BEYOND DROUGHT: THE COMING WATER SHORTAGE IS A THREAT FROM MAIN STREET TO WALL STREET / BARRON´S MAGAZINE

Beyond Drought: The Coming Water Shortage Is a Threat From Main Street to Wall Street

By Lauren Foster

A view of the water level at Hoover Dam, on the Lake Mead side, in 1997 . . ./ Chlaus Loetscher/Alamy

When Bob Seawright moved to San Diego 27 years ago, the only thought he gave to water was about the glistening swimming pool in his backyard. 

These days, water—or the lack of it—is a fact of daily life. 

Seawright has twice been forced to evacuate his home in the suburb of Rancho Bernardo due to the threat of wildfires. 

And the lush vegetation that once adorned the surrounding landscape has given way to dirt, hardy ground cover, and rocks.

“We have changed all of the shrubbery and ground cover to make it much more ‘water wise,’ ” says Seawright, chief investment officer of Madison Avenue Securities, and one of the 90 million Americans living under drought conditions.

The American lawn might be the most obvious casualty of the nation’s depleted water supply, but growing water scarcity, whether caused by drought, contamination, or deteriorating infrastructure, extends to every facet of our lives: the clothes we wear, the food and beverages we consume, the cars we drive, and the search engines and electronic devices we rely on.

Nor are investment portfolios immune. 

Water scarcity is emerging as a threat that could heighten business disruptions, crimp profits, and jeopardize growth—especially in thirsty industries such as agriculture, fashion, computer-chip making, and data centers.

Poor water stewardship carries the added risk of reputational damage, as regulators crack down on waste and environmental issues grow in importance. 

At the same time, companies that address water issues offer new investment opportunities.

. . . and the drastically lower water level at the dam this month. / Photograph by Jesse Rieser

“Investors who fail to incorporate water risk into their portfolios risk significant future underperformance,” says Thomas Schumann, creator of the TSC Water Security Index Family, a series of three regional equity benchmark indexes that measure the performance of large-capitalization stocks, weighted by their exposure to water risk. 

The U.S. and euro zone indexes were launched in January 2021, and a global index will arrive early next year.

The risk methodology looks at factors such as water utilization and policies to assess whether a company is a good steward of its water resources. 

Companies with lower risk are overweighted, while those with higher risk are underweighted.

Water metrics—such as the amount withdrawn and the volume consumed—are valuable tools for investors to gauge the dangers related to the natural resource, according to Sustainalytics, which is owned by Morningstar MORN –2.88%  (ticker: MORN). 

In a March report, “Water-Related Risks and Challenges,” the firm notes that just one in 10 companies reports information on water usage.

One way investors can analyze water risk—which includes scarcity, quality, and the threat of floods—in their investment portfolios is via the Investor Water Toolkit, created by sustainability nonprofit Ceres.

No grass here: Bob Seawright and his granddaughter caring for plants that require less water, at his home outside San Diego. / Photograph by John Francis Peters

In most developed counties, access to H20 is as easy as turning on a tap. 

But just 3% of the Earth’s water is fresh, according to the U.S. Bureau of Reclamation. 

About 2.5% is locked up in glaciers, the polar ice caps, the atmosphere, and soil, or is highly polluted or lies too far below the surface to be extracted affordably. 

So, just 0.5% of the available supply is fresh, and severe droughts threaten even that.

A United Nations report, “Drought in Numbers, 2022,” notes that since 2000, the number and duration of droughts has risen by 29%, compared with those in the two previous decades, and that from 1998 to 2017 droughts caused global economic losses of roughly $124 billion.

In the U.S., the problem is especially acute in the West, where the 1,450-mile-long Colorado River, which provides water to 40 million people and more than five million acres of agricultural land, has fallen to record-low levels. 

Its two enormous reservoirs, Lake Mead and Lake Powell, are below 30% of capacity, exposing sunken boats and even human skeletal remains.

