The global commitment to cap global warming well below 2 degrees Celsius above pre-industrial levels is an encouraging step toward limiting our negative impact on the planet. But even in a best-case scenario where we manage to limit warming to 1.5 degrees Celsius, there will still likely be major consequences. For example, the probability of drought in places like Brazil and China is projected to triple.
Water scarcity is an issue for everyone, not just for people in those countries affected by drought. We’ve already seen examples of this on the global stage – in 2021 the semiconductor industry was plagued by drought in Taiwan, where many of the chips are made. That made the ongoing chip shortage worse, impacting everyone from automakers to mobile phone manufacturers.
It’s a problem the country, and the industry, is up against once again this year. A severe drought has pitted Taiwan’s semiconductor producers against farmers in a battle for water. The more lucrative semi-conductor industry is coming out on top for now, with the government paying farmers not to grow rice.
It’s a short-term fix, though, and one that could make matters worse down the road. Rice farming is an important part of the local ecology – when the crops aren’t planted as usual, it leads to an increase in pests and as a result, the use of pesticides.
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Which sectors use the most water?
Making semiconductors is a thirsty business – one of the biggest semi-conductor companies uses more than 150,000 tons of water every day – that’s about 80 swimming pools worth. But semiconductors aren’t even in the top 10 most water intensive businesses. The top spot goes to electric utilities, which primarily use water to cool coal, nuclear, gas and oil power plants.
The chemicals industry takes the number two spot, sucking up 3.3bn cubic meters of freshwater every year. The water is mainly used for chemical processing and cooling.
Certain companies will be at risk if droughts become more common. Investing in new techniques and more efficient water management is a must if these companies want to grow well into the future.
You might not think of risks like these straight away, but they can have big impacts. For more information on how these types of risks can impact your investments and where opportunities could be, visit our Responsible Investment section.
Considering ESG issues can form a part of your investment analysis and decision-making process, but it shouldn’t be a replacement for fundamental financial research.
Investing in an individual company isn’t right for everyone because if that company fails, you could lose your whole investment. If you cannot afford this, investing in a single company might not be right for you. You should make sure you understand the companies you’re investing in and their specific risks. You should also make sure any shares you own are part of a diversified portfolio.
Akzo Nobel – the sustainability stand out among chemical companies
Dutch chemical company Akzo Nobel is exposed to this water scarcity risk. However, the group’s strong focus on sustainability is helping keep control of the problem.
The first step to managing water use is to work out how much it’s using – Akzo measures and reports on its freshwater consumption. This has allowed it to work toward an ambitious goal of reusing 75% of its water by 2030. To get there, the group’s focusing on efficiency at the sites that use the most water. As of 2021, the group was reusing water at 14 of its 47 most water-intensive sites.
Chemicals companies like Akzo arguably have bigger fish to fry when it comes to managing their environmental, social and governance (ESG) risks.
The risk of hazardous chemicals leaking into the environment and causing health issues is a much more pressing problem. However, more strategically sustainably focused companies like Akzo are better able to manage immediate concerns, as well as those that might develop well into the future.
The group’s board-level sustainability oversight does a good job of recognising potential risks and working to help manage them before they’re at risk of sinking the ship.
The group’s water risk management strategy is a good example of this. Akzo includes water scarcity in its risk assessments and assigns board-level responsibility for addressing it. That means this is a problem that’s unlikely to be overlooked until it’s too big to ignore.
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Anglo American – the mining leader in water management
The second on our list of water intense industries is a mining stock. Not only is this group a big water user, but they tend to operate in areas where water is already a concern. That means water use is a huge risk for these businesses, not only from an ethical perspective, but a financial one as well.
In order to continue operating well into the future, mining companies have a vested interest in helping protect against drought. Companies that are thinking about this risk and the future are already exploring ways to reduce their impact on the water supply.
Anglo American is one company that’s handling this issue relatively well. Anglo’s water intensity is well below the industry average thanks to ambitious targets and strong programmes and policies designed to cut down on usage.
The group’s committed to reducing freshwater use in areas where it’s scarce by 50% over the next seven years. And this is more than just a verbal commitment – Anglo’s promise is linked to a green bond issued in 2022. A failure to make good on its commitment would likely have immediate financial consequences.
Anglo’s also tied its water goals to its executive performance measures. That means senior managers are incentivised to help them come to fruition.
Ultimately, Anglo’s ambition is to create water-less mines which should allow it to operate in water-scarce areas without draining their resources. If achieved, it would put Anglo in a strong position to operate in some of the most lucrative mining areas decades down the road.
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