Gallagher Global Open

    July 2024

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    Water scarcity is a global crisis impacting communities, businesses and supply chains around the world. It's exacerbated by macro trends, such as climate change and population growth.

    Demand for water is set to outstrip supply by 40% by 2030 if economies are unable to "decouple" water use from economic growth.1

    For industries with a heavy reliance on water for cooling, manufacturing and irrigation, this presents a significant challenge. It requires innovation, careful resource management and contingency planning for extreme scenarios.

    The second of a three-part series, this Spotlight article looks at how four water-intensive industries sectors are both causes and casualties of water stress. It considers how they're adapting in the face of rising water insecurity and stakeholder pressure.

    Map showing regions that will be water stressed by 2050

    Agriculture: More efficient irrigation

    For over 2,000 years, water has been an essential resource for agricultural production and food security. According to the UN Food and Agriculture Organization (FAO), "agriculture is both a major cause and casualty of water scarcity," accounting for almost 70% of all freshwater withdrawals (rising to 95% in some developing countries).2

    Water availability plays an essential role in food production, but freshwater supplies are dwindling across many "food bowl" regions. There are more frequent weather extremes beyond normal seasonal variability, impacting the growing season.

    Extremely hot and dry summers across North America, Europe and Asia during 2023 caused poor harvests, with cocoa, olive oil, rice, potatoes and soybeans among the crops impacted.

    Distribution is also an issue. At the time of writing, Paraguay was on track for a record soy crop harvest, but the country's ability to distribute its grain remained uncertain. Drought conditions in central-west Brazil were impacting water levels in the critical Paraguay-Parana waterway, slowing exports along this important trading route.

    Meanwhile, the rise of agribusiness, a changing diet and population growth are factors further increasing demand for water-intensive agriculture.

    Farming methods can help alleviate water stresses moving forward, with drought-resilient crops, crop rotation, mulch and organic fertilizers increasing crop yields and preserving soil quality, all while using less water. But more innovation is needed.

    Across water-stressed countries, the use of solar-powered irrigation pumps is taking off. However, the technology has longer-term sustainability implications.

    "I'm in Nebraska, where a primary source of water for agriculture is the underground aquifer," says Mike Keenan, Senior Risk Control Consultant of Gallagher's National Risk Control (NRC) group. "Depletion of this aquifer due to various uses, including agriculture, poses a threat to crop production.

    "To conserve water, advanced computerized irrigation systems are utilized to prevent unnecessary water usage after insufficient rainfall."

    Too much water is also an issue. "In the region where I work and where my clients are located, we have been contending with drought for about a decade," continues Keenan. "However, this spring has brought a complete reversal. We received 5 inches of rain in just a couple of hours. The situation can change rapidly from too much to too little or vice versa.

    "This has immediate implications, but there are also longer-term considerations. When our agricultural producers plan their development and expansion, they need to consider if there are enough water resources not only for their current needs but also for the projections five or 10 years down the line."

    Manufacturing: Recapturing wastewater

    Staying with the global foodbowl, 77% of food companies recognize that water is a significant and growing risk to their business financial statements. As a result, one-third of food and drink manufacturers now expect their board and senior executives to prioritize water risk management.3

    According to Keenan, dairy producers in drought-prone Midwest states are exploring novel ways to recycle the water they use. "The feedstock cows have to drink a lot of water to produce milk, but at the same time, clients know they have to reuse that water because it's not a throwaway commodity.

    "One client, for instance, has a skim milk plant, and they are looking to reuse the water they remove from the milk — to make the powder — and feed it back to the cows. This way, up to 90% of the water can be recaptured, but there's a lot of engineering that has to happen for that to work."

    Another industry with a sizable water footprint is electronics. Taiwan currently produces over 60% of the world's semiconductors, with water playing an integral role in the chip manufacturing process.

    The industry as a whole consumes almost as much water in a single year as the whole of New York City. It is a factor S&P flags as a threat to the sector, warning that "mishandling of such a risk could hit a chipmaker's operations and creditworthiness."4

    During a drought in 2021, Taiwan's foundries were forced to truck in additional water. Taiwan Semiconductor Manufacturing Company (which uses over 150,000 tons of water a day) responded by investing in water recycling facilities to reduce vulnerability to future droughts.5

    Other innovations can significantly reduce water consumption in manufacturing. Small machine parts, such as nozzles and sprayers, can significantly reduce water consumption. Sensors and meters, meanwhile, allow for better control over water use, optimize processes and reduce waste.