A boat ramp leading to Lake Mead. As the lake’s water level has receded, the ramp has had to be extended repeatedly. / Photograph by Jesse Rieser

The federal government recently announced new mandatory water cuts and asked states to come up with a plan to save the river. 

Starting in 2023, Arizona will lose about 21% of its allotted annual supply of river water; Nevada, 8%; and Mexico, 7%.

As the Earth’s water resources shrink, the planet is getting thirstier.

A McKinsey analysis predicts that, by 2030, global demand will outstrip supply by 40%. 

The nonprofit World Resources Institute has an even grimmer forecast: It projects that the gap will be 56% by the end of this decade.

Much of that demand comes from companies that produce the goods for daily life.

While estimates vary, FoodPrint, a project of Grace Communications Foundation, says it takes 1,800 gallons of water, on average, to produce a pound of beef, and 240 gallons to manufacture a cellphone. 

Nearly 800 gallons are used to turn out a pair of Levi’s 501 jeans, according to the company. 

Levi Strauss (LEVI) launched a water stewardship program in 2011. 

It says that as of the end of 2020, two-thirds of its products were made using its water-saving finishing techniques or in facilities that meet its water recycle-and-reuse guidelines.

The biggest water hog is agriculture, which accounts for about 70% of global water withdrawals globally, according to the World Bank. 

Other thirsty sectors include apparel, energy, chemicals, pharmaceuticals, and mining. 

A report from nonprofit CDP found that the potential financial impacts of water risks are far greater than the costs of addressing them. 

In 2020, companies reported maximum financial impacts of water risks at $301 billion—more than five times higher than the $55 billion associated with mitigating them.

Tesla TSLA –2.70%  (TSLA) recently faced water-related hurdles at its electric-vehicle factory near Berlin. 

The plant was supposed to open in July 2021 but ran into bureaucratic challenges and resistance from locals worried that the factory—which may use up to 1.4 million cubic meters of water a year—would strain the area’s water supply, which comes from local surface and groundwater sources. 

This supply has been shrinking for several years, due to prolonged drought, climate change, and overuse.

Big Boulder Island rises in the background above Lake Mead Marina. The dark line at the top of the island marks the former water level of the lake. / Photograph by Jesse Rieser

Tesla CEO Elon Musk laughed off a reporter’s question about water usage when he visited the plant in August 2021. 

“This region has so much water; look around you,” he said. 

“[There’s] water everywhere here. 

Does this seem like a desert to you?”

But a peek below the surface told a different story.

Jay Famiglietti, director of the Global Institute for Water Security at the University of Saskatchewan in Canada, has been analyzing NASA satellite data for the past two decades, as part of his continuing research.

When asked to look in detail at Germany for a public television series there on water, Famiglietti used measurements from NASA’s Gravity Recovery and Climate Experiment, which tracks changes in Earth’s gravity field primarily caused by the movement of water over and through the planet’s surface. 

He found that the country has been losing 2.4 cubic kilometers of water annually for the past 20 years, probably due to factors such as drought and overuse of groundwater. 

That’s about 1.3 times the capacity of Lake Mead, the largest reservoir in the U.S.

The Tesla factory opened in March. 

Local officials said the auto maker could start production, on the condition that the plant meets environmental-impact requirements, including those related to air pollution and water usage.

Water scarcity is already showing up as a liability for companies and investors via stranded assets—plants, pipelines, and mines whose value has been written down due to water issues. 

A recent report from nonprofits CDP and Planet Tracker found that $13.5 billion in assets are already stranded and another $2 billion are at risk.

One company acutely aware of the intensity of its water usage is U.S. chip giant Intel (INTC), whose main U.S. manufacturing facilities are in Arizona, New Mexico, and Oregon. 

The Arizona and New Mexico sites are in areas experiencing high water stress, based on the World Research Institute’s 2021 Aqueduct Water Risk Atlas, a mapping tool that helps companies, investors, governments, and other users understand where and how water risks and opportunities are emerging worldwide.

To understand why water is a top concern, one need look no further than the crisis facing the states that rely on the Colorado River. 

