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Speaker 1: Welcome to zero. I am Actra Tarti this week water scarcity.

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Speaker 1: We perhaps take for granted how critical access to water

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Speaker 1: is for the future of life on this planet, not

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Speaker 1: just for people around the world to quench their thirst

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Speaker 1: and have access to good sanitation, but also for the

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Speaker 1: global economy. Climate change is caused by the accumulation of

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Speaker 1: green ass castles in the atmosphere, but mostly felt by

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Speaker 1: humans through the force of water too much in storms

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Speaker 1: and floods, to little in droufts. From agriculture to e commerce,

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Speaker 1: water access is central to so many industries, and those

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Speaker 1: industries are likely to feel pressure as climate change drives

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Speaker 1: water scarcity. In the years to come. By t thirty,

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Speaker 1: the fresh water demand is expected to outpace supply by

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Speaker 1: forty percent. It's a challenge, but also an opportunity. That's

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Speaker 1: what Bloomberg Intelligence researcher Melanie Ruas says. She's co authored

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Speaker 1: a new report on water scarcity, and some of the

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Speaker 1: examples she's shared on just how much financial impact companies

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Speaker 1: are already seeing as a result of water scarcity really

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Speaker 1: surprised me. She told me why investors now have enough

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Speaker 1: data to start to include water risks as they make

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Speaker 1: investment decisions. Melanie, welcome to the show.

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Speaker 2: Thanks so much for having me. It's a pleasure to

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Speaker 2: be here.

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Speaker 1: Now. Water scarcity is not a new issue, but it

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Speaker 1: is certainly becoming a more alarming issue around the world,

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Speaker 1: and your job is to dig into areas where investors

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Speaker 1: need more information to make decisions. What happened last year

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Speaker 1: that made you decide to focus on the issue of

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Speaker 1: water scarcity.

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Speaker 2: Yeah, absolutely, great question. You know, like you alluded to,

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Speaker 2: water scarcity is no longer a distant threat. It's a

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Speaker 2: present day financial and operational risk that companies across sectors

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Speaker 2: and globally are already facing. You pointed to some scary

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Speaker 2: stats of how demand for fresh water is expected to

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Speaker 2: outpace supply by forty percent by twenty thirty. That's only

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Speaker 2: five years from now, and up to seventy trillion dollars

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Speaker 2: of global GDP is at risk due to water stress,

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Speaker 2: you know, according to the World Resources Institute. So in

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Speaker 2: addition to overuse, to your point, climate change is also

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Speaker 2: a driver here. We have hotter, drier climate driving more

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Speaker 2: water demand and at the same time supply shrinks. This

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Speaker 2: is really contributing to that imbalance. So we're seeing this

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Speaker 2: risk manifest in real time. But I want to also

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Speaker 2: stress it's also in different ways. So in Mexico Constellation Brands,

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Speaker 2: you know, an alcoholic beverage producer abandoned a merely completed brewery,

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Speaker 2: taking a six hundred and sixty million dollar right down

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Speaker 2: because of water concerns. You know, the company had to

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Speaker 2: build a new plant six hundred miles away, which adds

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Speaker 2: logistics costs and supply chain complexities. But there's also you know,

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Speaker 2: things happening for semiconductors, like look at semiconductor makers in

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Speaker 2: Taiwan where water shortages have become a recurring issue. You know,

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Speaker 2: have been trucking in water and TSMC, Taiwan Semiconductor manufacturing Company,

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Speaker 2: estimates that over half a billion dollars in revenues at

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Speaker 2: risk due to drought. So these examples really highlight that

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Speaker 2: water risk isn't theoretical, it's already affecting companies, their bottom

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Speaker 2: lines and really their ability to operate. So investors need

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Speaker 2: to understand which industries and businesses are most exposed to

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Speaker 2: these challenges, and in the same way, businesses must adapt

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Speaker 2: or face financial consquences.

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Speaker 1: You know, so you talked about food and beverage. You

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Speaker 1: talked about semiconductor things you wouldn't usually I mean food

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Speaker 1: and beverage. Yes, of course there's water involved, but semiconductors

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Speaker 1: people typically don't think about the use of water. But

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Speaker 1: there are other industries where water isn't the primary focus,

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Speaker 1: and yet it can bring things to a halt. So

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Speaker 1: I'm thinking power plants exact, natural gas pop plants, coal

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Speaker 1: pop plants, any thermal power plant needs a lot of water.

