Insights

Water: the Paradox of Value

By October 22, 2020 No Comments
By Tim King
Tim King

Nothing is more useful than water: but it will purchase scarcely anything; scarcely anything can be had in exchange for it. A diamond, on the contrary, has scarcely any use-value; but a very great quantity of other goods may frequently be had in exchange for it.

Adam SmithOf the Origin and Use of Money 1
By Tim King

Nothing is more useful than water: but it will purchase scarcely anything; scarcely anything can be had in exchange for it. A diamond, on the contrary, has scarcely any use-value; but a very great quantity of other goods may frequently be had in exchange for it.

Adam SmithOf the Origin and Use of Money 1

Water scarcity presents one of the primary environmental challenges faced by the world

Although specific targets related to water, sanitation and hygiene are included in the UN Sustainable Development Goals (SDGs), much work remains to be done and many water statistics are alarming. For example:

  • water scarcity affects more than 40% of the global population2;
  • one-quarter of the world faces extremely high-water stress3; and
  • In 2018-19 some areas in the northern section of the Murray–Darling Basin experienced their lowest rainfall on record.4

The world’s water resources are under growing pressures from both demand and supply side factors, principally rising water consumption, increased pollution, weak governance, and climate change. According to UN Water5, the effects of these pressures will be felt principally through less predictable water availability.

Although agriculture is the largest consumer of water (70% both globally and in Australia 6), since the 1960’s the majority of demand growth has been driven by a 6-fold increase in demand from municipal water use.7

Growth in Global Water Withdrawals

Source: World Resources Institute (WRI)

Water scarcity therefore presents one of the primary environmental challenges faced by the world and a significant risk exposure for many companies.

As complex as this problem is, it largely stems from the fact that water is either free, or inappropriately priced.

Water Scarcity and Climate Change

Water scarcity is the primary medium through which companies will feel the effects of climate change.

The risks are both physical (eg reduced water availability) and transitional (eg policies to promote greater water efficiency) including:

  • higher temperatures and more extreme, less predictable weather conditions are projected to affect availability and distribution of rainfall and surface water;
  • the risk of more frequent and intense rainstorms, flooding, and drought; and
  • an increase in pollution run-off and poorer water quality.

Both Australia and New Zealand face Water Challenges

The WRI’s Aqueduct8 water risk map tool, which rates water risks such as droughts, floods and water stress, rates Australia’s water risk as Medium-High, and New Zealand Low.

In Australia, the Murray-Darling Basin covers four states and represents 60% of Australia’s surface water. It supplies 40% of Australia’s farms, but it has recently been facing severe drought and over-extraction. Despite recent rain, current storage levels are at only 54%9 (albeit an increase compared to storage levels of 45% at the same time last year).

In New Zealand the problem is more one of pollution, with water polluted in urban, farming, and forestry areas.10 New regulations (the National Environmental Standards for Freshwater11) came into force in September 2020,  which regulates activities that pose risks to the health of freshwater and freshwater ecosystems.

Global vs Local Response

In contrast to the problem of climate change, which has received a global, co-ordinated response through the 2015 Paris Agreement, the challenges relating to water have curiously received no such globally co-ordinated response.  This is probably due to a combination of factors; the focus on climate has perhaps had a “crowding out” effect and water scarcity is perceived as a more local issue than climate change.

Consequently, despite the magnitude of the risks posed by water scarcity, in contrast to climate action there are a dearth of risk assessment tools and target setting frameworks for water management.

Melior’s Response

Melior believes that companies have an important role to play as water stewards. All companies have exposure to water risk, albeit companies in sectors such as mining and agriculture are more exposed. Water stewardship, as defined by the Alliance for Water Stewardship Standard12 is, “the use of water that is socially and culturally equitable, environmentally sustainable and economically beneficial, achieved through a stakeholder-inclusive process that involves site-and catchment-based actions.”

Melior considers the future water risk for companies and monitors the number of companies with water policies. Remarkably, only 33% of ASX 300 companies have water policies. In contrast, 61% of Melior portfolio companies have water policies.13

For growers such as Costa Group (CGC) and Select Harvests (SHV) for instance, Melior applies a deeper assessment of their water management practices. This is done by using a higher materiality weighting to the company’s performance in environmental factors when considering both ESG and financial risk, and also when considering the company’s alignment to the UN SDGs. SHV continue to invest in upgrades to their irrigation infrastructure and use recycled, ground and river water to optimise utilisation at its almond orchards. As well as improving water efficiency via sensor technology and water meters, CGC has also expanded investment in resource-efficient protected cropping (greenhouses) for their tomato and mushroom categories. These are examples of the key issues on which we engage with agricultural companies.

We advocate that companies should commit to the Alliance for Water Stewardship International Water Stewardship Standard14 and/or join the recently founded Water Resilience Coalition15, a CEO led initiative to reduce water stress by 2050. Membership involves pledging to:

  • a measurable net positive water impact;
  • developing and implementing a water-resilient value chain; and
  • global leadership to raise ambition.

To date, 16 companies (no Australian or NZ companies) have joined the coalition.

This content is for general information only. In preparing and publishing this content, Melior Investment Management Pty Ltd (ACN 629 013 896, authorised representative no. 001274055) does not seek to recommend any particular investment decision or investment strategy and has not taken into account the individual objectives, financial situation or needs of any investor. Investors should consider these matters, and whether they need independent professional financial advice, before making any investment decision.