Most, if not all, businesses use semiconductors – the material is used in communications infrastructure, artificial intelligence, healthcare, quantum and cloud computing, and everyday consumer devices.

Semiconductor manufacturing, however, requires large amounts of ultra-pure water to avoid contamination. Taiwan Semiconductor Manufacturing (TMSC) uses around 150,000 tons of water per day, this is roughly equivalent to 60 Olympic size swimming pools. The manufacturing of semiconductors also generates wastewater containing heavy metals and toxic solvents. Droughts related to climate change exasperated the global semiconductor shortage in 2022.

Additionally, companies that use data centres are also more likely to have a higher exposure to water risks. Data centres consume large amounts of water for cooling – the typical data centre uses around 3-5 million gallons of water per day, this is approximately equivalent to the amount used by a city of 30,000-50,000 people. 

Water-related risks from climate change can also impact transportation – floods, droughts, storms, and rising sea levels can all impact the transportation of cargo. The river Rhine is one of the busiest freight routes in Europe, however, due to the drought in 2022, low water levels prevented fully loaded cargo vessels from sailing on the river. In 2019, the Rhine River was so shallow that a number of merchants had to declare a force majeure since they were unable to supply and receive material.

The importance of disclosures

Investors are increasingly becoming more aware of water risks and have been calling for action – a group of investors representing $1.7tn in combined assets have called on governments to do more to tackle the global water crisis. Investors have also been increasing corporate disclosure requests on water. Data from the CDP found that the number of companies asked to report on water security has risen by 51% in 2022.

Last year, a report from Planet Tracker and CDP found that financial institutions could lose $225bn from water-related risks. Despite this, 33% of financial institutions are not assessing their water risk exposure.

While there has been limited guidance on the reporting of material water-related financial risks, there have been some recent developments. The Climate Disclosure Standards Board (CDSB) has released Water Guidance which aims to provide companies with a means of developing their reporting practices. This allows investors to access the material water-related information needed for effective capital allocation. 

Additionally, the Taskforce on Nature-related Financial Disclosures (TNFD) recently published the final beta version of its disclosure framework. The TNFD aims to improve the accessibility of data on nature-related risks, impacts, and dependencies.  In its definition of nature, the TNFD includes the climate system, alongside land, ocean, and freshwater realms of nature. Assessing the level of exposure of their supply chains to these risks and disclosing them can prove beneficial for businesses.

What are companies doing?

In its 2020 Global Water Report, the CDP said that companies reported the maximum financial impacts of water risks to be $301bn, however, the cost of addressing these risks is just $55bn.

A number of companies have adopted innovative practises to enable water security – L’Oréal, for instance, has created ‘waterloop factories’ that recycle wastewater for industrial processes indefinitely. Unilever has introduced a new ‘dry personal care’ range for water-stressed areas, whilst also reducing the volume of water it uses in its manufacturing sites by about 50% per tonne of production since 2008.

In China, after regulators introduced rules requiring papermakers to reduce water consumption by 10%, Chenming Group upgraded its assembly line with advanced equipment which reduced daily water consumption by 45%.

Jordan’s Cereals requires its suppliers to sign up for the farm assurance scheme Conservation Grade (CG) – to meet CG requirements, farmers must satisfy key criteria including standards for water quality.

There are also several solutions that can help reduce the water usage of data centres – for instance, Google’s data centre in Finland uses seawater for cooling. The seawater is kept separate from freshwater and when expelled the hot water is mixed with cold seawater before being returned to the sea. Microsoft has also been experimenting with submerging a sealed data centre under water.