How water risks can threaten corporate profits (Capital Group)

Los Angeles ( – According to the UN, there will be 40 percent less freshwater in the world by 2030, according to Emma Doner, ESG Senior Manager at Capital Group.

At the same time, the number and intensity of droughts are increasing. Emma Doner warns that this could destroy entire business models. “Climate change is forcing investors to consider two new types of risk: transition risk, which is the cost of transitioning to low-carbon operations, and physical risk, which is the cost of increased drought and scarcity of fresh water,” Doner said.

Water stress is one of the most pronounced physical risks of climate change that investors should consider: droughts and water shortages are extraordinary events that have been shown to quickly halt production or even lead to the termination of late-stage projects. “In water-intensive industries, understanding how companies manage their water supply can be a critical factor in anticipating their longer-term performance,” she said.

The semiconductor industry provides a good case study for this. It is one of the most water-intensive industries. Several manufacturing facilities that make chips have experienced severe, long-term droughts in the past. “In response, several leading companies have found new approaches to water management that allow them to recycle more than 90 percent of the water they use and strengthen the long-term sustainability of their operations,” Doner said.

This is also noticeable in the United States. For example, a number of major semiconductor companies announced new manufacturing facilities in the US last year, several of which will be located at an expanding manufacturing center in Arizona. At the same time, however, the drought in Arizona is getting worse. In August 2021, for example, the US federal government declared a water shortage on the Colorado River, one of the largest rivers in southwestern North America. “Arizona will lose about 18 percent of its water supply, which is about 63 million cubic meters,” predicted Doner. This amount corresponds to the total annual water consumption of the state capital Phoenix or Intel’s annual water withdrawal.

It is therefore becoming increasingly important for companies to develop skills in recycling and the efficient use of water. With success: For example, the industry leader Intel can now recycle 80 to 90 percent of the water used in production.

Nevertheless, this cannot yet be transferred to all industries: “Utilities, for example, cannot expand their water recycling programs to reduce their risk,” says Doner. These companies would use water for hydroelectric power and cooling of thermoelectric and nuclear power.

Without water, no hydroelectric power is possible and the water consumption for the cooling of thermal and nuclear power plants is enormous compared to other branches of industry. “In order to protect against the risk of drought, these companies may be forced to relocate their production facilities or, if this is not possible, to abandon hydroelectric power and thermal energy altogether,” Doner said.

It is therefore important for investors to include water as a resource in their investment decisions. “How well prepared companies are for water crises is an indicator of whether they can continue to operate effectively and achieve good results in the future,” said Doner. Investors should reconsider the near-term appeal of certain resource-intensive sectors. Because without a sufficient amount of fresh water, the growth of numerous sectors could no longer be attractive in the medium to long term.

The sectors most affected by water stress risks include utilities, energy, chemicals, food & beverage, hotels, containers & packaging, semiconductors and building materials. “Companies in many of these sectors can potentially mitigate – and in some cases eliminate – water stress risk by selecting safer manufacturing sites, investing in recycling, and establishing local freshwater alternatives,” Doner said. (08.06.2022/ac/a/m)