When assessing climate risk, it is important to factor in the extent of the company’s dependency on natural capital, such as palm oil, water, forest and fossil fuels. Companies that generate more sales with less carbon, water and waste are likely to be more resilient to climate risk as they deploy resources more efficiently.
In a 2016 report, the American Association for the Advancement of Science estimated that two thirds of the global population is facing water scarcity. Fresh water is crucial for human welfare, yet it represents just 2.5% of the world’s water, and only 1% of it is easily accessible. The world’s population is expected to reach 9.8 billion in 2050, causing a global water deficit of an estimated 40% as early as 2030 if no action is taken. Without fresh water, food availability falls, and diseases spread.
It is therefore crucial to reduce and manage our consumption in order to save and distribute water where needed. Improving water-use efficiency is an imperative for industry, with water risk having the potential to impact corporate valuations through higher operating costs, and to threaten the viability of companies that do not rise to the challenge.
Case study: Anglo American (materials)
The mining sector is a heavy water consumer that tends to operate in remote, water-scarce regions: globally, almost 80% of the copper produced by major mines is in water-challenged regions.
Anglo American is materially exposed to water risk, with 75% of its current portfolio located in regions at high risk of water scarcity.
Anglo American is materially exposed to water risk, with 75% of its current portfolio located in regions at high risk of water scarcity. We engaged with the company to gauge the steps it is taking to manage this risk. We were reassured that Anglo American is addressing the issue head on, with a long-term goal of eliminating fresh water from the mining process.
For the short and medium term, the company has set ambitious targets to reduce its water consumption: by 2020, it aims to decrease fresh water intake by 20%, and 75% of the water it uses should be recycled or reused. Anglo American is also focusing on recovering water from tailings dams, which represent the largest water loss in mining.
Case study: Data centres (technology)
Our use of data is only growing, with cloud-based systems, artificial intelligence and the Internet of Things putting increased demand on data centres. Penetration of the Internet of Things is anticipated to grow from a 2015 base of 15.4 billion devices to 30.7 billion devices in 2020 and 75.4 billion devices in 2025, increasing data traffic and therefore the demand for data centres.
The growth of data centres is putting pressure on water resources in two ways:
- Directly, through the use of water-cooled chiller systems designed to prevent machines from overheating
- Indirectly, through power usage
Typically, a data centre will use 7-8 million gallons of water per year per megawatt (MW) of electricity used, primarily for heat reduction. Of the five largest data centre markets in the US, four (Northern Virginia, Dallas, Chicago and Silicon Valley) are located in areas designated as high or medium-high water risk, with location being primarily driven by factors such as proximity to end users, telecommunication networks and state incentives.
Water usage restrictions through drought or regulation could result in greater downtime and limit expansion.
In the future, water usage restrictions through drought or regulation could result in greater data centre downtime and also limit the ability for data centres to expand. In the US, California has been experiencing drought since 2012, and globally there are other examples – including India – of water risk impacting annual downtime hours.
Recognising this, data centre owners are looking to reduce their direct and indirect water footprint through alternatives to water-cooled chiller systems, and through the use of renewable energies for power generation. For example, Microsoft is making use of sea water cooling in its underwater data centre off the coast of the Orkney Islands in Scotland, while Facebook is trialling a new indirect evaporative cooling system in some of its data centres.
The securities above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell.
