Got Water?

J.P. Morgan Global Environmental, Social and Governance Research Team recently published “Watching water, a guide to evaluating corporate risks in a thirsty world”.

Most people, whether they’re getting dressed, flipping on the lights or turning on their computer probably aren’t thinking about how much water those simple acts require.  And yet, according to Watching water, a report recently published by the J.P. Morgan Global Environmental, Social and Governance Research team, it can take large amounts of water to dye garments, generate electricity or wash the silicon chips that power personal computers.  As an eye-opening illustration, the report states that Intel, the largest semiconductor company in the world, consumes 8.1 billion gallons of water per year, as much as a city the size of Rochester, NY.

Drawing on the expertise of the World Resources Institute, the report suggests that the “scarcity of clean, fresh water presents increasing risks to companies in many countries and many economic sectors.”  The report goes on to offer a framework to help investors assess their portfolios for water-related risks and provides case studies as examples.

Drinking it in—the big picture

According to the report, the world has plenty of water but most of it—97.5%, is saltwater, leaving just 2.5% to sustain mankind.  Further, there are a number of factors contributing to increasing pressures on the water supply.

Population growth has a direct correlation to water consumption and with the global population growing at about 70 million people a year, the demand on the water supply will also continue to increase.  Higher incomes and changing consumption patterns for people moving into cities are also factors.  Finally, climate change,an issue of global concern, is affecting freshwater systems, with impacts on the quality, availability and variability of water supplies.

Yet, with these growing pressures on our water supply, Watching water notes that Wall Street has paid little attention to “those sectors that rely on clean water as an input into supply chains or production processes, or have waste water as an output.”  The report further notes that corporate disclosure of water-related risk is seriously lacking and rarely appears in the regulatory filings on which most investors rely.

Investing in a thirsty world

There are four sectors which the seven analysts who co-wrote the report think are particularly exposed to water related risks:  power generation, mining, semiconductor manufacturing, and food and beverage. Each of these sectors relies heavily on water for direct production of their products or in their supply chains.  For example, the report estimates that the total annual water use of the five biggest food and beverage companies (Coca-Cola, Nestle, Unilever, Kraft and Danone) represents around 600 billion liters.  To put this in perspective, Watching water says “the combined water use of these five companies in 2006 came to 95 litres for every person.”

So how can investors better assess these water-related risks?  Watching water provides a framework investors can use, focusing on three key areas of risk: 1) Physical - impacts sectors who use water in their production process, 2) Regulatory - regulations that define conditions under which water may be used or discharged and, 3) Reputation, the potential for companies who use large amounts of water to be deemed irresponsible for their water usage or handling. In considering these risks, a number of issues are brought forward for investors to probe.  For example, investors may want to consider a company’s compliance with regulations and water-quality standards. They may also want to look at the company’s investments in water efficiency and the security of water rights.

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