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March 05, 2009

Global Water Resources Threatened by Climate Change and Population Growth
    by Robert Kropp

Report finds that business is failing to address impact of water scarcity on its operations, and provides investors with questions pertaining to water risks to ask of their portfolio companies. -- It could be said that the global economy runs on water.

70% of the water used globally is for agriculture, with as much as 90% in developing countries where most of the worldwide increase in population of 50 million people per year is occurring. Electric power plants account for 39% of all freshwater withdrawals in the United States. Water is an important resource for the high-tech industry, especially for semiconductor manufacturing. Intel and Texas Instruments alone used more than 11 billion gallons of ultra-pure water for cleaning and rinsing in the production of silicon chips in 2007.

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our sponsorsYet according to a report issued by Ceres, a coalition of investors, environmental groups and other public interest groups, and the Pacific Institute, a nonprofit research organization, few businesses and investors are paying attention to the financial threat presented by water scarcity problems around the world.

The report, entitled Water Scarcity & Climate Change: Growing Risks for Businesses and Investors, maintains that the impact of water scarcity and declining water quality on business will be extensive, and that climate change is likely to exacerbate already diminishing water supplies.

Mindy Lubber, President of Ceres, said, "The report's conclusion is eye-opening. Climate change is exacerbating water scarcity problems throughout the world, yet few businesses and investors are paying close enough attention to assess the risk, integrate it into their assessments of companies, and act on it."

The report finds that the global supply of water is rapidly becoming unsustainable. It is estimated that by 2025 two-thirds of the world's population will live in regions that are already water-stressed. The percentage of global land classified as very dry has doubled since the 1970s, and natural water storage capacity and long-term annual river flows are also declining, especially in the Northern Hemisphere.

Climate change is likely to cause a decrease in natural water storage capacity from glacier and snowcap melting, increase water scarcity due to changes in precipitation patterns, and increase the vulnerability of ecosystems.

Climate change will also contribute to the already serious problem of declining water quality. At present, almost 900 million people worldwide lack access to safe drinking water, and those numbers are expected to rise as climate change contributes to an increasing contamination of groundwater supplies and environmental health risks associated with water.

Climate change is also considered to be a significant factor in a number of water-related problems that have impacted business in the past few years. According to the report, "China and India are seeing growth limited by reduced water supplies from depleted groundwater and shrinking glaciers that sustain key rivers. California is limiting agricultural water withdrawals due to drought. France, Germany and Spain were forced to shut down dozens of nuclear plants due to a prolonged heat wave and low water levels."

Identifying water-related risks specific to eight key industries, including electric power, high-tech, beverage, and agriculture, the report finds that disruptions in water supply can undermine industrial and manufacturing operations where water is needed, contaminated water supplies may require additional investment and operational costs for pre-treatment, and water resource constraints make companies more susceptible to reputational risks.

Noting that the right to water is indispensable to the realization of many other internationally recognized human rights, including the right to food, the right to health, and the right to adequate housing, the report anticipates that water scarcity will lead to more stringent water policies from a regulatory standpoint.

Yet despite its finding that a scarcity of clean, fresh water presents increasing risks to companies in many countries and in many economic sectors, the report concludes that business is failing to address the problem, and investors have not yet pursued steps to better understand potential water-related exposure in their portfolio companies.

"Weak corporate disclosure on water risks and response strategies are especially glaring," according to Lubber of Ceres.

Dr. Peter Gleick, President of Pacific Institute, said, "Only 20% of corporations that we assessed look at real risks of water scarcity and contamination, and only 10% describe supply chain risks. Almost none of the companies address the risks of climate change."

The report offers a number of suggestions for companies to consider in evaluating and addressing water risks. Companies should measure water footprints throughout their supply chains, assess risks associated with their water footprints, engage key stakeholders, integrate water issues into strategic planning, and improve disclosure of water risks.

Anne Stausboll, CEO of the California Public Employees Retirement System (CALPERS), the nation's largest public pension fund with approximately $170 billion in assets, said, "The report calls for improved corporate disclosure so that investors are better equipped to evaluate companies' position relative to their peers on water-related risks and strategies."

In an excerpt from the report that Ceres and the Pacific Institute considered to be enough importance to investors to publish as an independent document as well, recommendations for questions that investors should ask of their portfolio companies were explored.

The report recommends that investors ask the following questions:

Does the company measure and understand its water footprint? Has the company assessed the business risks associated with its water footprint? Does the company engage with key stakeholders as a part of its water risk assessment, management, and long-term planning? Has the company integrated water risk into its overall business planning and governance structure? Does the company disclose and communicate its water performance and associated risks?

"With impacts of climate change on water resources already affecting businesses, this report provides a first-of-its-kind list of key questions companies and investors should be asking and responding to in an integrated way," said Jason Morrison, program director at the Pacific Institute and the report's lead author.

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