Liquid assets

The economic implications of water scarcity.

Along with oxygen, food, shelter and sleep, water is one of the five things essential to human survival. At least 60% of the adult body is made of it and every living cell in the body needs it to keep functioning. With water scarcity and climate change on our doorstep, we are also discovering the vital role of water in the healthy functioning and survival of a global economy.

What is happening water-wise?

One of the more alarming impacts of climate change has been an increasingly depleted global water supply.

A 2015 University of California Irvine (UCI) study of groundwater storage trends for 37 of the world's largest aquifers used data from NASA satellites to determine that 21 of the 37 aquifers have exceeded sustainability tipping points and are being depleted, with 13 considered significantly distressed, threatening regional water security and resilience.

The global finding is echoed in the current state of Australia's water resources. When Melbourne Water analysed the effect of greater consumption caused by population growth combined with the impact of climate change, its worst case scenario was that demand could outstrip supply in the Victorian capital by 2028.

The situation is also concerning for Western Australia's capital. Australia's Climate Council estimates that water flow from rainfall into Perth's dams has slumped by 80% since the 1970s, with precipitation in the south-west corner of Australia forecast to drop by up to 40% by the end of the century.

In its projections for Sydney's water supply, the Climate Council estimates that water inflows to key Sydney dams such as Warragamba and Shoalhaven could decrease by as much as 25 percent by 2070 if greenhouse gas emissions continue on their current trajectory.

What could it mean for the economy?

Water scarcity is just one of many categories where climate change disruption is set to manifest itself in a range of problematic ways. However, the flow on effects of curtailed water availability will reach deep into the beating hearts of multiple commercial interests.

Between 2002 and 2003 decreases in agricultural production due to drought resulted in a 1 percent fall in the Gross Domestic Product (GDP), which is equivalent to half of Australia's decline in annual GDP following the global financial crisis in 2009.
- Climate Council of Australia

In a Morgan Stanley Research Sustainability Compendium published in late 2017, water scarcity was identified as a key issue for sustainability and the economy.

According to the Compendium, decreased availability of water has the potential to impact on businesses and industry in a number of ways.

The possible impact on company valuations

As water becomes increasingly scarce, options for cost-cutting could dry up as companies struggle to adjust to new limitations. Businesses doing well could find their expansion prospects reined in by limited water availability, which could contribute to outages in production or operations.

Capital expenditure could also be a concern, as companies face the expensive prospect of relocating operations away from areas where water is scarce, or need to invest heavily in efficiency enhancements for existing facilities.

Additionally, decreased availability of H2O will lead to higher operating costs, either from commodity inflation or regulation.

Vulnerable industries i

Beverages: Some breweries are positioned in areas where water availability is a significant pressure point moving into the future. For those companies, there is a possibility of long-term risks and underappreciation in the marketplace. In Mexico, an estimated 25% of beer production is located in areas with "high" levels of water risk, and another 48% in areas with medium to high levels; in China this increases to 75%.

Food: At least a third of production of the three major food commodities - wheat, corn and soybean - is exposed to water stress. The lack of water availability in the future could make it difficult for food producers to continue their operations.

Apparel: An estimated 60% of global cotton is grown in areas exposed to high or extremely high levels of water scarcity. To minimise negative impacts companies need to invest in a sustainable supply chain.

Mining: Water is critical to copper production, 78% of copper produced by the world's 20 largest mines is currently in water challenged regions, with Chile most affected. Copper miners are mitigating this with increased recycling rates, direct use of seawater and installation of desalination plants. Of these options, 'desal' plants are typically preferred by the industry, despite their substantial cost.

Utilities: Utilities is one of the most exposed industries when it comes to water risk. Water is required to produce fuel used in the generation of electricity and for power generation itself. Periods of drought have already impacted hydro generation globally.

For information on investing in sustainable industries please contact your Morgan Stanley Financial Adviser.

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