Water Shortages Increase Investment Risks in Companies

Water Shortages Increase Investment Risks in Companies

Water shortages that impact business operations could create risk for investors by lowering stock prices, but not all companies report water use data.

Water Shortages Lead to Water Risks

Water shortages could impact investors in unfortunate ways through reduced company productivity, and, consequently, reduced stock prices. Unfortunately, while many companies might have policies that address water use, as many as one quarter of companies don’t publish their water use data.

Water scarcity, or what the Harvard Law School National Security Journal referred to as “the most understated global security risk,” threatens to undermine our years of technological advancements and improvements to our way of life and create economic and security risks that threaten our stability. It’s a heavy burden to place on such an important resource.

As climate change sinks it’s teeth into our weather by changing how, where and when precipitation falls, water availability is no longer as predictable as it once was. In the United States as of 2014, the Government Accounting Office reported that 40 out of 50 state water managers were anticipating water shortages in their state in the coming decade. Since then, the western states have been experiencing prolonged, extreme droughts that have shrunk water resources even further.

Extent of State Shortages Likely over the Next Decade Under Average Water Conditions, 2013

In addition, population growth, economic growth, aging infrastructure and land use changes have altered the nature and availability of water resources across the country (and the planet). Businesses that rely on old data or models that don’t account for potential water shortages or acknowledge their water risk could find themselves strapped for resources.

Markus Barth, developer of the TSC Water Security Index (launched this year by Thomas Schumann Capital) and currently “the world’s only sponsor of investable indices and financial products for water security,” maintains that this could be addressed by demands for change from regulators and investors. “While nearly all companies report on their water policies (because this is a positive aspect), only about 75 percent of companies report on water usage, water recycling and waste water discharge.  This will only change when regulators (and investors) demand that these companies comply with transparent water reporting requirements. More importantly, there needs to be a set of standards on what needs to be reported and how it is measured so that investors are able to compare water usage across companies, sectors and countries,” says Barth.

What is a wise investor to do? Sustainability-savvy “investors of consequence (the largest pension funds, endowments, mutual funds and asset management firms) need to put pressure on company management to report on this data by divesting investment in those that do not report,” says Barth.

CERES along with several partners, put together a toolkit for institutional investors that provides some guidance for investors on “how to better assess and manage these risks from both a portfolio-level lens and company-specific lens.” It’s a smart move, as large investors like pension fund managers are finding out. Individual investors might have to do more homework in order to take water risk into account with their portfolios.

Now that the drought is hitting California full force and many farmers are making tough decisions about which crops they will have water to grow (HINT: almonds aren’t always a sustainable choice), those funds that are invested heavily in agriculture are experiencing the damaging effects of water risk impacts on their portfolios. The future of water demands that farmers, corporations, investors and governments alike do better, or our future could be drier and poorer.

Image: Almond Blossoms in California Before the Drought; by Anna Newman/Adobe Stock