Awareness of water scarcity is rising to the surface - live from the Milken Institute Global Conference

I often remark that sustainability is good risk management: by looking at the world (and our portfolios) through the lens of making the sustainability, it can also enable us to uncover emerging risks before they are widely appreciated.

The latest example of this came at an event I chaired at the Milken Institute. The title: Managing Water: The Next Big Business Risk.

In a world of growing population pressures, climate volatility and ever-growing digital infrastructure, access to water is no longer just a humanitarian concern – it’s about business resilience against climate change. Understanding and integrating water-related risks and potential opportunities into investment frameworks will be necessary to help build resilient portfolios in the coming years.

Water use intensity is a business risk

Access to water is critical to the operation of businesses across many industries, from obvious areas such as beverage and food production to industries such as pharmaceuticals and semiconductors. As climate patterns shift and competition for resources increases, the risks associated with these dependencies are intensifying.

Water stress can manifest through operational disruptions, supply chain bottlenecks, or rising input costs, each of which can create significant downstream impacts on the health of the business.

As yet, the risks posed by the potential for water scarcity are comparatively under-considered by investors. Asset owners with exposure to water-intensive sectors may be underestimating how vulnerable portfolio companies are to physical water scarcity or regulatory and policy changes associated with water use.

Beyond the business risk, investors with global exposures – especially in emerging markets – must consider how water insecurity can act as a destabilizing force, affecting both direct holdings and the wider macroeconomic environment. Supporting water access and infrastructure at the community level is increasingly viewed through the lens of ensuring market stability, beyond simple corporate responsibility.

Acknowledging this dependence is the first step in evaluating the impact it may have on the value and long-term growth potential of your portfolio. Investors allocating capital to infrastructure or real assets should be scrutinizing water access and sustainability as part of their due diligence.

Water availability, or the lack thereof, can have a material impact on asset valuations, operating costs, and long-term viability. Far from being a ‘woke’ concern, water is a critical business and infrastructure resource.

Risks and potential opportunities in water

One of the key questions investors face is whether allocating capital to water-related projects sits solely within their impact allocation, or whether they can generate compelling financial returns. The answer may well be a bit of both.

While not all water-focused investments offer traditional return profiles, there may arguably be growing opportunities in water infrastructure, with a clear need for blended finance to provide the capital needed to get critical projects started across water efficiency technologies and sustainable agriculture. For some investors, the return may be balanced against the broader benefits to society, alongside portfolio derisking, enhanced resilience and positive societal impact.

And while water-related risk is only beginning to gain traction among investors, regulatory and reputational pressures are expected to grow. Some regulators globally are beginning to consider water usage and rights, and it looks likely that companies will face increasing scrutiny on how they interact with local water systems.

These considerations bring with them the potential for growing reputational risk, as those perceived to be mismanaging water resources or operating without adequate safeguards may face backlash from stakeholders and communities. We already see evidence of this in the UK and elsewhere, underscoring the need for greater transparency and diligence of water-related practices across portfolios.

As awareness around these concerns continues to grow in prominence, we expect to see increasing numbers of investors reconsidering water as both a thematic opportunity and cross-portfolio risk. If you are interested in exploring more via my work and our teams, please follow Mercer - Investments and visit www.mercer.com

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