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Speaker 1: But tell me more, also about AI. There is a

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Speaker 1: huge amount of water need for AI data centers, right.

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Speaker 2: Yep, exactly that. You know, water risks really shows up

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Speaker 2: in different ways across industries. To your point, Yes, there's

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Speaker 2: obvious water intensive industries, agriculture, peril, power, the less obvious.

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Speaker 2: So I hinted at semiconductors. You know, can talk a

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Speaker 2: little bit about that. How manufacturing chips require one point

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Speaker 2: four to one point six Leaders of water, leader of

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Speaker 2: ultrapure water use. Also, forty percent of semiconductor plants announced

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Speaker 2: since twenty twenty one are being built in water stressed areas,

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Speaker 2: including Arizona, where concerns over water access are already emerging.

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Speaker 2: But to your point, something that's not so obvious data

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Speaker 2: centers generate a lot of heat. They need cooling, and

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Speaker 2: water based cooling is generally the most efficient, but it

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Speaker 2: is water base and so AI driven data centers. They've

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Speaker 2: used almost two billion gallons of water in twenty twenty

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Speaker 2: three in Virginia alone. You know, we mentioned this in

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Speaker 2: the report, a sixty four percent increase since twenty nineteen.

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Speaker 2: You have companies like Microsoft and AWS Amazon Web Services

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Speaker 2: that have set water positive targets for twenty thirty, meaning

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Speaker 2: they're replenishing more water than they're using. But the scale

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Speaker 2: of water use in this industry is enormous, and you know,

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Speaker 2: water scarcity is already reshaping industries and forcing companies to

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Speaker 2: really rethink sourcing, product and expansion plans.

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Speaker 1: So in typical decisions that investors are trying to make

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Speaker 1: about which company to invest in and understanding what risks

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Speaker 1: the companies that they have in their portfolio might be facing.

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Speaker 1: Climate change and carbon dioxide features quite high in these

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Speaker 1: environmental social governance metrics. But on the environment, water is

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Speaker 1: kind of now getting to the point where there's reporting happening,

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Speaker 1: and with your report and others that have come around

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Speaker 1: water scarcity, it's starting to become an issue that is

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Speaker 1: being highlighted. Yet are there investors who are making decisions

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Speaker 1: based on water scarcity just like there are investors today

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Speaker 1: that make decisions based on COO two emissions.

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Speaker 2: Yep, So you know exactly what you're talking about, you know,

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Speaker 2: for investors when we're talking about risk, you know, like

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Speaker 2: this really means assessing portfolio exposure to water intensive industries

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Speaker 2: and being able to tie identify the companies which are

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Speaker 2: most at risk. And beyond corporate exposure, banks and investors

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Speaker 2: are also exposed through their lending and financing decisions. But

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Speaker 2: to your point, it's not really a risk that's yet

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Speaker 2: widely disclosed. Just to cover a bit, you know, our

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Speaker 2: analysis did look at financed water consumption, finding that banks

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Speaker 2: like Bank of America, Wells Fargo, some of the largest

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Speaker 2: finance also some of the highest water consumption and risk

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Speaker 2: exposure in such water intensive industries. And yet water risk

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Speaker 2: hasn't to your point, been accounted for in the same

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Speaker 2: way as finance CO two missions.

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Speaker 1: And so the finance part of it here is the

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Speaker 1: fact that if a bank is lending money to a

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Speaker 1: company that then has either consumption of water or is

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Speaker 1: producing CO two, those emissions, or that water consumption is

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Speaker 1: then considered as financed water or financed emissions on the

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Speaker 1: books of the lender, And does the lender is being

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Speaker 1: exposed to all this that the company that has taken

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Speaker 1: their money is going to be facing.

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Speaker 2: Yep, exactly. That we really just apply similar to the

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Speaker 2: CO two finance emissions methodology of you know, the PEA

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Speaker 2: CAF methodology, doing the same thing for water. And so

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Speaker 2: though for investors they don't yet systematically price in water risk,

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Speaker 2: as these financial impacts grow, it's really going to become

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Speaker 2: increasingly difficult to ignore. Right the cost of inactions already evident.

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Speaker 2: You know, investors who don't proactively assess their exposure might

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Speaker 2: find themselves holding companies with significant unrecognized liabilities.

