Lloyd’s Warns of ‘Increasing Stress’ on Water Resources

December 7, 2010

“Water scarcity is a pressing problem around the world – and not just in countries that have an arid climate,” warned Lloyd’s in its latest 360 Risk Insight report.

“Water is a critical resource in mature economies, as a commodity for industrial processes and a coolant in energy production as well as for household use. But water systems that have been taken for granted since the industrial revolution are coming under increasing stress from a combination of intensive use and climate change.”

Dr Celine Herweijer, director in the sustainability and climate change team at PricewaterhouseCoopers, explained that too often businesses base future decisions on past availability of water supply. “We know that is incorrect,” she stated, “as alongside the stresses on water resources from growing populations, industrialization, regulatory changes and land-use change, climate change will affect the availability and quality of water, with negative implications in some regions and positive in others. Investors and businesses currently lack a framework to identify, plan for and adapt to water-related risks.”

The implications of water scarcity are beginning to be felt all along the economic chain. Lloyd’s selected the U.S. as an example, noting that “water stress is so acute in some parts of the country that institutional investors are being warned about the financial risks it poses to them.

In a recent report Ceres, the investor coalition, and Water Asset Management, the global equity investor, warned investors who buy water and electric utility bonds that finance much of the country’s vast water and power infrastructure that “some of the nation’s largest public utilities may face moderate to severe water supply shortfalls in the coming years. Yet these risks are not reflected in the pricing or disclosure of bonds that finance the infrastructure projects.”

Mindy Lubber, president of Ceres, pointed out: “Water scarcity is a growing risk to many public utilities across the country and investors owning utility bonds don’t even know it. Utilities rely on water to repay their bond debts. If water supplies run short, utility revenues potentially fall, which means less money to pay off their bonds. Our report makes clear that this risk scenario is a distinct possibility for utilities in water-stressed regions and bond investors should be aware of it.”

The U.S. isn’t the only country facing a scarcity of water. Europe is also facing a crisis, with “greater efforts needed to stop and reverse the over-exploitation of limited water resources in certain countries.”

Lloyd’s cited a new report from the European Commission on the progress of member states in addressing water scarcity. Some EU members have “begun to suffer permanent scarcity across the whole country.” Nor is the problem is limited to hot Mediterranean countries: France and Belgium have both reported over-exploited aquifers and the Czech Republic has areas with frequent water scarcity, according to the report.

As a result, the Commission has launched a number of preparatory activities in advance of a 2012 water scarcity and droughts policy review. The results will feed into the 2012 Blueprint to Safeguard EU Waters, together with a review of the implementation of the Water Framework Directive.

About 11 percent of total freshwater abstracted across Europe is used by manufacturing industries, with about half used for cooling and half for processing. Water abstracted for energy production accounts for 44 percent of total freshwater abstraction but very little of this water is consumed in the process.

Among the awareness raising initiatives suggested by the EC is a system of labeling that will let consumers see how much water was used in making a product.

Source: Lloyd’s of London

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