One of the most significant challenges for agriculture and the global economy over the next few decades will be “water insecurity,” according to the FAIRR Initiative (FAIRR). FAIRR is a collaborative investor network that raises awareness of the material risks and opportunities in the global food sector. In a new report, the group notes that while the costs of water insecurity are under-researched and uncertain, given the agri-food industry’s dependence on water, they could be significant, especially if left unaddressed.
The report from FAIRR, titled “An Investor Primer: Water Insecurity in the Agri-Food Value Chain,” explains that water plays a fundamental role in the production and availability of almost all products and services across all industries and sectors, while underpinning the world’s most basic needs. Around 60% of global GDP (gross domestic product) is highly dependent on water access. However, demand for freshwater is set to outstrip supply by +40% in five years, according to the Global Commission on the Economics of Water.
Businesses along the agri-food value chain are highly dependent on water. Reports circulating today estimate that roughly 70% of all global freshwater withdrawals are used for agriculture, with most going toward crops that are often used as livestock feed or in biofuels. Reports indicate that other industries account for approximately 20% of freshwater withdrawals, and domestic use accounts for about 12%.
While businesses and livelihoods are highly dependent on the availability of freshwater, there is no clear consensus on its financial value. However, there are clear financial costs to not having enough of it. Water insecurity and stress could lead to higher operating costs, supply chain disruptions, and stranded assets for livestock and biofuels companies, as well as the broader agri-food value chain.
The level of exposure to water insecurity among livestock companies differs significantly depending on their products. Dairy operations, for example, require around 2,714 liters (717 gallons) of water per kilogram (just over +2.2 pounds) of product, while poultry is significantly less at just 660 liters (174 gallons). Water insecurity, while a global issue, also varies significantly between geographies. Huge areas of China, India, the Middle East, and the western United States – major breadbaskets for feed crops – are experiencing baseline water stress of over 80%.
The nature of the risk differs in each geography, but the locations cited by FAIRR are all places where water sourced from wells or rivers is most at risk, whereas in countries that rely on rainfall, such as Brazil, shifting weather and evaporation patterns are rapidly emerging risks to farmers and the companies they supply.
Water is embedded in the production and international trade of goods, as well. Known as “virtual water,” it is especially prevalent in the global food supply chain. Almost 20% of water withdrawn for global food production is traded virtually, rather than being consumed domestically. Livestock, wheat, corn, soy, and a handful of other commodities contribute over 70% to the total virtual water trade. The most significant water scarcity risks occur where the trade in virtual water overlaps with companies operating in regions of high water stress.
FAIRR warns that the world is approaching a series of tipping points that, if reached, would mean the natural systems society relies on for food and water no longer function as expected, substantially increasing the risk of catastrophic impacts. Though the scientific consensus on the societal and economic tipping points are stark, the financial costs of passing such points is under-explored, though likely devastating.
The Coller FAIRR Protein Producer Index assesses producers’ performance across 10 material sustainability factors, and, of those, reporting on water withdrawals and scarcity indicators has repeatedly ranked among the lowest of the metrics. Top protein players have largely refrained from disclosing information on water use. Still, the briefing reported that over 60% of livestock producers fall in the high-risk category for water use and scarcity, which FAIRR refers to as an indication of “widespread failure to manage water-related risks effectively.”
A significant barrier to progress is that much of the improvement in disclosure only covers companies’ direct operations and management of facilities, rather than their supply chains. Thoroughly capturing water usage by protein sources requires tracing water withdrawals to account for grain and feed, which can be complicated as well as costly.
At the same time, ignoring growing water scarcity will also be costly. It is projected to cost companies across all sectors +$200 billion to $300 billion — five times the estimated cost of proactively managing water-related risks, FAIRR noted. To remedy the problem, FAIRR believes investors need to demand greater disclosure, standardize material metrics, and set ambitious and resilient targets. The full report is available HERE.
