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Economic Impact of Global Water Risks. Are your assets covered?

Updated: Sep 8, 2022

It’s no secret that climate change-related disruptions are increasingly threatening the health and future of human and environmental systems worldwide. And while we've seen a rise in net-zero commitments, are we giving enough attention to water risks?


Image retrieved from National Oceanic and Atmospheric Administration (NOAA)


From severe droughts and fires to monsoons and flash floods, the profound impacts on the social and ecological domains hamper business productivity and socio-economic stability, with the effects rippling through the global economy. The U.S. alone has experienced more than 40 weather disasters in the last two years costing a minimum of $1 billion each. And a recent study found that more than 200 of the world's largest companies face $1 trillion in climate-related risk.


In response to both the compounding prevalence of such threats (and ESG greenwashing), the SEC voted to move forward with requiring publicly-traded companies to disclose their climate change-related financial risks – among other criteria – including those arising from transitioning to sustainable practices.


The threat of drought and water risk


A UN report identifies that both the duration and frequency of droughts have increased more than 30 percent in the last two decades

While carbon emissions have taken center stage, the extraordinary droughts endured worldwide in recent years (and recent months) highlight the looming threat of global water scarcity. A UN report identifies that both the duration and frequency of droughts have increased more than 30 percent in the last two decades, causing over $120 billion in losses.


Record shortages in the Southwest U.S.


The situation in the Southwestern region of the United States is particularly severe, with 22 years of drought worsened by climate change and overuse leading to record lows in the Colorado River and the region's largest reservoirs. These water sources serve 40 million people and millions of acres of agricultural land across California, Arizona, Nevada, Utah, Colorado, New Mexico, Wyoming, and Mexico while supporting 16 million jobs and $1.4 trillion in economic activity. Dangerously low water levels could have catastrophic implications for the region affecting water delivery, hydroelectric power production, agribusiness, and overall economic stability.


After declaring the first tier-1 shortage on the Colorado River last fall, the lack of snow and rainfall in the Southwest this year furthered already dire conditions prompting the announcement of the nation’s first tier-2 water shortage and federal intervention. The states must devise plans to cut water usage by 15 to 25 percent, and the first mandatory restrictions will be imposed on Arizona, Nevada, and Mexico in 2023.


While drought has long since hampered cropland in the Southwest, increased water restrictions – combined with variable climate change-related weather impacts – could devastate the nation’s most productive agricultural region. The Southwest is responsible for more than half of the nation’s specialty crop production, and more than 50 (up to 87) percent of each of the seven states’ gross economic product relies on the Colorado River.


With the water shortage expected to leave hundreds of thousands of acres of cropland uncultivated, what does this mean for commodity prices and the U.S. food supply?


The threat in the Southwest is merely one facet of the climate risks impacting a single region representing only 8.3 percent of U.S. gross domestic product. What risks face the remaining 91.7 percent of the economy?

Let’s stop for a moment and consider a couple of things:

The threat in the Southwest is merely one facet of the climate risks impacting a single region representing only 8.3 percent of U.S. gross domestic product. What risks face the remaining 91.7 percent of the economy? Hurricanes? Flash floods? More drought? Better still, what risks are countries facing around the world?



Image retrieved from the World Resources Institute (WRI)


Drought is a global disaster


Drought – and corresponding water insecurity – has become a legitimate global disaster for the first time in human history, presently affecting at least 300 million people. Europe is amidst its worst drought in 500 years. The drought in South Africa threatens famine for more than 22 million people. Waterways are receding and drying up across China, Spain, Serbia, and the Netherlands, just to name a few.


And while the U.S. is starting fire season off early with an extreme and prolonged heat wave amid record dry conditions in the West, the nation is simultaneously dealing with the wreckage of flash floods in the South and further drought in the Northeast.


Devastatingly thirsty sectors


Aside from the obvious concerns surrounding drinking water supplies, what does the increase in global water scarcity mean for the agriculture sector and the many industries that rely on it? And how will this impact the global economy?

Agriculture alone is responsible for 70 percent of global water withdrawals (more than 79 percent in the Southwest U.S.). Yes, you read that right. Global agricultural production – a significant portion of which are crops grown for food animals – is the most water-intensive sector by far. For example, it takes 1800 gallons of water to produce a single pound of beef. So, not only are cattle responsible for a significant proportion of the sector's emissions but its water usage as well. Other sectors with high water usage are energy, apparel, mining, pharmaceuticals, and chemicals.


But we’re the blue planet. We have more water than we could possibly need, right?


Unfortunately no. Only 3 percent of the water on Earth is freshwater; of that, merely 0.5 percent is accessible for human consumption; the balance is in glaciers, ice caps, soil, and the atmosphere. And as the Earth gets warmer, more water evaporates, and the freshwater supply continues to shrink. Even more concerning are the 2030 water projections demonstrating that demand will outstrip supply by between 40 and 56 percent.


