Running Dry: The Challenges of Global Water Scarcity
Growing water stress is presenting critical environmental and economic challenges.
Key Takeaways
Climate change and population growth have created a global water crisis that will likely force businesses and consumers to face tough sacrifices.
Water scarcity affects many economic sectors, raising costs and supply chain risks. Most processes require freshwater, which is increasingly scarce.
Companies are assessing water use and its true cost, adopting water management strategies to help find opportunities in a water-scarce world.
How Does Water Stress Affect the Global Economy?
Most of us take for granted that when we turn on the faucet, as much water as we need will come gushing out. Similarly, many investors don’t give much thought to water’s role in the global economy even though many areas now regularly face inadequate and shrinking water supplies.
However, the world is pushing against the upper boundary of sustainable water consumption – in simple terms, we’re using water faster than it is being replenished.
The United Nations International Children’s Emergency Fund (UNICEF) forecasts that by 2025, half of the world’s population will live under water-stressed conditions. By 2030, 700 million people (approximately one out of every 11 people on Earth) could be displaced by intense water scarcity.1
The World Bank says challenges related to water access and scarcity make water stress one of the most significant risks to economic progress, poverty eradication and sustainable development.2
The water crisis is a critical environmental and economic challenge. In this article, we summarize the leading causes of water stress, its financial impact on different sectors of the economy and how some innovative companies are confronting the issue.
What Is Water Stress (or Water Scarcity)?
Simply put, “water stress” is an inability to meet the demand for water. That demand comes from people, businesses and cities. Importantly, it also includes water needed to maintain healthy ecosystems.
Water stress is not just about quantity but also quality and accessibility. Water that is unfit for use or inaccessible cannot help to meet water demand. The term water scarcity sometimes means water stress, although there are differences. We stick with water stress here as it is a broader term.
While the global population is growing, which increases water demand, the world's fresh water supply is static.
Agriculture is responsible for roughly 69% of total freshwater use (industrial and municipal purposes use 19% and 12%, respectively), and water stress makes it harder to grow enough food to feed everyone.3 Agriculture, manufacturing and other business activities not only utilize significant amounts of water but also produce greenhouse gas emissions. These emissions contribute to climate change, leading to droughts and wildfires, further escalating the demand for water resources.
Industrial activities also degrade water quality with various pollutants. Fertilizers and other chemicals containing nitrogen and phosphorous end up in lakes and streams, which causes aquatic plants to overgrow. This uses up all of the oxygen in the water, killing the fish and other animals that live in it. A staggering 80% of wastewater returns to rivers, oceans and groundwater untreated or unused.4 All of this reduces water availability, degrades water quality, harms wetlands and pollutes rivers, affecting entire ecosystems.
Putting this all together, the world is now unsustainably depleting and degrading its usable freshwater sources.
What Are the Different Types of Water and How Are They Used?
In terms of usability, there are three different types of water, which we summarize here:
Fresh vs. Salt vs. Brackish
Although water covers over 70% of the earth’s surface, less than 1% is freshwater accessible for human use.5
Saltwater is unsuitable for human, agricultural or industrial needs.
Brackish water, a mix of fresh and saltwater, is typically found where rivers meet the sea. It can be used in certain industrial processes and applications in the oil and gas sector.
Grey vs. Black
There are two types of wastewater:
Grey water, generated from activities such as bathing and washing dishes and clothes, can be collected and reused for irrigation and flushing toilets.
Black water contains biological waste and must be treated before being safely discharged or reused.
Surface, Ground, Rain and Storm
The primary source of freshwater is surface water in rivers, lakes and reservoirs.
Groundwater is stored underground in layers of porous rock, sand or gravel.
Rainwater can be used for various purposes, including irrigation and, with proper treatment, drinking.
Stormwater, including snow/ice melt, can collect pollutants in urban areas and must be managed to prevent further water pollution.
Climate Change and Water Stress
Climate change is worsening the water crisis, causing destructive floods and droughts and negatively impacting the global distribution and availability of water.
