Good quality and sufficient amount of water is essential for health, sanitation, food production, power generation and numerous other industrial processes. Water is closely connected to many other global challenges and risks, such as climate change, biodiversity loss, poverty and involuntary migration. The management and valuation of water resources can have significant societal and economic consequences.
Water scarcity may feel a distant threat in many places in Global North, not least considering that about 71 percent of the surface of our ‘Blue Planet’ is covered with water. However, only 3 percent of water on Earth is freshwater, and of that, only about 1.2 percent can readily be used as drinking water. Even if some places have so far been mostly spared from acute water stress, there is a serious imbalance between supply (availability) and demand globally. Droughts are increasing and rainfall patterns becoming more erratic, and groundwater resources are being depleted. Sometimes too much water is the problem: flood-related disasters have risen by 134 percent in the past two decades, according to the World Meteorological Organization. Indeed, climate change impacts will largely present themselves through water.
At the same time, water demand is growing rapidly, driven particularly by population growth, economic development and new consumption patterns. The consequences include worsening water pollution. The biodiversity of freshwater ecosystems is declining faster than any other biome, while marine and coastal habitats are also under increasing pressure.
While tangible water impacts are often local, few things remain unrelated to others in today’s interconnected world. Droughts and floods in food-producing regions will affect the availability of ingredients in markets that import from there (‘virtual water footprint’). Companies headquartered in countries with a stable water situation may experience sourcing disruptions thanks to their suppliers suffering from water stress or deficient hygiene conditions. Water-related consequences such as price increases, social unrest and energy insecurity can directly and indirectly also affect businesses that don’t use much water in their own operations and countries without direct water scarcity.
As such, water security is a pressing and escalating global challenge, which will also have material implications for companies and investors. Certain operations are more affected by water risks than others due to their location and/or reliance on large amounts of (and/or high-quality) water, and they are typically also the sectors that have the biggest potential impact on shared water resources. For example, food production is entirely dependent on water and accounts for 70% of the world’s freshwater withdrawals. The fashion industry also has a big water footprint both in terms of freshwater extraction but particularly through being behind 20% of water pollution globally. Other business activities for which water is of critical importance include power generation (in 2020, 87% of global electricity generated from thermal, nuclear and hydroelectric systems directly depended on water availability), microchip manufacturing (which requires both vast amounts of and ultrapure water), mining (which consumes industrial amounts of water and whose safe waste management practices can be vulnerable to heavy rainfall), and data centres (a typical one uses as much water per day as a town of 30,000-50,000 people), among many others.
How does the Council on Ethics work with water?
As the above examples on both systemic and industry-specific challenges indicate, water can present a material risk for AP funds’ assets. Conversely, through active ownership, investors can play an important role in encouraging better water management and stewardship and indeed many of the Council’s reactive engagements have addressed water-related incidents. In addition, proactive dialogues within the collaborative Feeding the Future engagement programme advocate for responsible water stewardship within the food sector. Analysis and discussions are currently ongoing to establish other opportunities for proactive engagement addressing water-related risks.