Amid this parched backdrop sits Chandler, Ariz., home to two of Intel’s manufacturing campuses and 12,000 of its employees. 

A fabrication factory, or “fab,” for making semiconductors requires vast quantities of water to operate, from the “ultrapure” water needed to prevent impurities from damaging the chips, to the water for cooling and facilities. 

According to Intel’s latest Corporate Social Responsibility report, the Ocotillo campus in Chandler used about 15,800 megaliters of water in 2021, or about 4.2 billion gallons.

Todd Brady, Intel’s chief sustainability officer, tells Barron’s that ultrapure water, which has had as many of the impurities removed as possible, accounts for the largest share of the water used by the company. 

Chips and their pathways are built up in layers and, between manufacturing steps, must be washed to remove solvents and debris from the layer completed previously.

Water is also needed in semiconductor manufacturing facilities for purposes such as cooling and removing pollutants from the air. 

“Water is used in most applications,” notes Brady, adding that the company uses about 14 billion gallons of fresh water a year.

A sunken watercraft exposed by the receding waters of Lake Mead. / Photograph by Jesse Rieser

Intel is trying to conserve water in its operations, collaborating on initiatives with local communities through water-restoration projects, and using technology to help others reinvent how they use the resource. 

The chip maker has set a goal of being “water positive”—restoring more freshwater to its local watersheds than it consumes—by 2030.

When Brady started at Intel in the mid-1990s, it took about two gallons of water to create one gallon of ultrapure water—50% efficiency. 

Today, it takes about 1.1 gallons of water to produce one gallon of ultrapure water, he says. 

The company has found ways to reuse water, and has funded more than 30 projects to restore it to local watersheds.

Brady says that, over the past 10 years, Intel’s conservation efforts saved about 44 billion gallons, enough to supply about 400,000 U.S. homes for a year. 

“[Water scarcity] is something that we’ve been working on for a very long time, and we’re very mindful of and continue to evaluate our risk,” Brady adds.

Intel’s sustainability efforts are paying off: The company topped the 2022 list of Barron’s 100 most sustainable companies, created by Calvert Research and Management.

Tesla also pays attention to water risk. 

In its recently released 2021 Impact Report, the company acknowledges that “water is becoming increasingly scarce as the climate changes,” which is why Tesla is reducing its usage throughout its operations “as much as possible.”

In August, the electric-car manufacturer asked the Shanghai government for help in dealing with a severe drought in Sichuan province that has affected hydroelectric power production there, forcing some manufacturers to close plants. 

Tesla didn’t respond to requests for comment.

When it comes to climate risk, water has garnered much less attention among investors than greenhouse-gas emissions. 

That appears to be changing.

Famiglietti of the Global Institute for Water Security says that “increasingly severe flooding and drought, melting glaciers and permafrost, groundwater depletion, and increasing water scarcity” are happening far more rapidly than climate models predicted.

Investors are waking up to the risks. 

The Securities and Exchange Commission’s proposed climate disclosure rule, expected later this year, could require companies to disclose material risks if their facilities are located in regions of “high or extremely high water stress.” 

The potential rule has elicited objections from companies that argue that it lacks clarity and would be costly to follow.

“Water scarcity drives innovation,” says Will Sarni, CEO of the Future of Water Fund./ Photograph by James Stukenberg

In August, Ceres launched the Valuing Water Finance Initiative, with 64 investment firms that collectively manage $9.8 trillion in assets. 

The initiative is intended to push some of the world’s “biggest corporate water users and polluters” to consider water as a financial risk.

Addressing the world’s growing water shortage—and its investment implications—will take more than glossy sustainability reports.

It will require a collective effort across many sectors of society. 

Will Sarni, CEO of the Future of Water Fund, a venture fund that focuses on the Colorado River Basin, sees a silver lining. 

“Water scarcity drives innovation, which drives investment opportunities,” he observes.

Competition for water will grow more intense over time. 

And companies that safeguard the long-term availability of clean water—and investors who recognize water scarcity as a material business risk—will be better positioned to weather the dry years.