Liquid capital: how investors should tackle the water crisis The worsening water crisis Water risks Global water use is increasing faster than population When water stress combines with non-stress related factors growth. In fact, over the past century, global water use (eg, climate change or natural disasters), this aggregates has increased at more than twice the rate of population into a risk measure of the severity and likelihood of being growth.4 While the global population is projected to rise unable to source water from a particular watershed/basin. 21% from the present 8 billion to 9.7 billion in 2050,5 global (see exhibit 1.) water demand could rise by 20–30% over the same period.6 Geographically, some areas are more exposed to water A combination of increasing demand and water pollution is stress than others. For example, the Middle East is likely pushing some regions to reach their water resource limits, to be the most a昀昀ected area by 2040, according to the heightening related social risks. At the current rate, two- World Resources Institute (WRI).8 Kuwait, Palestine, Qatar, 7 thirds of the world’s population may face water shortages. Israel and Lebanon are among those nations that draw There are three elements to the water crisis: water scarcity, heavily on groundwater and desalinated sea water. As the water stress, and water risks. sourcing of such resources can be signi昀椀cantly exposed Water scarcity to geopolitical factors, including con昀氀icts, these nations risk experiencing high water stress by 2040. The US, China This is when water demand exceeds availability because and Australia are projected to experience a signi昀椀cant water supplies can be limited for several reasons. increase in water stress in the future. The WRI study Water stress also highlights that growing competition for access to Water stress covers water accessibility and quality in diminishing resources could prompt political, geopolitical addition to availability. Water stress potentially poses a and economic tensions. global systemic risk to every sector and economy around the world. In addition to direct operational risks, businesses face physical, regulatory and reputational risks. Exhibit 1: Understanding water scarcity, stress and risks Imbalanced Physical eg, floods, droughts and degraded water quality Scarcity Availability Regulatory Stricter regulation, s loss of licenses ! k Stress Quality s Ri Reputational Perception of misuse of water resources Accessibility Systemic eg, supply chain disruptions – Physical risk encompasses water quantity and quality issues and represents a major threat for water- intensive sectors like apparel, food and beverages, and agriculture. – Regulatory risk is related to the potential for local authorities to impose stricter regulations, limit use or increase the pricing. – Reputational risk is linked to the potential brand value damage coming from the perceived negative impacts on the quantity and/or quality of water resources. Source: Allianz Global Investors 4 United Nations, 2018, Water Scarcity 5 United Nations, 2022, Revision of World Population Prospects 6 nature partner journals, 2019, Reassessing the projections of the World Water Development Report 7 WWF, 2022, Water Scarcity 8 World Resources Institute research, 2015, Acqueduct projected water stress country rankings 2