Morgan Stanley
  • Investment Management
  • Sep 18, 2019

The Top Industries Imperiled by Water Scarcity

These are some of the industries threatened by the world’s water crisis. How can investors protect assets?

Andrew Harmstone Lead Portfolio Manager, Global Balanced Risk Control Strategy

Water is fundamental. Nearly every other substance or material that’s part of everyday life can be substituted, but there’s no replacement for water. Entire industries, from agriculture to commodities to manufacturing everyday goods depend on it absolutely.

The growing scarcity of fresh water affects industries with high water usage, from food companies to technology manufacturers.

A global water crisis has been long in the making. Depleted aquifers, droughts made worse by climate change, advancing desertification, the decline of once dependable glacial melt-off, even as growing demand from larger populations and economic activity all put unprecedented pressure on the supply of fresh water. It’s created what the World Economic Forum calls the fourth greatest global societal risk1 by impact—after weapons of mass destruction, failure of climate change mitigation and adaptation and extreme weather events. The global consequences of insufficient safe drinking water range from higher child mortality and other health issues to social instability and mass migrations.

The growing scarcity of fresh water also affects the global economy, especially industries with high water usage, which run the gamut from food companies and energy firms to textiles and technology manufacturers. For corporations, policymakers, investors, and even consumers, now is the time to understand the core issues and engage with solutions to manage the growing risks to businesses, supply chains and even more acute vulnerabilities.

Here are some of the industries most at risk because of the world’s water woes:

Bulk Users: Food, Beverage and Agriculture

Agriculture accounts for 69% of global fresh water use, which makes the entire food and beverage supply chain highly sensitive to water stress. A single kilogram of beef takes more than 15,000 liters of water to produce, based on irrigating feed crops, providing drinking water, and hosing down factory farms, transport trucks and abattoirs. Similarly, a kilogram of nuts uses around 9,000 liters of water.2 California dedicates roughly 10% of its water supply just for growing almonds.

Agriculture-related water stress isn’t just limited to food production. For example, growing, washing and dyeing the cotton used to make a single pair of jeans requires 9,500 liters of water.

Not all businesses are prepared to deal with water stress. Only 40% of beverage companies have developed programs to optimize water usage, and just 24% of food companies report efforts to manage water stress in their supply chains.3 At the other end of the spectrum, some companies in the industry have targeted a 100% rate of water reusage by 2020.

Agriculture Consumes Huge Amounts of Water
Water footprint per kilogram across food types

Source: www.waterfootprint.org/en/resources/interactive-tools/product-gallery/Mekonnen, M.M. and Hoekstra, A.Y. (2012) A global assessment of the water footprint of farm animal products, Ecosystems, 15(3): 401-415

Oil and Gas: Water Management Risks

Oil and natural-gas companies also face water challenges, usually tied to environmental and community impact, and their related costs—often not included in the initial project financing—as well as reputational and regulatory risks. The industry’s water management costs can reach 15% of the total cost to drilling and maintaining oil and gas wells4.

The extraction of oil using hydraulic fracturing (fracking) is particularly fraught, requiring high-pressure water mixed with chemicals and sand to extract shale oil. To complicate matters, 38% of these projects worldwide are located in arid areas. Fracking also produces contaminated water that requires proper disposal, with its own costs and risks.

Utilities: Water Costs in Power Production

Water is used in 90% of global power production (raw material extraction, powering turbines, cooling thermal processes and cleaning emissions),5 with 47% of global thermal power plant capacity (coal, natural gas and nuclear) located in regions already experiencing water stress.6

Poor water management and unsustainable rates of water consumption increase the risk of operational disruptions and regulatory water-withdrawal limits. These disruptions can not only lead to a loss of revenue, but often require additional investment in infrastructure, such as desalinization plants or air cooling, which often aren’t part of the initial project financing.

Semiconductors: Growing Thirst for Ultrapure Water

The production of wafers—the thin layers used to make integrated circuits—requires massive amounts of ultrapure water (UPW), the hyper-purified water needed to meet the industry’s stringent manufacturing requirements. Producing a single smartphone requires more than 12,000 liters of water.

A typical semiconductor manufacturing facility uses two to four million gallons of UPW per day. Semiconductor companies have also historically incurred clean-up costs connected to groundwater contamination of up to $100 million per incident7. The main solution appears to be water recycling; however, recycling rates in the industry for processed water range from as high as 80% (mainly in Asia) to as low as 10%.

Investors can use scores on companies’ ESG performance to identify leaders and laggards in water stress exposure.

Water Scarcity in the Investment Process

Investors can use scores on companies’ environmental, social and governance (ESG) performance (available through specialist data providers) to identify the leaders and laggards in water stress exposure and risk management, and analyze factors such as water recycling rates, consumption reduction targets and investment in water infrastructure.

To facilitate dialogue and understanding, investors can engage with companies in various ways:

  • Encourage water stewardship and evaluation of water metrics and conservation policies.
  • Monitor the water footprint in all steps of the supply chain, to gain a better understanding of inefficiencies and viable improvements.
  • Prompt companies to improve the quality of their disclosure on water management, for example, by participating in the Carbon Disclosure Project annual water survey.
  • Ensure companies follow the relevant water stewardship code for their industry.

Global industries and their component corporations are on the frontlines of the water scarcity issue. The risks they face have repercussions for their top and bottom lines, as well as potentially long-term ramifications to brand favorability and market standing—precisely because the issue of water management also ripples out to their customers and beyond.

Adapted from the Macro Insight “A Holistic Approach to the World’s Water Woes." For more information, ask your Morgan Stanley representative or visit Morgan Stanley Investment Management. Plus, more Ideas from Morgan Stanley's thought leaders.

1 World Economic Forum’s Global Risks Report 2019. https://www.weforum.org/reports/the-global-risks-report-2019

2 www.waterfootprint.org/en/resources/interactive-tools/product-gallery/Mekonnen, M.M. and Hoekstra, A.Y. (2012) A global assessment of the water footprint of farm animal products, Ecosystems, 15(3): 401-415

3 MSCI.

4 Morgan Stanley Research, How Water Can Impact Share Economics, 14 January 2019.

5 UN Water. www.unwater.org/water-facts/water-food-and-energy/ Accessed 28 June 2019.

6 World Resources Institute. www.wri.org/ blog/2018/04/water-stress-threatens-nearly-half-world-s-thermal-power-plant-capacity Published: 11 April 2018.

7 www.sustainalytics.com/esg-blog/world-water-day-water-use-semiconductor-industry/

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The Global Risks Report 2019 is the 14th edition of the Global Risks Report, prepared by the World Economic Forum with the support of Marsh & McLennan Companies and other partners, examines the evolving macro-level risk landscape and highlights major threats that may disrupt the world in 2019 and over the next decade. An electric-vehicle battery (EV Battery) or traction battery is a battery used to power the propulsion of battery electric vehicles. Vehicle batteries are usually a secondary battery. The water desalination processes separates dissolved salts and other minerals from water. Feedwater sources may include brackish, seawater, wells, surface (rivers and streams), wastewater, and industrial feed and process waters. A water footprint is the amount of fresh water utilized in the production or supply of the goods and services used by a particular person or group.

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