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Speaker 1: Yeah. Now we are going to talk about solutions and

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Speaker 1: opportunities in the space, but before that, can you spill

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Speaker 1: out some of the worst case scenarios that might happen,

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Speaker 1: or perhaps there are already case studies that you can

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Speaker 1: point to saying this could have been a cause that

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Speaker 1: would have been avoided had they thought about water scarcity risk.

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Speaker 2: Yeah. Absolutely, I think this really goes back to the

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Speaker 2: idea of the report of how water risks shows up

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Speaker 2: in different ways, and we really want to highlight the

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Speaker 2: importance of focusing on water intensive industries. So giving you

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Speaker 2: like real examples. Looking at agriculture, a quarter of the

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Speaker 2: world's food crops are grown in high water stress regions.

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Speaker 2: You know, severe drought in Brazil Ca Arabica coffee production

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Speaker 2: by eleven million bags, which really cause an eighty percent

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Speaker 2: spike in future prices. And yes, though coffee prices surged

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Speaker 2: exceptionally high levels due to impart to drought as well

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Speaker 2: as flooding in some cases. In apparel, half of the

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Speaker 2: world's cotton crop will be exposed to drought by twenty forty.

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Speaker 2: You know, you have companies like Nike whose supply chain

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Speaker 2: relies on cotton for eighty percent of its water footprint.

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Speaker 2: They're investing in recycled fabrics and waterless dying techniques. So

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Speaker 2: there are companies also like Levi's pushing cottonized hemp, which

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Speaker 2: uses a quarter of the water needed for cotton. I

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Speaker 2: mentioned semiconductors on the production side, but it's the development too, right,

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Speaker 2: Like the forty percent of semiconductor plants since twenty twenty

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Speaker 2: one that are being built in water stressed areas. You know,

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Speaker 2: water can basically slow or halt growth depending on access

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Speaker 2: of it. So these are also like a few ways

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Speaker 2: in which investors can really think of water risk and

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Speaker 2: sometimes in ways that are not so obvious. For the

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Speaker 2: industry agriculture, like I mentioned, it was a lot about crops,

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Speaker 2: but Archie Daniel's Midland their carbon sequestration facility leaked due

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Speaker 2: to compromise monitoring wells, So this raised concerns over long

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Speaker 2: term water security risks and shell. Yes, you know water

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Speaker 2: is needed in extractive industries, but they agreed in California

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Speaker 2: to a two hundred and thirty million dollars settlement over

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Speaker 2: contaminated wells. So this really shows that companies are not

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Speaker 2: only vulnerable to water scarcity but also water related liability.

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Speaker 1: After the break, more of my conversation with Bloomberg Intelligence

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Speaker 1: researcher Melanie Rua. And if you've been enjoying this episode,

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Speaker 1: please take a moment to rate and review the show

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Speaker 1: on Apple Podcasts or Spotify. It helps other listeners find

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Speaker 1: the show now. In terms of technologies in the climate space,

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Speaker 1: there are a myriad of technologies that are now available

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Speaker 1: to try and start to reduce emissions from sectors. What

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Speaker 1: are the technology solutions available to try and deal with

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Speaker 1: water scarcity?

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Speaker 2: Yes, so I do have to say there's not one

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Speaker 2: solution for something like this, the water crisis. It's really

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Speaker 2: fueling demand for alternative water sources, efficiency technologies, the sustainable materials,

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Speaker 2: you know. To give you some more insights on these

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Speaker 2: different solutions. On desalination and treatment, you have companies like Veolia,

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Speaker 2: who plans to boost revenue from water treatment technologies by

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Speaker 2: fifty percent by twenty thirty. On cooling tech, you have

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Speaker 2: Lenovo's Neptune liquid cooled servers, which reduce power consumption by

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Speaker 2: forty percent, cutting water needs. And then you have alternative fibers.

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Speaker 2: So Gailey, which H and M invested in, is developing

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Speaker 2: lab grown cotton which uses ninety seven to ninety nine

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Speaker 2: percent less water than conventional cotton. So while yes, there's

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Speaker 2: multiple solutions, there's also trade offs. Right, Desalination is energy

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Speaker 2: intensive and switching from water cooling to air cooling and

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Speaker 2: data centers. While it may be more efficient stuff, this

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Speaker 2: would increase energy demand, can drive expenses, and it doesn't

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Speaker 2: work everywhere. So investors really need to evaluate that cost

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Speaker 2: benefit equation of.

