Major companies from across a range of sectors are increasingly concerned about the cost and availability of the world’s ultimate renewable resource: water.
The availability and relatively low cost of water does not tend to capture much attention until it effectively runs out. Yet, with the climate crisis seen as a “risk multiplier” to water scarcity, analysts warn that even companies with relatively limited financial exposure to water risk should brace for disruption.
It comes at a time when water prices are rising around the world. The average price of water increased by 60% in the 30 largest U.S. cities between 2010 and 2019, according to data compiled by Barclays, while California Water Futures have regularly jumped as much as 300% in recent years.
In a research note published June 14, analysts at Barclays identified water scarcity as “the most important environmental concern” for the global consumer staples sector, which includes everything from food and beverages to agriculture and tobacco.
Consumer staples, which was said to be the most exposed of all sectors to water risk, faces a $200 billion impact from water scarcity, analysts at the U.K. bank said.
This came down to a strong reliance on agricultural commodities, an extreme vulnerability to water price fluctuation and operational risks — including disruption from extreme events such as droughts and flooding, and fines and lawsuits linked to pollution.
The bank found that water-related comments in company transcripts last year jumped 43% when compared to the end of 2019, which it said reflected a growing corporate awareness of the risks associated with clean water and sanitation.
Sustainable investors, meanwhile, seemed to be prioritizing other environmental concerns. “Our recent conservations with investors suggest that many are instead focusing mainly on the potential impact of rising carbon costs,” analysts at Barclays said.
The research found the potential financial impact from water risk was likely to be three times higher than carbon risk.
Cost of inaction
“Water scarcity is really important because when it runs out you have really serious problems, and because of its low price it is one of those classic externality risks,” Beth Burks, director of sustainable finance at S&P Global Ratings, told CNBC via telephone.
“It needs to be managed very carefully and thoughtfully and you don’t always have that natural pricing signal that helps us conserve it.”
Water prices do not tend to reflect its scarcity, particularly because its use is often at a very low cost or even free. However, the availability of water underpins many parts of the economy and analysts at Barclays have attributed the latest rise in global water prices with the asset’s growing scarcity.
The bank estimated that the so-called “true cost” of water was three to five times greater than the price companies currently pay, once direct and indirect costs of water shortages and other risks were incorporated.
