Alarm bells ring as world approaches 'peak water'

Water is a critical resource in mature economies, as a commodity for industrial processes and a coolant in energy production as well as for household use. But water systems that have been taken for granted since the industrial revolution are coming under increasing stress from a combination of intensive use and climate change.

Dr Celine Herweijer, director in the sustainability and climate change team at PricewaterhouseCoopers, says too often businesses base future decisions on past availablity of water supply. “We know that is incorrect, as alongside the stresses on water resources from growing populations, industrializsation, regulatory changes and land-use change, climate change will affect the availability and quality of water, with negative implications in some regions and positive in others,” she told Lloyd’s 360 Risk Insight. “Investors and businesses currently lack a framework to identify, plan for and adapt to water-related risks.”

The implications of water scarcity are beginning to be felt all along the economic chain. In the US, for example, water stress is so acute in some parts of the country that institutional investors are being warned about the financial risks it poses to them.

A new report from Ceres, the investor coalition, and Water Asset Management, the global equity investor, warns investors who buy water and electric utility bonds that finance much of the country’s vast water and power infrastructure that some of the nation’s largest public utilities may face moderate to severe water supply shortfalls in the coming years. Yet these risks are not reflected in the pricing or disclosure of bonds that finance the infrastructure projects, Ceres says.

“Water scarcity is a growing risk to many public utilities across the country and investors owning utility bonds don’t even know it,” said Mindy Lubber, president of Ceres.  “Utilities rely on water to repay their bond debts. If water supplies run short, utility revenues potentially fall, which means less money to pay off their bonds. Our report makes clear that this risk scenario is a distinct possibility for utilities in water-stressed regions and bond investors should be aware of it.”

There are about 50,000 public water utilities in the US serving an estimated 258 million Americans. The energy sector is very water-intensive and accounts for 41 per cent of the nation’s freshwater withdrawals.

The Ceres report evaluates and ranks water scarcity risks for public water and power utilities in some of the country's most water-stressed regions, including Los Angeles, Phoenix, Dallas and Atlanta. The water utility system bonds issued by L.A. and Atlanta received the highest risk scores.

Water scarcity is also moving up the agenda in Europe where greater efforts are needed to stop and reverse the over-exploitation of limited water resources in certain countries.

A new report from the European Commission on the progress of member states in addressing water scarcity and droughts shows that some member states have begun to suffer permanent scarcity across the whole country. The problem is not limited to hot Mediterranean countries: France and Belgium have both reported over-exploited aquifers and the Czech Republic has areas with frequent water scarcity, according to the report.

As a result, the Commission has launched a number of preparatory activities in advance of a 2012 water scarcity and droughts policy review. The results will feed into the 2012 Blueprint to Safeguard EU Waters, together with a review of the implementation of the Water Framework Directive.

About 11% of total freshwater abstracted across Europe is used by manufacturing industries, with about half used for cooling and half for processing. Water abstracted for energy production accounts for 44% of total freshwater abstraction but very little of this water is consumed in the process.

Among the awareness raising initiatives suggested by the EC is a system of labelling that will let consumers see how much water was used in making a product.

Lloyd’s 360 Risk Insight Briefing Global Water Scarcity: Risks & Challenges For Businesses, published earlier this year, warned that companies increasingly face a physical shortage of water which in turn will lead to new regulatory and reputational consequences.

“Business needs to consider how governments and the international community will manage water scarcity over the medium to long term and how can they work with the public and non-governmental sector,” said the report’s author Dr Guy Pegram, “Not simply to influence the debate, but also to broker solutions – given that water is, perhaps, the world’s ultimate shared resource.”

PwC’s Dr Celine Herweijer agrees that businesses face both financial and operational risks from water scarcity, and the gap in knowledge of these risks could affect not just business themselves, but investors and credit insurers.

“Investors and businesses who identify these risks and how they can be managed, can reduce exposure to water-related risks. Better disclosure by companies on the scale of risks and the actions they are taking to manage them is emerging, but it is early days on common standards and action.”

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