The world is running critically low on the most important natural resource: water. For the global Consumer Staples sector, this scarcity is of particular concern, given its reliance on agricultural commodities and withdrawals from water-risk areas.
A growing imbalance between demand and supply is visible in higher prices; Global Water Intelligence reports that municipal water prices around the world have doubled, on average, over the past decade. This imbalance is also visible in efforts to promote efficiency and conservation. Trading has become common in water-scarce regions, such as Australia, Israel and China, as well as parts of Europe and the US. In times of drought or dry seasons, California water futures (now traded on the CME) can change hands at two to three times the spot price.
But none of this captures the real cost of water. Our team of Research analysts dug deep to estimate the direct and indirect expenses of water-related risks, finding that both companies and investors should pay much more attention to impending shortages, higher costs and tighter regulation. In high consuming sectors such as global consumer staples, water risk should top the list of ESG concerns.
Companies routinely disclose their utility bills. But it is likely that they are understating the all-in costs of their water consumption. A better metric would equalise tariffs across emerging and developed markets, while factoring in the cost of extreme events such as drought and flooding (and insurance against such risks), reputational damage from water use deemed irresponsible, and the impact of water shortages on future growth. Under this model, our analysts estimate that the true cost of water is three to five times greater than reported by companies.
Source: Barclays Research
The consumer staples industry looks particularly vulnerable in this context. The industry, which includes food, ingredients, agribusiness, meat, beverages, tobacco, and household and personal care, sources the lion’s share of agricultural produce, which accounts for more than two-thirds of global water withdrawals. Our analysts estimate that, on average, 19-27% of the industry’s withdrawals are from areas of high or extremely high water risk, based on data collected by CDP, the international non-profit organisation that helps companies disclose their environmental impact.
Some of the biggest operators, including Colgate, Diageo and Nestlé, have made efforts to quantify the impact of water scarcity on their businesses. But many others have not. If a high true cost of water were applied across the industry, the profitability of some companies could be theoretically wiped out.
Companies are starting to consider rising costs as they try to improve their resiliency to water rationing and measures by governments to promote conservation.
Some big companies have seen success through what they describe as a ‘4R’ approach to water management in their own facilities: reduce, reuse, recycle and reclaim. Others are cutting dependency on pumped water by adopting rainwater harvesting, or returning water to the environment or other users after treatment, as required.
Action to neutralise water risks could be a lot less costly than inaction. In 2020, companies across the food, beverages and agriculture sectors reported to CDP that their maximum potential financial impact of water risks came to $196bn. The same companies evaluated the cost of addressing those risks at just $11bn.
Source: Barclays Research, CDP
Note: Graph excludes the manufacturing sector for which costs of action/inaction are $30bn/$1.92tn, a 64x risk-reward ratio.
Water stress has been a part of the public and political agenda for about half a century in most parts of the world. But water is a shared resource, and all parties – policymakers, regulators, citizens, and agricultural and industrial users – will need to take joint responsibility for ensuring a water-secure future.
Efforts include ambitious top-down initiatives such as Saudi Arabia’s Qatrah (Arabic for “droplet”) programme, which aims to reduce per capita water consumption by more than 40% by 2030. In Maharashtra, India, drinks companies pay 800 times the unit costs of households for their water, as the local government tries to penalise the heaviest users. And in Mexicali, Mexico, a partially constructed $1.5bn brewery near the already-stressed Colorado River is being dismantled after more than three-quarters of the local population objected to its development.
Some companies are now discussing such risks more openly. According to our Data Sciences team, mentions of “clean water and sanitation” in corporate transcripts doubled over the last 15 years. In the second quarter of 2020, dialogue related to water was up more than 40% from the end of 2019.
Source: Refinitiv, Barclays Research
Our Research team’s analysis suggests that water risk should be the leading ESG issue for consumer staples sector investors, but investors seem to have a greater focus on other ESG-related matters, such as the potential impact of rising carbon costs. A combination of tougher regulation and consumer demand should bring more attention to water, driving investors to ask more questions about the proactive investments companies could make in response to growing water scarcity.
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