Watching Water

It is interesting to note that a host of business and financial analysts are beginning to look and write about water security and risks it poses to business and investors.  One report released by JPMorgan Global Equity Research - - Watching Water: A Guide to Evaluating Corporate Risks in a Thirsty World - - lays out the water-related risks and opportunities they see facing companies.

The main points include the following:

• Exposure to water scarcity and pollution is not limited to on-site production processes and may actually be greater in companies' supply chain than in their own operations.
• Power generation, mining, semiconductor manufacturing, and food and beverage sectors are particularly exposed to water-related risk.
• Corporate disclosure of water-related risks is seriously inadequate and in typically included in environmental statements prepared for public relations purposes, rather than in the regulator filings on which most investors rely.
• They recommend that investors assess the reliance of their portfolios on water resources and their vulnerability to problems of water availability and pollution.

The report also pointed out the three varieties of water-related risks companies face in the value chain:

1. Physical Risks.  Physical water risks mostly affect sectors in which water is consumed or evaporated in the production process.  In these sectors, a lack of water of adequate quality directly reduces production.  Agriculture, beverages, food processing are most obvious examples, but other industries, such as power generators requiring large amounts of water for cooling also are subject to physical risks.
2. Regulatory Risks.  Regulatory water risks have to do not so much with the absolute quantity of water available as with the conditions under which it may be used or discharged.  Traditionally, many industries were able to obtain water at little or no cost by drilling their own wells or installing their own intake pipes.  Regulatory responses include permits, prices, or both to control consumption and discharge.  Regulation has become dramatically more important in the water sector in recent years as water resources have been fully committed and engineering solutions no longer offer easy ways to increase supply.  This not only raises costs, but may result in less predictable supply.  Regulation is most consequential for sectors that use or discharge relatively large amounts of water in connection with relatively low-value production processes.
3. Reputation Risks.  The increasing competition for clean water among economic, social, and environmental interests has a large potential for damaging the reputation and even growth prospects of companies.  This is particularly true in developing countries where multinational companies source inputs, as the associated water use or discharge directly affects the livelihoods of people who may themselves not have sufficient access to clean water.  Multinationals may be deemed "guilty by association" and singled out as culprits.