Two billion people globally, including many children, do not have access to safe drinking water and 44% of household water is not safely treated. The global urban population facing water scarcity is projected to potentially double from 930 million in 2016 to between 1.7 and 2.4 billion people in 2050. These were some of the staggering statistics shared in the latest edition of the UN World Water Development Report launched around World Water Day in March.
Water is a theme that is close to my heart, particularly ingrained through the many public awareness campaigns during my growing up years in Singapore on the need to save water. Singapore used to be considered one of the most water-stressed countries in the world with a heavy dependence on rainfall due to the lack of natural water resources and limited land available for water storage facilities.
Over the years however, Singapore has successfully worked on an integrated, effective and cost-efficient way to meet the nation’s water needs with investments in research and technology to treat, recycle and supply water.
Seeing first-hand how water is such a necessary resource and economic asset, there are three practical questions for investors to be asking as they think about the connection of water to one’s investments.
From a risk management perspective, how well is a company managing its water risks?
Water risk refers to the possibility of a company experiencing a water-related challenge, such as water scarcity, water stress, flooding, infrastructure decay or drought. Good water management is increasingly an important material ESG risk across various industries.
The Climate Disclosure Project (CDP) 2020 Global Water Report highlighted that the cost of inaction on water risks for companies is five times the cost of taking action. Supply chains and the resiliency of supply chains were brought into the spotlight during the Covid-19 pandemic. Water risks in the supply chains can impact production, as seen in the semi-conductor sector which led to a shortage of chips worldwide. Therefore, companies that invest in water resilience will be better at managing these risks.
What is the investment potential given the huge needs to be met?
The demand for clean water continues to outstrip supply. While 2022 was the ‘year of drought’ with many across the developing markets impacted, this is an issue not just for them. Even in developed markets, outdated systems with poor access to clean drinking water has presented health risks to people. The American Society of Civil Engineers estimated that $7.6bn of treated clean water was lost in 2019 due to leaky pipes. If no further investment is made, the loss could double to $16.7bn by 2039. The global water infrastructure is due for necessary upgrades, and the global financing needs range from $6.7trn by 2030 to $22.6trn by 2050.
CDP’s 2022 water report Riding the Wave demonstrates how companies are moving beyond risk to looking at opportunities to be captured by the challenges of solving the water crisis. Acting on water needs can help a company tap into new markets, increase production capacity, build resilience, and gain competitive advantage.
Encouragingly, companies who made public water disclosures reported water-related opportunities worth $436bn and firms that have integrated water into their business strategy have realised four times more opportunities. Meeting water and sanitation needs is one of the Sustainable Development Goals and according to industry experts, current investments must be quadrupled to meet the annual estimated $600bn to $1trn required to realise this goal.
How is regulation driving growth opportunities?
It is anticipated that large and listed companies will be required to report on the EU’s first set of ESG reporting standards from January 2024. The European Sustainability Reporting Standards list water and marine resources as a key topic, alongside others such as climate change and pollution. This strengthening of EU disclosure rules is expected to bring more accountability and a better understanding of water risks and opportunities, enabling the tracking of progress against EU and global goals that will raise the bar on what is expected from companies.
Beyond the EU, China launched its ‘Water Ten Plan’ in 2015, aimed at improving China’s water environment quality. It involves more than 12 ministries and government departments, with more than $300bn directed to address water pollution. The plan covers a range of broad actions, from seeking to control pollution discharge, to strengthening the management of water environment safety, promoting science and technology and enforcing law and regulations.
I urge investors to consider these questions as they set about to future proof the investment health of their portfolios.