As contaminants and pollutants degrade water quality, aquatic ecosystems are less able to adapt to climate change. That reduces species diversity, which causes imbalances that can cascade through food chains. In short, climate change, water stress, and food supplies are intertwined.
Ironically, efforts to fight climate change can make water stress worse. For example, mining requires a lot of water, and we need to mine copper and other metals to make electric vehicle (EV) batteries and expand the electric grid to increase the use of renewable energy.
The Financial Impacts of Water Stress
Water stress creates material financial risks that directly affect a company’s ability to create value for its shareholders, and managing these risks can be particularly challenging. Alternative water sources may or may not be geographically accessible or polluted, and existing water treatment technologies are costly and energy-intensive.
Water stress affects certain sectors of the economy more than others. For example, surface and groundwater can have a big financial impact on companies in nature-dependent sectors, including agriculture, aquaculture, food & beverage and forestry, paper & packaging.
Below, we highlight how specific industries within these sectors depend on water:
Agriculture
Almost 70% of global freshwater is used for agriculture. Water is essential for growing crops and raising livestock, which are the backbone of the global food supply.
Forestry, Paper and Packaging
These industries use water to make products and cool down machinery. Chemicals and waste from these processes can harm water quality and aquatic ecosystems. Cutting down trees worsens water stress by disrupting natural water cycles.
Power
Water is needed for many forms of power production, not just hydropower but also for cooling thermal power plants, and declining water availability can increase heat and electricity prices. Hydrogen fuel, which creates zero carbon emissions if produced using renewable energy, is made with water.
Industrials
Cooling, cleaning, and making textiles and chemicals require large amounts of water. The quality and quantity of water can affect output and costs, affecting profitability.
Data Centers
Data centers, which are expanding everywhere, use significant amounts of water for cooling and to generate electricity. Water costs and availability can impact a data center’s operational efficiency and reliability.
Mining
Mining depends heavily on water and is highly vulnerable to water scarcity. Acquiring water rights can be costly, affecting a project’s economic viability, and mining activities can pollute water from acidic runoff and by releasing contaminants like heavy metals, degrading surrounding ecosystems and water quality.
Societal Debates About Water Stress
With water demand exceeding supply, there are growing debates over privatizing water rights and how to price water. Still, water use and pricing are mostly unregulated. This largely stems from the view that people are entitled to unfettered access to fresh water and because its availability is location-specific. This makes it challenging to assign a “fair” price to water that reflects its true value, including the cost to access, transport, use, and recycle it.
Assessing the actual value of the water used to run a business can help companies better manage financial risks and identify cost-saving opportunities. The 2022 CDP water report notes that among the companies that participated in the CDP survey, those that compute a price for the water they use say that opportunities related to water efficiency are six times greater than those reported by companies that do not calculate a price for water.6
Investment Considerations in a Water-Stressed World
Businesses in water-dependent sectors may not be sustainable long-term if they do not mitigate and adapt to water risk. Here, we provide examples of what some companies are now doing in this area:
Water Stress Mitigation
Adopting water-efficient technologies to reduce consumption: Sustainable farming uses drip irrigation and soil moisture sensors to determine precise watering needs to grow crops; factories are implementing closed-loop water systems to recycle and reuse water and are upgrading to water-efficient equipment.
Reducing water waste: Using advanced algorithms and low-cost sensors, companies can identify and repair leaks, addressing a significant source of water loss. New treatment technologies can make wastewater reusable, and “green” builders and other businesses can upgrade systems or modify processes to reduce water use.
Water Stress Adaptation
Developing drought-resistant crops: Innovative crops that require less water are helping farmers avoid financial disaster when drought strikes. These crops are becoming more crucial to food production, food security and profitability in the agriculture sector.
Shifting to water-efficient processes and reducing reliance on freshwater: More water-efficient processes are helping companies minimize their water footprint, recycle wastewater, and explore ways to use brackish or gray water for specific processes.