So what does this mean for businesses and investors?


First, and most importantly, come to terms with the reality of the risks and tackle them head-on. A 2020 CDP report revealed that reporting companies assessed the financial impact of water risks at more than $300 billion, five times higher than the cost of mitigation measures. Therefore, it is imperative for organizations and investors alike to reevaluate the severity of water risks threatening their assets.


Investment managers that fail to account for these risks in their portfolio assessments will inevitably underperform. Foreign investors must stop exploiting the lax environmental laws of host countries, and instead invest in technologies that increase efficiency, decrease water usage, and reduce risk.


Governing authorities must devise more pragmatic solutions for water allocation and management, including incentivizing water technology innovations and reassessing water rights and regulations. For example, Arizona’s “beneficial use” clause should not provide a loophole for a 10,000-acre Saudi-owned hay farm to exhaust groundwater supplies to the point where local residents' wells are drying out.


Business owners in water-intensive industries, it’s time to seriously step up your climate-action game and invest in innovation focused on things like reuse and circularity. We must collaborate across disciplines, sectors, and governments to take swift action and correct our historically poorly-managed (and rapidly declining) water supplies. Preventative measures will most certainly cost less than the alternative in the long run.


 

I am a systems-thinking future-focused strategy & management coach striving to share knowledge on and propose solutions to the risks we face in the present and potential future state of our world. I am passionately driven to work collaboratively with organizations and aid them in developing sustainability mindsets and roadmaps to increase their adaptability, resilience, and long-term sustainability. If your organization has yet to take its first steps toward future-proofing, please don’t hesitate to contact me at me@dcorsetti.com to discuss how we can get you started or schedule a free consultation here.


 

References

(Ricky) Rood, R. B. (2022, August 25). America’s summer of floods: What cities can learn from today's climate crises to prepare for tomorrow's. The Conversation. http://theconversation.com/americas-summer-of-floods-what-cities-can-learn-from-todays-climate-crises-to-prepare-for-tomorrows-189293 CALIFORNIA AGRICULTURAL STATISTICS REVIEW. (2021). California Department of Food and Agriculture. https://www.cdfa.ca.gov/Statistics/PDFs/2021_Ag_Stats_Review.pdf Canon, G., & Luscombe, R. (2022, August 17). US issues western water cuts as drought leaves Colorado River near “tipping point.” The Guardian. https://amp.theguardian.com/us-news/2022/aug/16/drastic-water-cuts-expected-as-megadrought-grips-western-us-states Focus on Croplands in the Southwest. (n.d.). Retrieved August 28, 2022, from https://www.climatehubs.usda.gov/hubs/southwest/topic/focus-croplands-southwest Foster, L. (2022, August 27). Beyond Drought: The Coming Water Shortage Is a Threat From Main Street to Wall Street. Barrons Online. https://www.barrons.com/articles/water-shortage-drought-investing-51661467637 Hawes, T. (n.d.). Economic Importance of the Colorado River. The Nature Conservancy. Retrieved August 29, 2022, from https://www.nature.org/en-us/about-us/where-we-work/priority-landscapes/colorado-river/economic-importance-of-the-colorado-river/ Lutz, J., & Welsh, C. (n.d.). Foreign Purchases of U.S. Agricultural Land: Facts, Figures, and an Assessment of Real Threats. Retrieved August 28, 2022, from https://www.csis.org/analysis/foreign-purchases-us-agricultural-land-facts-figures-and-assessment-real-threats Mahapatra, R. (n.d.). Drying planet: Drought has become a truly planetary disaster in 2022. Retrieved August 30, 2022, from https://www.downtoearth.org.in/blog/climate-change/drying-planet-drought-has-become-a-truly-planetary-disaster-in-2022-84552 Panfil, M., & Victor, D. G. (n.d.). Climate change creates financial risks. Investors need to know what those are. Retrieved August 28, 2022, from https://www.brookings.edu/blog/planetpolicy/2022/03/29/climate-change-creates-financial-risks-investors-need-to-know-what-those-are/ Snider, A. (n.d.). “All bad options” as Biden administration faces Western water crisis. POLITICO. Retrieved August 28, 2022, from https://www.politico.com/news/2022/08/12/colorado-river-water-cuts-00051235 “Very dangerous” heat may reignite fire season in western U.S. (2022, August 29). The Washington Post. https://www.washingtonpost.com/climate-environment/2022/08/29/western-california-heatwave-fires-forecast/ Whitt, K. K. (2022, August 26). Drought around the world, August 2022, in dramatic images. EarthSky | Updates on Your Cosmos and World; EarthSky. https://earthsky.org/earth/drought-around-world-2022-revealing-hidden-artifacts/




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