In the coming decade, water scarcity will drive firms to rethink their operations and supply chains, and force countries to consider how they compete.

By James Watson

The topic of environmental sustainability usually goes hand in hand with energy and its related emissions. Growing attention is being paid to the need to cut energy use, increase efficiency and start seeking alternatives.

But another resource constraint is also looming rapidly: fresh water. It is not necessarily the case that the world is running short of fresh water, but that the supply of water is radically mismatched with demand.

Canada’s population of just 34m people, for example, has access to more fresh water resources than China’s 1.3b citizens. China, along with growing economies such as India, are experiencing increasing levels of water stress, both in terms of the quantity of fresh water available, and the quality.

“There is a mismatch between the global economic footprint and the distribution of water,” says Juan Climent, Global Leader for Climate Change and Sustainability Services at Ernst & Young.

This mismatch is worsening, as supplies in some regions become depleted. India, for example, currently withdraws more fresh water from its total supply than any other country, 645 cubic kilometers per year, or more than all of Africa and South America combined.

The drivers for this are clear: rising populations; climate change; rapid urbanization; and increasing agricultural and industrial needs. This is not just an emerging market problem: parts of California, Australia and Spain join countries such as Mexico and South Africa in facing water scarcity.

All this clearly holds serious implications for citizens, but also for governments and business.

From a macro perspective, it may ultimately start to affect the relative competitiveness of certain economies, while at a micro level, it will mean that firms will have to rethink their operations and supply chains in order to cope with increased scarcity.

From micro to macro

Although efforts are far from widespread, a small but burgeoning number of firms are measuring their water footprint, just as many have mapped out their overall energy use.

As the picture on this becomes clearer, firms will need to explore ways to reduce their overall consumption of water, recycle more of the water they do use, and pump less polluted water back into the system. For companies that have water-intensive supply chains, such issues will be even more pressing.

“Once companies start measuring their water footprint, then some will recognize that their products are not sustainable from a water point of view in the supply chain,” says Arjen Hoekstra, a Professor in Water Engineering and Management at the University of Twente, in the Netherlands, and Scientific Director of the Water Footprint Network.

Firms such as Unilever and Coca-Cola, for example, already focus closely on water issues as key corporate social responsibility and brand risk concerns, not least in the face of mounting pressures.

The pressures come in two primary forms:

1. Increased costs, as certain inputs either become more expensive, or else simply become scarcer.
2. Increased regulation, as governments start switching from supply management, such as building dams or canals, to demand management, by forcing firms to consume less and recycle more.

This is already underway. Companies in India, for example, are facing increasing regulatory pressures from government.

“They’re now being asked by local authorities to do the groundwater recharge,” explains Chaitanya Kalia, a Partner for Climate Change and Sustainability at Ernst & Young in India. “All industries are being asked to do this. Especially those located near large cities.”

And if there is simply not enough supply of water, then operations will need to be physically relocated. One manufacturer in South Africa, for example, has had to relocate its factory after struggling with water scarcity, while some firms in the United States have had to rethink the way they choose their production locations.

“From a sustainability perspective, every industry has to put water into their decision-making process going forward,” says Mr. Kalia.

“It’s a key challenge that industry is trying to prepare for. If they have to grow, they need water. This is very important. You put up a plant and all of a sudden you can’t produce if there’s no water.”

This is not necessarily all gloomy for business. For some, just as concerns over energy have fueled the growth of a global cleantech and renewable energy industry, water constraints may hold opportunity too.

In India, Indonesia and Mexico, Unilever has launched a product called Pureit, which allows households to purify water easily and cheaply. Various Middle Eastern firms are already renowned for developing technologies aimed at improving water efficiency.

And as scarcity increases, along with prices, those firms that can best manage their water efficiency will start to gain a degree of comparative advantage.

An economic issue

But in the coming decade, water will become an issue of national competitiveness too. Governments will be forced to evaluate which economic activities make sense for them.

“Countries will start to ask themselves if it is wise to be an export region for a certain crop if that crop requires a lot of water,” says Professor Hoekstra.

“In the end, it’s about the economy and about industries and about what to invest in. So, if you’re wise, you’re not going to invest in a water-intensive economy in a water scarce area.”

Such considerations will affect agriculture first, which uses some 70% of fresh water globally, but in turn affects the supply chains of many industries. Water-scarce countries will start to cut down on exports of food products, and import more.

Spain, for example, has started paying greater attention to the water footprint of some of its exports. “[They’re asking] why do we use this scarce water for making cheap export products, when they don’t get a lot of money for it,” says Professor Hoekstra.

As such considerations become more widespread, it will also affect the relative competitiveness of some economies. No matter how low the wages might be in one location, if there is no water, then no one will seek to manufacture there.

Going virtual

As such considerations increase, the trade in “virtual water” will increase between countries. This relates to the water embedded within a product, as part of its production.

For example, a kilogram of wheat requires 1,300 liters of water to produce, while a pair of jeans uses nearly 11,000 liters to make and a typical passenger car some 400,000 liters. As such, trade can be viewed as some countries exporting billions of liters of water each year, while others import this.

“Importing food implicitly means importing water too, but in a much more efficient way,” says Mr. Climent. “Many countries are reducing their agricultural production because they don’t have enough water; for example, in the Middle East, and they import food, they import products.”

Ultimately, this could lead to the more direct trade of bulk water, just as millions of barrels of oil are shipped from oil-rich countries today. In some ways, this is not new: Singapore has long relied on Malaysia for its fresh water, while Israel in the past has attempted to set up a bulk water trade deal with Turkey.

“If, in the next 20 years, we are going to have a real problem of water scarcity, then it is very clear that the international trade of bulk water will develop at pace,” argues Mr. Climent.

Of course, such trade faces considerable obstacles: no clear regulatory framework; serious public concerns over the loss of a vital national resource; questions of fairness; and so on.

Figuring this all out will be extremely challenging, but so too will be the question of how to quench the thirst of both citizens and businesses.

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