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Speaker 1: These companies like Gailey that I've written about which will

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Speaker 1: link in the show notes. You know, interesting technology, but

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Speaker 1: adoption of those kinds of technologies that are mass scale

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Speaker 1: takes time, takes people to experiment. So yeah, there are

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Speaker 1: options available, but for water scarcity that is coming so

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Speaker 1: soon or is already here in many cases, there have

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Speaker 1: to be other options for investors to think about. Now again,

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Speaker 1: I'm taking the CO two lens, which I understand. Investors

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Speaker 1: have models now, quite sophisticated models where they can estimate

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Speaker 1: if this is the pathway that the world is taking,

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Speaker 1: this is the level of warming that the world is

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Speaker 1: likely to have. These are the companies in our portfolio

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Speaker 1: that become an investable that may have stranded assets on

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Speaker 1: their books, and so we should start to reduce our

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Speaker 1: exposure to these companies. Is that level of modeling available

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Speaker 1: for water scarcity for investors to be able to start

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Speaker 1: making decisions today?

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Speaker 2: Oh? Absolutely, to your point, right, Like companies with high

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Speaker 2: exposures need to be on the investors watch list, and

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Speaker 2: there is data available to do that. In the report

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Speaker 2: we include this. We have asset level now that leverages

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Speaker 2: Bloomberg's company acid data and wri's aqueduct tool. So we

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Speaker 2: really identified asset exposure to water stress out to twenty

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Speaker 2: thirty again five years from now, and you could do

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Speaker 2: it under three different scenarios pessimistic, optimistic, or business as usual.

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Speaker 2: We chose to do business as usual, and we did

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Speaker 2: it for metals and mining, power generation, and we also

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Speaker 2: did it for steel producers. And just to share insights

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Speaker 2: on that, we found that Spanish power company in Dessa

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Speaker 2: nearly seventy percent of its power plans could face high

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Speaker 2: or extremely high water stress in twenty thirty. Similarly, we

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Speaker 2: see Fresnillo where seventy percent of their metals and minds

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Speaker 2: are also in areas of high or extremely high water stress,

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Speaker 2: compared with you know, just fifty seven percent of bar

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Speaker 2: gold mines. And so this really is showing the risk

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Speaker 2: side of how you know, industry industries rely on water

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Speaker 2: for their cooling. You know, we're talking about power green

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Speaker 2: for production or for metals in mind extraction exposure to

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Speaker 2: water stress. So lack of access to water can really

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Speaker 2: be disruptive and huge risk to investors who are also

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Speaker 2: exposed to these companies.

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Speaker 1: And where are there still data gaps and what is

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Speaker 1: being done about it? At a regulatory level, or at

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Speaker 1: a corporate level, or at an investor level.

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Speaker 2: Great question. So in terms of data gaps, I do

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Speaker 2: have to say, while it's probably still early on or nascent,

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Speaker 2: in terms of having robust nature related data and water,

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Speaker 2: I do have to say there is sufficient data to

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Speaker 2: be able to make investment decisions and really draw out insights.

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Speaker 2: It would be great for more disclosure, you know, going

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Speaker 2: back to our financed water analysis, there were a lot

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Speaker 2: of limitations simply because of the fact that not all

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Speaker 2: banks are disclosing the purpose of their loans and for

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Speaker 2: their borrowers. Not all companies are disclosing their water consumption

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Speaker 2: or exposure to water stress, right, So that really falls

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Speaker 2: on just more more disclosure, more transparency. But water scarcity

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Speaker 2: is intensifying, the financial risks are already being fell and

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Speaker 2: companies are being forced to act. So I mentioned there's

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Speaker 2: enough data exists for investment decisions. We find that water

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Speaker 2: is deemed financially material for nearly half of Bloomberg's easy

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Speaker 2: scoring peer groups. This is forty seven industries out of

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Speaker 2: one hundred and six, you know, twenty twenty four A

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Speaker 2: loan has shown how urgent this is from record low

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Speaker 2: Rhne river levels, disrupting supply chains, to drought in Brazil,

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Speaker 2: driving food inflation. You know, these risks are already shaping markets.

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Speaker 2: Financial costs are driving action, right. I mentioned Constellation six

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Speaker 2: hundred and sixty million dollars right down, but they're not

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Speaker 2: all basfs. Two hundred and fifty million euro loss from

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Speaker 2: Ryan River disruptions is another example. Or Intel was one

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Speaker 2: of the companies whose Arizona expansion is facing water constraints.

