Water scarcity and future business risks

Wednesday, April 15, 2009

With the deepening global recession dominating the world’s headlines, concerns are growing that the looming threat of resource scarcity is being overlooked at a time when it too demands an urgent response from governments and businesses.

In the same way that credit bubbles burst to spark the financial crisis, ‘water bubbles’ that have fuelled economic growth in particular regions in the past 50 years are also set to explode, warned the World Economic Forum (WEF).

The consequences may be no less severe, the WEF cautioned. “Worsening water security will soon tear into various parts of the global economic system,” it stated in a recent report.

“We are now on the verge of water bankruptcy in many places with no way of paying the debt back … The consequences for regional economic and political stability will be serious.”

Water bankruptcy

Increasing shortages of water in the coming years are likely to threaten national and regional security, economic growth, global trade, energy and food production, warn experts.

Professor Sir John Beddington, the UK Government’s Chief Scientific Adviser warned in a speech last month of a ‘perfect storm’ around 2030 created by increasing shortages of food, water and energy supplies that could trigger public unrest, conflict between states and mass migration.

It may seem strange that water scarcity is becoming an increasingly big problem when water covers three-quarters of the world’s surface, but the vast majority of this is undrinkable.

Available water

Less than 3% of the world’s water is fresh, while a much smaller amount than that is actually available for human consumption as much of it is locked in glaciers and ice caps.

By 2030, almost half the world’s population will live in areas of high water stress, due to a combination of climate change, population growth as well as rising demand for food, energy and biofuels, stated a report by the United Nations published in March.

Even when the world’s population peaks around 2050 at about 9 billion the demand for water will continue to grow because of an increasing demand for it from world agriculture due to changing diets.

How is water used?

Already around 70% of global water use is in agriculture. That is only likely to grow, for as people become richer their consumption of meat, grains and milk increases—all of which require substantial water to grow.

If we continue as we are today there will not be enough water to grow the food needed to meet the population growth and changing diet demand, says the WEF.

It predicts that 55% of the world’s population will be dependent on food imports as a result of insufficient domestic water by 2030.

The demand for energy is also set to further squeeze our precious water supplies. Energy production accounts for about 39% of all water withdrawals in the United States and 31% in the European Union.

With energy production forecast to grow in both regions by about 50% over the next two decades, water consumption for energy production is set to more than double over the same period.

There will also be rapid energy growth in the non-OECD countries, especially across Asia, which will have a big impact on water resources.

Choosing between ‘good’ energy and water

Meanwhile, plans to switch from petrol to electricity or biofuels in an attempt to solve some serious problems, namely energy security or climate change, will aggravate an even more serious problem—acute water shortages.

All of this will have far-reaching repercussions on businesses in the coming years.

Water stress is becoming an increasing issue for water-intensive businesses such as those in the power, mining, food and beverage and semi-conductor sectors, which could have knock-on effects to other parts of the economy.

The WEF raises the question of whether companies may relocate to resource-rich countries in the same way as many firms have moved their manufacturing bases to countries that pay lower wages.

Emerging risks

But other industries may not be fully aware of the risks that increasing resource scarcity may present in future decades.

The risk of business interruption may rise, if a company’s supply chain breaks down, for example, because of energy shortages due to drought conditions.

As water becomes an increasingly politically and socially sensitive issue, a firm’s reputation could be damaged if it were found to use excessive amounts of water or to be polluting precious water supplies.

Regulatory risk may also increase as governments step in to supervise water use, while a company’s water management strategy could affect its access to capital, just as firms’ output of greenhouse gases is becoming a bigger concern for institutional investors.

Opportunity to act

But the current global economic downturn offers an opportunity to start tackling the impending water crisis, says the WEF.

The actions taken to remedy the global financial crisis provide something of a template for tackling the water crisis.

Governments have realised that the status quo will not deliver the solutions required to the global financial problems. Instead, they have sought to broker agreements with social, civic and business groups and other states to kick start their economies out of recession.

A similar consensual approach is needed to address the growing water crisis, because the world simply cannot carry on using water in the same way as it has in the past, say experts.

“Now, when a suite of reforms is required to fix systemic problems in the economic system, is the perfect time to start the water reform dialogue,” says the WEF.

This story was featured on The Lloyds Website

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