Designing buildings to collect and use rainwater: Sustainably designed buildings collect and channel rainwater from rooftops and surface areas into storage tanks for reuse, reducing demand for municipal water supplies and mitigating the impact of runoff on urban drainage systems.
Opportunities in Water Use Efficiency and Innovation
Desalination technologies: The demand for desalination is increasing, and the cost has declined significantly in the last 10-15 years. The brine produced as waste offers opportunities to create new revenue streams from products such as gypsum, magnesium, salt, potassium and lithium, and reduces the negative impacts of discharging that waste into marine ecosystems.
Water collection technologies: Innovative technologies draw fresh water directly from the atmosphere (from dew or fog). The most common approach (some 90% of the market) uses a condenser and cooling coil technology or something similar to draw moisture from the air, where feasible.7
The Role of Governments and Regulations
Growing water stress calls for stronger government involvement. The U.S. government has allocated roughly $585 million to water infrastructure repairs and has enacted a new standard to address PFAS (“forever chemicals”) in drinking water. It has also passed a $50 billion Lead Pipe and Paint Action Plan. The UK has introduced a plan that allocates £1.6 billion for water infrastructure to combat pollution and restrict PFAS chemicals. In the EU, water treatment and nature-based solutions are included as criteria for sustainable water use.
Our Perspective as Active Managers
A company’s water use and vulnerability to water stress can be difficult for investors to evaluate, as mandatory disclosures are rare. As active managers, we discuss a company’s water dependence and management as part of our engagement activities. When evaluating municipal bonds and sovereign debt, we look for policies ensuring sustainable water resource use.
Case Studies in Corporate Water Stewardship
Nestlé: Pioneering Water-Saving Practices
Nestlé faces water-related risks due to its dependence on agricultural commodities and conducts annual water risk assessments at its sourcing locations. In Pakistan and South Africa, the company works with dairy farmers to use water sensors and water-saving techniques in animal feed production. Nestlé calculates a cost for water use, which has led to innovative practices in its milk facilities — it now has six factories that rely entirely on water from evaporated milk. One of them has profitably sold its excess water to other industries during drought periods.8
Ford's Journey to Zero Fresh Water Use
Ford has set an ambitious long-term target of using zero freshwater across its manufacturing facilities globally, driven by the company’s view that governments worldwide will inevitably impose limits on water withdrawals. Ford has reduced water withdrawals by roughly 40% thus far; freshwater consumption per vehicle at its plant in Chennai, India, is just 16% of what it was just a decade ago. By using grey water in non-production activities and prioritizing water-efficient processes, the company now recycles almost 100% of its industrial wastewater.9
Alphabet (Google) and Thirsty Data Centers
Water-cooled data centers use about 10% less energy and thus emit roughly 10% less carbon emissions than many air-cooled data centers, helping the company to reduce its carbon footprint.10 However, cooling with water puts more stress on water resources. Google’s global data centers consumed approximately 4.3 billion gallons of water in 2022 (before the release of new generative AI tools that are extremely data-hungry), comparable to the amount needed to maintain 29 golf courses in the southwest U.S. annually.11 The company uses reclaimed or non-potable water at over 25% of its data center campuses.12
Author
Sharvari Johari
UNICEF. n.d. Water Scarcity. Accessed March 3, 2024.
The World Bank. n.d. Water Overview. Accessed March 2, 2024.
Food and Agriculture Organization of the United Nations. n.d. Accessed March 3, 2024.
Unwater.org. September 2018. Accessed March 3, 2024.
USGS. June 6, 2018. Where is Earth’s Water? Accessed March 3, 2024.
CDP. 2022. The Global Water Report 2022. Accessed March 3, 2024.
Water News Europe. July 17, 2023. Opportunities for technology that extracts water from air. Accessed March 3, 2024.
Nestle. n.d. Water Stewardship. Accessed March 3, 2024.
Ford. 2023. Ford Recognized for Water Stewardship Commitment.
Google. November 21, 2022. Our Commitment to Climate-Conscious Data Center Cooling. Accessed March 3, 2024.
Ibid.
Ibid.
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