Water Scarcity Part 1: Cause and Casualty

This Spotlight article — the first in a three-part series — considers the key drivers of water scarcity and its direct and indirect impact on business and society.

Executive summary

Humans have successfully harnessed many of the world's natural waterways for millennia, for irrigation and to support the growth of civilizations. But today, many of these vital water tables, rivers, lakes, and aquifers are drying up.

Demand for water is projected to outstrip supply by 40% by 2030, driven by macrotrends such as population growth, urbanization and climate change.

The tussle over rights to water is particularly acute in developing nations where supplies are finite.

Many industries are vulnerable to water scarcity, while also directly contributing to the depletion of freshwater resources.

Building resilience will require sustainable water management approaches, strategic partnerships and investment.

Insights

• Demand for water is set to outstrip supply by 40% by 2030.¹ Population growth, urbanization and climate change are among the drivers.
• Currently, water scarcity and poor sanitation cost the global economy $260 billion a year.²
• Many industry sectors are vulnerable to water stress, while also directly contributing to the depletion of freshwater resources.
• The tussle over rights to channel water away from communities to agriculture and construction projects is a growing source of social unrest.
• It's not just drought-prone regions that are waking up to the realities of water scarcity. There are implications across the value chain that impact an organization's total water footprint.
• Building resilience will require sustainable water management approaches, strategic partnerships and investment.

Waiting for monsoon

It's March in Bengaluru, and many trees lining the thronging highway that links Kempegowda International Airport to the central business district are dusty and brown in the dry 35°C (95°F) heat. The local government is urging migrant workers to leave the city and residents to use water sparingly to alleviate the drinking water crisis.

The once lush garden city faces a severe and prolonged drought, exacerbated by a weak monsoon in 2023. All around are signs of a construction boom, which is reducing Bengaluru's ability to replenish its water table. Last year, farmers took part in a number of strikes over access to water from the Cauvery River system and its reservoirs, which are experiencing a five-year low.

The strain is palpable. A population of over 14 million, continued urbanization and crop cultivation in Karnataka and neighboring Tamil Nadu are all competing for one essential resource: Water.

Water scarcity is a global crisis impacting communities, businesses and supply chains. In some regions, the pressures are so great they are creating energy blackouts and involuntary migration, and spilling over into social unrest.

"In parts of North Africa, there have been a number of consecutive drought years, which we have never seen before," says Antoine Bavandi, executive director, head of Public/Private Solutions, Gallagher Re.

"It's such an extreme and prolonged drought the consequences are disrupting the entire economy, including many livelihoods within the agricultural sector. The little water that is still available is being diverted from irrigated agriculture to urban centers, resulting in waves of migration."

Water stress: How did we get here?

Humans have successfully harnessed many of the world's natural waterways for millennia. Ancient Egyptians and Romans successfully used sophisticated irrigation and aqueducts to support the growth of civilizations. But today, many valuable water tables, rivers, lakes and aquifers are drying up.

According to the United Nations (UN), demand for water is projected to outstrip supply by 40% by 2030.³ It warns that macro trends, such as population growth, urbanization and climate change, are contributing to severe water stress.

Currently, water scarcity and poor sanitation cost the global economy an estimated $260 billion a year.⁴

The El Nino effect

Many parts of the world are experiencing more frequent and extreme heatwaves and droughts because of the climate crisis. Natural cycles, such as El Nino, are further contributing to climate extremes.

In Mexico City, officials warn that Day Zero could be looming, when the water system can no longer support its 22 million residents, forcing individuals to queue for rations. Day Zero could come as soon as June 26, 2024 and last until September 2024, as many parts of the country suffer extreme drought.⁵

"You are always going to have these pendulum swings between El Nino and La Nina phases," says Steve Bowen, chief science officer at Gallagher Re. "Taking this into account, we can expect more extreme weather events in the future due to climate change. This has implications for food availability, harvests, shipping channels and overall circulation patterns."

"Climate risk goes much deeper than the surface," he adds. "The downstream implications can be significant and lead to difficulties from a humanitarian standpoint."

According to Gallagher Re, below-average rainfall has worsened drought conditions in many parts of the world over the past 12 months — including the highly vulnerable regions of south-central Africa last year, where there was an ongoing crisis for local communities.⁶

In Asia, exceptional drought conditions were observed in Vietnam, Cambodia and Laos, with saltwater intrusion in the Mekong Delta contaminating the water supplies that communities and farmers rely upon in these countries.

Freshwater contamination

Pollution contributes to water stress by rendering freshwater supplies unsafe and unusable. Around 80% of wastewater globally is estimated to be discharged without being treated and/or reused, a figure that rises to 90% in developing countries.⁷

Rapid urbanization and the intensification of farming are among the practices contaminating waterways and aggravating water scarcity issues.⁸ Meanwhile, saltwater intrusion into rivers and groundwater is becoming more commonplace due to changes in rainfall patterns and the increased frequency and severity of droughts.

