Why a number of the largest firms on the earth fear

Dry cracked earth can be seen along the shores of Phoenix Lake on April 21, 2021 in Ross, California.

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LONDON – Large companies from a number of sectors are increasingly concerned about the cost and availability of the world’s ultimate renewable resource: water.

The availability and relatively low cost of water doesn’t attract much attention until it actually runs out. However, since the climate crisis is viewed as a “risk multiplier” for water scarcity, analysts warn that even companies with relatively limited financial exposure to water risk should be prepared for disruption.

There comes a time when water prices are rising around the world. The average price of water in the 30 largest US cities rose 60% between 2010 and 2019, according to Barclays, while California Water Futures have risen consistently by up to 300% in recent years.

In a research note released on June 14, Barclays analysts identified water scarcity as “the top environmental concern” for the global consumer products sector, which includes everything from food and beverages to agriculture and tobacco.

Consumer staples, which have been said to be the most exposed of all sectors to water risk, face $ 200 billion from water scarcity, according to analysts at the UK bank.

This was due to heavy dependence on agricultural commodities, extreme vulnerability to water price volatility, and operational risks – including disruption from extreme events such as droughts and floods, and fines and lawsuits related to pollution.

Water scarcity is really important because when it is used up you have really serious problems, and because of its low price, it is one of those classic externality risks.

Beth Burks

Director of Sustainable Finance at S&P Global Ratings

The bank found that water-related comments in corporate transcripts rose 43% over the past year compared to late 2019, reflecting growing corporate awareness of the risks associated with safe water and sanitation.

Sustainable investors, meanwhile, appeared to be prioritizing other environmental concerns. “Our recent preservation with investors suggests that many are instead primarily focusing on the potential impact of rising carbon costs,” said Barclays analysts.

The study found that the potential financial impact of water risk is likely three times greater than carbon risk.

Cost of inaction

“Water scarcity is really important because when you run it you have really serious problems, and because of its low price, it’s one of those classic externality risks,” Beth Burks, director of sustainable finance at S&P Global Ratings, told CNBC.

“It has to be managed very carefully and thoughtfully and you don’t always have that natural price signal to help us maintain it.”

The water prices usually do not reflect the scarcity, especially since it is often very cheap or even free of charge. The availability of water supports much of the economy, however, and Barclays analysts have explained the recent surge in global water prices to the increasing scarcity of the asset.

The bank estimated that the so-called “true cost” of water was three to five times higher than the price companies are currently paying, given the direct and indirect costs of water scarcity and other risks.

Half-loaded cargo ships pass the low water of the Rhine along the vineyards in Osterspai near Sankt Goarshausen on November 13, 2018. Summer heat wave in Germany, unfavorable wind conditions and no rain left the Rhine – which begins in the Swiss Alps, flows through Germany and flows into the North Sea – at record low water levels.

Andreas Rentz | Getty Images News | Getty Images

Solving the problem of proactive water management would cost the global consumer goods sector $ 11 billion, the bank estimates. This makes the cost of inaction about 18 times higher than the cost of action.

Agricultural exposure has been identified as a “key determinant” of financial risk from water scarcity, with agribusinesses – like ABF and Tyson Foods – facing a 22% EBITDA impact, the bank said, referring to the acronym for Earnings Before Interest, Taxes and Depreciation and Amortization.

Of the companies most at risk, global food giant Unilever, consumer goods maker Colgate, and cleaning products maker Reckitt Benckiser are all said to face an EBITDA impact of 40 to 50%, even in the less extreme possible scenarios of Barclay.

Reckitt Benckiser plans to be “water positive” in arid locations (currently there are 20 such locations) by 2030. The company has launched a series of listening sessions with key stakeholders to discuss climate change and water risk.

“We understand the impact water stress has on people, their lives, their health and our business,” a Reckitt Benckiser spokesperson told CNBC via email.

“That is why we have enabled better access to clean water and sanitation facilities in many arid locations through our brands,” they added, citing India, Pakistan and Bangladesh.

Unilever and Colgate did not respond to requests for comment.

Physical, reputational and regulatory risks

S&P Global Ratings said that while water scarcity “rarely” has a direct impact on a company’s creditworthiness, the problem can have more subtle effects.

These risks can be physical, reputational or regulatory.

In Germany, for example, barges on the Rhine, one of the most important shipping routes on the continent, faced loading and transport problems in 2018 due to critical low water levels. This led to production stoppages in places with increased manufacturing costs and interrupted supply chains in some parts of the industrial heartland of Europe.

Elsewhere, Constellation Brands in Mexico and Coca-Cola in India have had to abandon plans to build new facilities in recent years. The projects were halted after widespread protests over the amount of water these facilities would require.

Water pollution-related fines have also increased, analysts at Barclays said.

“I don’t think that water prices in themselves are likely to increase significantly because of the social impact of this decision. So the ways to potentially see the hidden costs of water scarcity that are affecting financial results would be to source alternative water sources when your water is insufficient, “said Burks.

“If you have to bring in water from far away, if you have to set up a desalination plant to increase the amount of fresh water available, then it all comes with increasing infrastructure costs [and] rising energy costs, “she added.

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