A bigger environmental problem than CO2: water shortages will cost corporations many billions


Bigger environmental problem than CO2
Water shortages will cost corporations billions

When it comes to sustainable investments, investors still look at the CO2 costs for companies. A big mistake, a study warns. Because the financial water risks are three times higher. In order not to fall into the cost trap, corporations are rearranging themselves. The goal is: water neutrality.

In our latitudes, water is still a natural commodity, and is therefore hardly an issue for shortages. It runs out of the tap, is available in abundance and, on top of that, costs little. In Africa the appreciation for water is all the higher. Wherever the spring runs dry, urgent attention is certain to be given to climate change and the growing drought. Experts agree that there will be more in the future.

Climate activists, environmentalists and human rights activists, as well as large organizations such as the UN, have long been aware of climate change as a “risk multiplier” for water scarcity. The UN human rights expert David Boyd called in his report Human Rights and the Global Water Crisis in March: “In view of the devastating effects of the global water crisis on life, health and human rights, corrective action must be taken quickly and systematically.”

Analysts have also recognized – and calculated – the consequences of water scarcity for business and companies. In their latest study, Barclays experts describe risk as “the greatest environmental problem” for the global consumer goods sector, from food and beverages to agriculture and tobacco.

How the situation on the water market is changing is reflected in the rising prices around the world. In the 30 largest US cities, these climbed an average of 60 percent between 2010 and 2019. The water futures in California have even made jumps of up to 300 percent in recent years, the US television station CNBC quoted from the study.

The economy depends on the “water drip”

Manufacturers of basic goods such as staple foods are most affected by this. According to Barclays, they will suffer the most from the water crisis financially. According to the calculations of the experts, the risks in this area alone add up to a total of 200 billion US dollars. The reasons for this are the dependence on agricultural raw materials, the susceptibility to fluctuations in the water price and disruptions from extreme weather such as droughts and floods as well as fines and lawsuits.

The food giant Unilever, the consumer goods manufacturer Colgate and the manufacturer of cleaning products Reckitt Benckiser serve as specific examples. According to the study, water risks will weigh 40 to 50 percent on operating profits. The first companies are admitting to take precautionary measures. “We have recognized the impact that water shortages have on people, their lives, their health and also on our business,” CNBC quoted the spokesman for Reckitt Benckiser as saying. The group has declared a clear goal: Reckitt Benckiser wants to operate “water-neutral” by 2030 in its 20 factories located in arid regions.

Awareness of water risks is increasing

But it is not only at Reckitt that a rethink has begun: An evaluation of their protocols shows that companies today deal with the problem regularly. According to the study authors, water-related comments increased 43 percent in 2020 compared to 2019.

When it comes to sustainable investments, investors still – completely wrongly – focus on CO2 costs, the authors complain. The water risk is estimated to be three times higher than the financial risks associated with carbon dioxide.

The discussion about electromobility shows the problem: CO2 emissions are often still not fully recorded. Electric cars are praised and promoted because they drive emission-free. However, this “end of the pipe” approach leaves out the fact that extensive amounts of greenhouse gases are released during the extraction of the necessary raw materials such as copper or iron ore as well as during the construction of the cars themselves.

According to the study, prices also show that there is a large discrepancy between reality and public perception of the water crisis. Although it has increased, Barclays still estimates the “real cost” of water three to five times higher when considering the direct and indirect costs of water scarcity and other risks.

If the global consumer goods sector decides in favor of proactive water management, according to Baclays it should in any case be significantly cheaper for the companies: The analysts estimate the costs for corresponding measures at around 11 billion US dollars. The cost of inaction, according to their calculations, is 18 times higher.

According to S&P Global Ratings, while water scarcity rarely has a direct impact on a company’s creditworthiness, there are other effects that can be very expensive. This can be reputational damage or a fine. Physical problems can also be a major blow to the office. In Germany, for example, barges on the Rhine, one of the continent’s most important shipping routes, failed in 2018 due to low water levels as a means of transport. The result was production downtime, increased manufacturing costs and interrupted supply chains in parts of Europe.

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