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Speaker 2: And you mentioned policy well three ms ten billion dollars

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Speaker 2: in PFAS settlements. All show how water related risks are

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Speaker 2: materializing into real losses and how companies are being forced

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Speaker 2: to address these challenges, whether proactively or reactively. And we

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Speaker 2: were able to use a lot of this data to

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Speaker 2: be able to identify a company level like asset level

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Speaker 2: exposure and being able to really identify also those who

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Speaker 2: are taking action right like being able to adapt to

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Speaker 2: the such risks.

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Speaker 1: Right. This is the theory that has been for a

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Speaker 1: long time considered important that there are non financial metrics

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Speaker 1: that have financial impact on companies. It's not just carbon,

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Speaker 1: it's water, but it's so many other things, right, and

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Speaker 1: we're going through this period where these non financial metrics

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Speaker 1: which are broadly cossed under ESG Environmental social governance is

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Speaker 1: seeing a political backlash. You're seeing that in the US

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Speaker 1: with the presidency of Donald Trump, but even before Trump

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Speaker 1: came to power, there were all these Republicans going after

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Speaker 1: investors to try and get them to not invest on

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Speaker 1: ESG criteria. Then you're seeing some of the ramifications show

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Speaker 1: up in Europe. We ran a recent episode on Zero

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Speaker 1: looking at how the ESG backlash is causing Europe, which

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Speaker 1: is a leader in rule making on ESG, to start

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Speaker 1: to undo some of them to try and please investors,

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Speaker 1: but also try and manage the relations across the Atlantic. So,

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Speaker 1: if water is so important, and we know COO two

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Speaker 1: is so important, how are you seeing investors think about

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Speaker 1: ESG in this moment and start to actually still take

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Speaker 1: the decisions that are necessary for investments, but perhaps do

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Speaker 1: it in a way where they're not advertising to the world.

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Speaker 2: Yes, great question and very time. To your point, I mean, look,

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Speaker 2: the backlash against is she investing. Yes, it's led to

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Speaker 2: increased scrutiny on climate related disclosures, for example, some sustainability initiatives.

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Speaker 2: But to your point, you know, when it comes to

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Speaker 2: issues like water, especially in this report, we're really talking

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Speaker 2: about a financially material issue that companies and investors cannot

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Speaker 2: afford to ignore. This isn't about ideology, It's about economics, right,

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Speaker 2: Like global GDPs at risk, and we have real world

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Speaker 2: examples of companies already facing operational shutdowns, rising costs, stranded assets,

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Speaker 2: all due to water stress, water scarcity, drought and what

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Speaker 2: have you. And the number of incidents. It's not just

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Speaker 2: increasing but intensifying, right, meaning companies and investors will have

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Speaker 2: to deal with these risks, whether or not is she

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Speaker 2: is politically popular if you will yes. At the same time,

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Speaker 2: policies uncertainty is a risks you know you mentioned and

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Speaker 2: you're up some of the undoing of some rules well

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Speaker 2: you know here in the US, particularly under the Trump administration,

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Speaker 2: which has signaled the rollback of environmental regulations. I can

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Speaker 2: give an example, right the EPA's new PFAZ Drinking Water rule,

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Speaker 2: So it requires utilities and companies to meet strict contamination

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Speaker 2: limits for forever chemicals to give background, the role will

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Speaker 2: cost US businesses and utilities around one point five billion

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Speaker 2: dollars annually with significant compliance and litigation risks for companies

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Speaker 2: like three m which I mentioned earlier, DuPont Keymores. You

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Speaker 2: know they've already settled over eleven billion dollars in PFAS

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Speaker 2: related lawsuits. And if the role is rolled back, which

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Speaker 2: I do think likely, but you know, if it is

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Speaker 2: even weakened, it could shift financial liabilities from regulated companies

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Speaker 2: back onto local governments and taxpayers, but increasing uncertainty for

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Speaker 2: businesses really trying to manage long term water risks.

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Speaker 1: This is very insightful. Thank you so much for this

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Speaker 1: report on motor scarcity, and thank you for coming on

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Speaker 1: the show.

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Speaker 2: Yeah, my pleasure.

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Speaker 1: Thank you for listening to Zero. And now for the

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