Climate Disclosure Brings Water Scarcity into Focus

When we talk about environmental risks, carbon emissions usually come to mind first. New regulations from the Securities and Exchange Commission, however, should raise the visibility of water for companies too, after working water-related financial risks into the first-ever disclosure rules for climate risk.

The climate disclosure rules call for issuers to report water-related risks posed by short-term events such as hurricanes and long-run concerns like shifting weather patterns. The move is “is part of the strong global momentum – both regulatory and voluntary – behind increased transparency around water risk,” according to Kirsten James, the senior program director for water at nonprofit sustainability organization Ceres.

“The new SEC rule will give investors some of the sorely needed consistent, comparable and transparent information they have been seeking, and that is crucial to ensuring long-term portfolio value and beneficiary returns,” James said.

By 2030, the shortfall between demand and supply of freshwater across the globe may hit 40%, according to one estimate. While water concerns may not generate the same types of headlines as global warming, many companies are already adjusting to scarcity around the globe. Consider food company General Mills, which counts brands such as Fiber One, Betty Crocker and Chex Mix in its portfolio. Water shortages can be catastrophic for the farmers whose harvests supply the ingredients for cereals, crackers, and countless other food products. In the technology sector, companies are facing fears about a lack of adequate water to satisfy needs such as cooling data centers and manufacturing microchips.

According to CDP, an environmental disclosure watchdog, global companies have $15.5 billion in assets that have been stranded or are at risk of being lost due to issues triggered by water-related concerns. Even for companies that don’t make water-intensive products, water issues can indirectly meddle with their operations by creating problems in areas like supply chains and logistics. Given the ubiquity of water in so many companies’ businesses, it should come as little surprise that investors have started calling on industries to take a more scrupulous approach to water management.

Meanwhile, the growing use of artificial intelligence is adding to the burden of the tech sector on the global water supply. As with all other server operations, for example, cooling in the data centers that house AI servers uses significant amounts of freshwater. And demand for more generative AI products translates into a need to produce additional semiconductor materials, which requires lots of water. Not to mention the thermoelectric plants that rely on water to produce the power needed to fuel an expanding number of tech devices and applications. Then there’s the demand for more electricity to keep the growing number of data centers up and running. You get the point.

But will incorporating water risks into the SEC-mandated climate disclosures raise awareness of the broader concerns about scarcity? To be determined.