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Do investors need to worry about water?

Last week, fund giant BlackRock argued that investors were overlooking the risk of water scarcity and the impact it could have on their investment portfolios over the next ten years.

Do investors need to worry about water?
Garry white employee

by
Garry White

in Features

03.08.2020

Companies in water-stressed locations may need to spend more to source water, raise their water efficiency and meet more stringent environmental regulations. But perhaps the most dramatic impact of looming water scarcity is the disputes it is creating between and within nations. Is all this talk of water wars something that realistically needs to be considered within the Square Mile?

Disputes about water are as old as human history and the major impact will be geopolitical. The first recorded water war occurred more than 4,500 years ago in modern-day Iraq, near the confluence of the Tigris and Euphrates. That’s because water is without doubt the most valuable commodity on the planet – more significant than gold or data – because we die in about four days if we can’t get a drink. 

Calls for Egypt to declare war on Ethiopia were dismissed last week by President Abdel Fattah al-Sisi, as he continued to seek a diplomatic solution to the issue of the Grand Ethiopian Renaissance Dam (Gerd), which has been in construction since 2011.

Egypt argues that the dam will inhibit its share of the downstream water supply from the Nile – and an agreement seems far from being reached. Neither country came to an agreement as tensions escalated during the latest round of talks, sponsored by the African Union earlier this month. Now the dam has been filled with 4.9 billion cubic metres of the Blue Nile's water after this season's rains and Donald Trump is mediating between the two parties. US Congress has even introduced a bipartisan amendment to its annual defense authorisation bill calling on “Egypt, Ethiopia and Sudan to immediately reach a just and equitable agreement regarding the filling and operation of the Grand Ethiopian Renaissance Dam.”

US water issues

America is also in the middle of its own dispute over water. Lawsuits have been filed in the US as the state of Florida is accusing neighbouring Georgia of taking so much water that it will lead to “doom” for part of the state. “Denying Florida relief not only would spell doom for Apalachicola, it would set the bar so high for an equitable apportionment that it would effectively invite states to raid water as it passes through their borders,” Florida lawyers said in a US Supreme Court document filed on Monday. The US is seeing many other water disputes, particularly in the south west in places such as Las Vegas.

But perhaps the greatest near-term significance of water conflicts is part of larger geopolitical fights. The technological cold war between Beijing and Washington has spilled over into power battle over water, with the Mekong River once again becoming significant in the race for superiority between East and West.

China’s 11 dams on the Mekong River have given it extensive control of the waters that ultimately flow down to Laos, Myanmar, Thailand, Cambodia and Vietnam. In late 2019, the river started to run dry downstream. These countries depended on water from the river for agriculture and fisheries - with Laos also using it for hydropower.

Shortages of water also threaten public health, production facilities and global supply chains. Indeed, many technology companies have been moving their operations to places such as Vietnam as the US administration continues its trade dispute with Beijing. Thailand, a major sugar exporter, is expected to produce up to 30% less sugar than in previous years because of the drought. In Vietnam, the drying up of the Mekong has resulted in saltwater intrusion damaging rice fields, hitting vital food crops.

Water as a geopolitical tool

An American, 28-year study released in April blamed the series of recently constructed upstream Chinese dams for the record-low levels of water seen at the end of last year in the downstream region of the Mekong. It is also accused of diverting water that can be used in future hydro-electric projects. Of course, Beijing insists this is nonsense.

China is trying to extend its geopolitical influence through projects such as Belt & Road and even providing funding to countries to help deal with Covid-19. Just this week Beijing agreed a $1bn (£760m) loan to Latin America and the Caribbean to help deal with the fallout of the crisis. China has been accused of using its financial firepower to bring countries into its sphere of influence and the weaponising of water in the Mekong can be seen in this context.

Investors therefore need to consider water scarcity in their investment decisions – and this will become a significant factor in scoring companies for ethical, social and governance (ESG) investing. It matters because, as more investors choose ESG benchmarks over traditional indices, the difference between being an ESG “winner” and “loser” could become much more meaningful. As demand wanes for shares in companies that do not meet these criteria and increases for those that do, there is a real incentive to take these issues into account when investing your hard-earned money. Supply chains are becoming an increasingly important area of concern.

Geopolitics is also becoming increasingly important to companies with long supply chains or a global reach of customers. The new cold war between China and America is a battle for resources and influence – and water looks likely to play an increasing part as the global population booms in the hotter parts of the world at a time when droughts are common. BlackRock is right. Investors need to consider the future of water when choosing a company for investment. Ultimately, it may be expensive not to do so.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

A version of this article appeared in the Daily Telegraph.

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