By Andrew Wetzel, CFA, Principal, Managing Director of Sustainable Investments
Unfortunately, for many people the answer to the question in the title above is yes. This is also true for many companies, particularly those in semiconductor manufacturing and data centers, where water use is critical to operations. Although water appears abundant on Earth, readily available freshwater is remarkably scarce – a challenge made worse by climate change, pollution, and unsustainable extraction. While social, environmental, and business risks mount, there are potential opportunities for investors in companies that are working to address the growing problem of water scarcity.
The vast majority of water on planet earth is saltwater. Based on USGS information, the total freshwater resource on earth is only 2.5% of total water. Of this freshwater, almost 70% is locked up in glaciers and icecaps. McKinsey estimates that only 39% of the remaining freshwater in aquifers, lakes, and other sources is reliable and suitable for use.
As discussed in our letter on natural capital, humans are using resources as if we had 1.8 Earths. Global renewable freshwater availability per capita has declined over 50% since 1970, according to World Bank data. Over half of freshwater aquifers are beyond sustainable tipping points, and roughly 1/3 of water running through pipes globally is lost to leakage. Global freshwater demand is expected to exceed supply by 40% by 2030. Half the world’s population already experiences extremely high water stress at least one month per year, and this is expected to reach 60% by 2050. Population growth, climate change, pollution, and groundwater depletion all play roles in the supply/demand imbalance.
Water quality is an increasing concern as the global population grows. The World Economic Forum and National Geographic estimate that roughly 80% of global sewage is discharged into oceans without adequate treatment and microplastics have been found in 83% of tap water. The UNEP estimates that 1/3 of all rivers in developing countries are severely polluted. Chemical toxicity is also a growing concern, particularly the presence of per- and poly-fluoroalkyl substances (PFAS), which have been linked to cancer, liver damage, and reproductive issues. PFAS chemicals have been used in nonstick coatings, waterproofing, and other applications for decades, and are now turning up in water supplies. In the US, 45% of tap water is estimated to have PFAS present. To make matters worse, climate change exacerbates quality risk as rainfall patterns shift, introducing instability into water systems.
World bank data shows that annual economic losses from inadequate water supply and sanitation total roughly $260 billion – a figure expected to rise. Looking forward, the World Resources Institute estimates that $70 trillion in global GDP will be exposed to high water stress by 2050.
Over two thirds of businesses have substantial water risk in their direct operations or value chain according to McKinsey. While risk can take many forms, the two most immediately impactful for investors are physical and regulatory risks. Physical risks – often linked to drought and water shortages – can lead to both short-term operational disruptions and long-term cost pressures. ADM, a global agricultural supply chain company, incurred hundreds of millions of dollars in increased costs in 2022 as Mississippi River shipping stalled due to low water levels. Regulatory risks are also often related to shortages and government restrictions intended to protect access to water for citizens. In 2017, Pepsi operations in India were impacted by a state groundwater restriction of 75%, leading to the closure of a bottling plant. Perhaps the most glaring recent example of regulatory risk was the over $10 billion in partial PFAS settlements at 3M.
Solutions to water challenges can come in many forms. US data centers currently account for 2-3% of national freshwater use, a figure projected to rise to 8% as demand for AI and cloud computing grows, according to Bloomberg Intelligence. In Virgina’s “Data Center Alley,” large tech companies used 1.85 billion gallons of water in 2023, up 64% from 2019. Microsoft recently unveiled closed-loop cooling systems, which eliminate 33 million gallons of water use annually per data center – highlighting the role of infrastructure innovation in risk mitigation.
Other companies address water challenges directly through products or services as part of a business model. Companies like AECOM are leaders in PFAS remediation through testing, monitoring and treatment services. Companies like Xylem provide hardware, sensors, and software that target leak detection, water analytics, and system efficiency, which helped customers detect over 80,000 water leaks in 2023, saving 13 billion gallons of water.
As available freshwater resources are increasingly strained by population growth, economic growth, and environmental degradation, both risks and opportunities are becoming more impactful. Investors are increasingly paying attention.
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