Last summer, a state of emergency was declared in New Orleans, Louisiana, as saltwater from the Gulf of Mexico made its way up the Mississippi towards the southern US city.⁹ As river levels dropped, seawater moved upstream, threatening the city's main source of fresh drinking water.

Industries adapt to new normal of water stress

Many industry sectors are vulnerable to water stress while also directly contributing to the depletion of freshwater resources.

It's not just drought-prone regions that are waking up to the realities of water scarcity. There are implications across the value chain — encompassing raw materials, suppliers, direct operations and product use — which impact an organization's total water footprint.

Among the top exposures to industries as a result of water stress are:

• Business interruption, contingent business interruption and supply chain disruption;
• Environmental liability;
• Social unrest and geopolitical risk;
• Inflation and higher operational costs;
• Reputation and brand risk; and
• Stakeholder and regulatory pressures.

"I've worked with a number of manufacturers which rely upon the availability of water for their production," says Hugh Morris, Risk Management Consultant team leader, Risk Management Solutions, Gallagher UK.

"We have seen companies install large water tanks so that they do have some contingency, if there is a mains break, for instance. It's one of those issues where companies have to think about how they keep their facilities operational if there isn't a reliable supply of water," he adds.

"It's impractical for companies with a heavy reliance on process water to just tanker it in, because of the volume required in any sort of manufacturing process and the costs involved. With boreholes and natural springs, the water table may drop and then that becomes an issue."

The UK experienced one of its wettest winters on record in 2023/2024, yet some local councils are warning of water use restrictions come the summer.¹⁰

The combination of hotter, drier summers, pollution and the inability to capture excess water during wetter months due to chronic underinvestment in wastewater infrastructure are some of the factors at play.

To increase resilience in the face of a changing climate, the UK Environment Agency is proposing the development of desalination schemes, in addition to reservoirs and water recycling schemes, over the next 25 years. Without it, the country risks facing a shortfall of five billion liters of water per day by 2050.¹¹

Ripples across the supply chain

There are direct and indirect impacts to businesses arising from water shortages. Some of the secondary challenges relating to water shortages include disruptions to supply chains, heightened energy and food insecurity and higher operational costs.

In some parts of the world, including Brazil and China, energy blackouts have become more prevalent during years of drought. As reservoirs dry up, hydroelectricity plants are unable to operate.

"A lot of UK businesses have products, components and materials supplied from elsewhere in the world," says Morris of Gallagher UK. "We've started to see those organizations looking a little bit more carefully at their supply chain in terms of the global issues that could impact their suppliers."

He continues, "It's important not just to think about who your suppliers are from the point of view of their financial viability, quality control and exposure to natural perils, for instance, but also if they will continue to be viable if there are water scarcity problems."

In a world of growing climate extremes, too little and too much water can disrupt global trade. During the first quarter of 2024, drought caused marine bottlenecks in the Panama Canal, as record low water levels resulting in restrictions on daily crossings.¹²

Too much water can also be an issue for transportation and logistics, resulting in floods and river currents that are too strong for vessels to navigate safely.

"This variability in water availability has implications for supply chains, energy delivery, health and other areas," says Gallagher Re's Bowen. "It can lead to higher inflation and increased costs for labor supply. Climate risk affects various sectors and has cyclical effects. It puts financial pressure on businesses and that gets passed down to consumers."

The politics of water

A single issue rarely causes political instability; however, water scarcity can be a contributing factor. As water stress becomes more prevalent, businesses are likely to see more disruption. Community strikes in Bengaluru last year are just one example.

The tussle over rights to channel water towards construction and urban projects remains controversial. This tension is particularly acute in developing nations where water supplies are finite and the needs of communities aren't always a priority.

"There are so many issues around industry and land use, where we are seeing population growth, and there is a significant risk of not having enough drinking water," notes Bowen.

In water-stressed regions, disputes over access to water have even given rise to interstate conflicts. In the Middle East, just 1% of the world's freshwater is shared among 5% of the global population, with long-standing disputes stemming from access rights to the Euphrates and Tigris rivers.¹³

The World Economic Forum warns that "intensifying competition for resources could spark disputes over dwindling freshwater sources" on a domestic level, while internationally, "changes to agricultural production and water availability could alter global trade patterns and alliances." ¹⁴

Conclusion: Time to decouple

Based on current trends, governments will need to spend $200 billion a year to meet the water needs of society and industry. However, most countries have a mixed track record in managing their water resources.

The UN Environment Programme warns that more must be done to decouple water use from economic growth to stave off the looming crisis.¹⁵ In this context, decoupling means reducing the use of water per unit of economic activity.

There are a number of strategies for reducing water use in heavy industry. In sectors such as energy and manufacturing, for instance, more efficient use of water in heating and cooling processes and in the transportation of goods can make a big difference to an organization's water footprint.

In part 2 of the series, we will look in more depth at the impact of water scarcity across five key industry sectors. Part 3 considers the essential role of risk mitigation and insurance solutions as businesses adapt to the new normal and build resilience for the future.

Published May 2024