On April 21, 2021, near Ross, California, dry cracked dirt may be seen along the banks of Phoenix Lake. Getty Images/Justin Sullivan LONDON, United Kingdom — Water is the world’s ultimate renewable resource, and major corporations from a variety of industries are increasingly concerned about its cost and availability. Water’s accessibility and low cost do not usually attract much notice until it is substantially depleted. However, because the climate issue is considered as a “risk multiplier” for water scarcity, economists warn that even businesses with a low financial risk of water scarcity should prepare for interruption. It comes at a time when global water prices are on the rise. According to data gathered by Barclays, the average price of water surged by 60% in the 30 major U.S. cities between 2010 and 2019, while California Water Futures have regularly jumped as much as 300 percent in recent years. Water shortage was recognized by Barclays analysts as “the most major environmental problem” for the global consumer staples sector, which encompasses everything from food and drinks to agriculture and tobacco, in a research note published on June 14. According to analysts at the U.K. bank, consumer staples, which is thought to be the most susceptible of all sectors to water risk, faces a $200 billion impact from water scarcity. This was due to a heavy reliance on agricultural commodities, a high sensitivity to water price fluctuations, and operational risks, such as disruption from extreme events like droughts and flooding, as well as fines and litigation related to pollution. Water scarcity is critical because when it runs out, it causes major problems, and it is one of those classic externality hazards due to its low cost. Burks, Beth S&P Global Ratings’ director of sustainable finance The bank discovered that water-related comments in business transcripts increased by 43% last year compared to the end of 2019, indicating a greater corporate knowledge of the dangers connected with clean water and sanitation, according to the bank. Sustainable investors, on the other hand, appeared to be putting other environmental concerns first. “Our recent discussions with investors indicate that many are instead concentrating primarily on the potential impact of increased carbon pricing,” Barclays analysts wrote. According to the study, the financial impact of water risk is expected to be three times greater than that of carbon risk. The price of inaction “Water scarcity is incredibly important because when it runs out, you have really serious problems, and it’s one of those classic externality risks because of its low price,” Beth Burks, director of sustainable finance at S&P Global Ratings, told CNBC over the phone. “It requires very careful and attentive management, and you don’t always have the natural pricing signal that aids in conservation.” Water prices do not usually represent scarcity, owing to the fact that it is frequently used for free or at a very cheap cost. Water availability, on the other hand, is critical to many aspects of the economy, and analysts at Barclays have linked the recent increase in global water prices to the asset’s increasing scarcity. Once direct and indirect costs of water shortages and other hazards were included in, the bank projected that the “real cost” of water was three to five times higher than the price corporations already pay. On November 13, 2018, in Osterspai in Sankt Goarshausen, Germany, half-loaded cargo ships travel by the Rhine’s low water along the vineyards. The Rhine, which begins in the Swiss Alps, passes through Germany, and empties into the North Sea, is at record low water levels due to a summer heat wave and poor wind conditions. Getty Images News | Getty Images Andreas Rentz According to the bank, addressing the issue of proactive water management would cost the global consumer staples industry $11 billion. This means that the cost of inaction is nearly 18 times that of action. Agricultural exposure has been recognized as a “key determinant” of financial risk from water scarcity, with agribusinesses like ABF and Tyson Foods facing a 22 percent EBITDA hit, according to the bank. EBITDA stands for profits before interest, taxes, depreciation, and amortization. Even in the least-extreme of Barclay’s conceivable scenarios, global consumer goods behemoth Unilever, consumer products business Colgate, and cleaning products maker Reckitt Benckiser were all expected to face a 40 percent to 50 percent EBITDA hit. Reckitt Benckiser says it wants to be “water positive” in water-stressed areas by 2030 (it already has 20). To tackle climate change and water risk, the corporation has begun a series of “listening sessions” with important stakeholders. “We recognized the impact of water stress on people, their lives, their health, and also on our company,” a Reckitt Benckiser representative said in an email to CNBC. “As a result, we’ve been enabling better access to safe water and sanitation in many water-stressed countries,” they stated, mentioning India, Pakistan, and Bangladesh as examples. A request for comment from Unilever and Colgate was not returned. Physical, reputational, and regulatory hazards are all factors to consider. While water shortage “rarely” has a direct influence on a company’s creditworthiness, the issue might have a more subtle impact, according to S&P Global Ratings. Physical, reputational, and regulatory dangers are all possibilities. For example, due to extremely low water levels on the Rhine River, one of the continent’s most vital maritime routes, cargo barges on the Rhine suffered loading and transportation challenges in 2018. In some sections of Europe’s industrial heartland, it resulted in production halts, increased manufacturing prices, and interrupted supply chains. In recent years, both Constellation Brands in Mexico and Coca-Cola in India have had to shelve plans to develop additional facilities. Following strong concerns over the amount of water these facilities would demand, the projects were shelved. Water pollution fines are also on the rise, according to Barclays analysts. “I don’t believe that water prices will rise much as a result of the social consequences of that decision. So, when your water supply is limited, you might possibly see the more hidden costs of water scarcity hurting financial outcomes by exploring alternate water sources “Burks explained. “If you have to pump in water from afar, if you have to build up desalination to improve the amount of fresh water available, then all of that comes with higher infrastructure expenses [and] higher energy costs,” she noted. Continue reading
