How wise is it to invest in industries with high water use?

There have been a lot of articles in the financial media recently about the financial impact of global water shortages in terms of investment. Given that the UN estimates we could have a 40% shortfall in freshwater resources by 2030, this is a serious challenge for global business.

Some sectors use a lot of water, and businesses have begun experiencing the negative effects of drought. In Taiwan in 2021, a severe drought meant water supplies were unable to sustain the semiconductor industry and the rice farmers. In this instance, the Taiwanese government paid the farmers to not grow rice in order to save the more lucrative semiconductor industry. However, what if this situation happens again in the future? There comes a point at which growing food has to be the priority. And what would that mean for the investability in the semiconductor industry?

While global industries that are water intensive, such as textiles, food and energy, are particularly vulnerable to water shortages, all businesses are at risk. It’s estimated that more than two-thirds of companies that are most vulnerable to water scarcity have failed to address freshwater-related risks or are inadequately managing them. In a report commissioned by the Swiss Federal Office for the Environment, High and Dry, it was found that 69% of listed equities are exposed to water-related risks that could affect value by up to US$225 billion.

Investors are now taking note

Wealth funds and investment companies are beginning to factor water security into their investment decisions. The consequences of floods, drought and water quality can be huge for businesses, with the risk of business interruptions, issues with supply chains and damage to turnover. As an example, one US-owned brewery’s plan to build a brewery in the water-scare north of Mexico met with huge local opposition, and the proposal was eventually rejected after two years of protests. As a result, share prices in the company dropped by more than 10%.

Water sustainability is good for business and good for investors

Back in 2018, research done by the Boston Consulting Group showed that investment in water sustainability is good for business. The report’s authors said the evidence showed “that robust environmental, social, and governance (ESG) practices, as elements of a company’s ‘total societal impact’ (TSI), correlate with better financial performance including higher total shareholder returns.” Indeed, the greater the investment in water resource management, the better the financial performance of the company. Water conservation alone added up to 5.5 percentage points to gross margins, and those companies that also invested in other environmental measures were awarded up to 11% higher valuation premiums by investors.

Investors are increasingly interested in companies that take water security measures. CPD (Carbon Disclosure Project), a not-for-profit charity, runs a global disclosure system for investors, companies, cities, states and regions to manage their environmental impacts. It holds the largest environmental database in the world and every year scores over 15,000 companies on climate change, forests and water security disclosures. CPD has been consulted by investors with assets worth over US$136 trillion and buyers with a combined purchasing power of US$6.4 trillion. Given that, in 2022, only 15 companies made the A list in all three environmental impact categories (with 299 on the climate change list, 25 on the forests list and 107 on the water security disclosures list), large investors with an eye on companies with active sustainability measures aren’t going to take long working out where to put their money.

How to improve your business’s water efficiency

Your company may not be directly affected by the stock markets, but it will be affected by the UK’s increasing risks of water shortages. With consumers, clients and investors becoming increasingly aware of the human and business impact on water security, you need to take water efficiency measures now in order to protect your business. By saving water, you’ll also be saving money, making your business more sustainable and therefore more investable.