    Energy: Keeping the lights on

    Some water-stressed countries also have the highest concentrations of oil and gas activity. The Middle East region is the world's leading exporter of crude oil and natural gas, yet across the Middle East and North Africa (MENA) region, just 1% of the world's freshwater supplies are shared among 5% of the global population.

    Many forms of energy production, such as thermal power plants and hydroelectricity, require significant amounts of water for the cooling processes. As economies diversify away from oil and gas and into renewables, concentrating solar-thermal power (CSP) plants also have a large water footprint.

    Globally, energy production consumes approximately 52 billion cubic meters of freshwater each year. In the US, energy accounts for around 40% of both total and freshwater water withdrawals, a factor that is coming under growing scrutiny.

    Water is critical to energy security. In 2022, Russia's invasion of Ukraine heightened concerns across Europe about the effect this would have on energy supplies across the continent. The invasion was followed by a summer-long drought, with power generation at hydropower facilities in Italy and Spain down by 40% and 44%, respectively.6

    Companies in the sector are adopting better water management practices, such as reusing wastewater. Broader solutions may lie in the transition to renewables, including solar and wind, but renewable sources of power generation are also water intensive.

    Within CSP, firms are looking to reduce waste by introducing more efficiency to the cooling process. In parts of the MENA region, producers are investing in desalination, turning brackish water into potable water that can be used within CSP facilities.

    Advances in technology, such as desalination, offer potential solutions to mitigate water scarcity challenges, but are just one part of the solution. Solar may prove to be a more feasible option for desalination moving forward, which researchers have shown is 20% cheaper than traditional methods and can be deployed in more rural areas.7

    Technology: The data center challenge

    The rapid adoption of cloud technology and generative AI are two factors behind the explosive growth in demand for data centers and servers. This requires water and cooling systems, with the overall global cooling market expected to grow to $9 billion by 2027.

    Around the world, the resources needed to support data centers are becoming increasingly contentious. Water consumption from data centers has risen by 60% in just the last four years, and electricity consumption is likely to double by 2026, according to the International Energy Association (IEA). It warns that improvements in efficiency will be crucial to meeting the surge in demand.8

    In Lagos, Nigeria, a shallow water table, intrusion of saltwater into groundwater sources, continued population growth and urban sprawl continue to put stress on the megacity's freshwater supplies. This has been exacerbated by the growing water footprint of data centers located just outside the city.

    Water demand is expected to almost quadruple by 2030 across Sub-Saharan Africa. At the same time, the region is becoming a hub for data center investment. While tech companies are expected to report on their carbon footprint, there are currently no similar requirements to provide data on water footprints and how this is being managed.

    In the US, which has about 25% of the world's data centers, a mid-sized data center consumes around 300,000 gallons of water each day. Tech giants such as Microsoft, Amazon and Google have been working on water replenishment to offset their consumption, but there's a long way to go.9

    Other solutions include the use of alternative sources of water and constructing new facilities in colder climates (where it is easier to maintain equipment temperatures without excessive use of water).

    Innovations in water risk management

    Water shortages will continue to challenge business and society. The situation is becoming more pronounced in many regions due to population growth, climate extremes, and overexploitation by industry. Water stress brings secondary impacts, such as food insecurity and the risk of wildfires.

    Moving forward, water availability is likely to continue to shape the future of global trade and international alliances.

    Taking a sustainable approach to water management is not just the right thing to do; it's critical to building resilience and avoiding major global shocks. According to the UN Environment Programme (UNEP), "no single policy or set of practices" will successfully tackle water scarcity. It calls for holistic water management plans across every stage of the water cycle. Specifically, it recommends:

    • Investing more in research and development to improve technology that reduces water waste
    • Building sustainable infrastructure to improve the efficiency of water use and eliminate water contamination and pollution
    • Introducing policies to curb water demand and re-allocate water to sectors that best serve society while ensuring vulnerable groups are protected
    • Strengthening research into the value of the ecosystem services and water to human welfare and economic development
    • Doing more to assess "virtual water" (water used to manufacture goods that are traded internationally), water footprints, and related impacts

    Taking action on all these steps will help to decouple water use from economic growth. Ultimately, water scarcity has to be considered alongside wider sustainability imperatives, thinks Steve Bowen, Chief Science Officer at Gallagher Re.

    "From a protection and risk mitigation standpoint, investing in biodiversity and natural resources is very important. It's going to be really hard in some cases to actually reintroduce some of the ecological advantages that nature provided for centuries before humans came in and disrupted that.

    "Society and the private sector have had to make adjustments on the fly to be able to withstand the changes that are already very evident today, and frankly, they're only going to accelerate more in the future if we don't start to reduce our carbon footprints."

    In part 3 of the series, we will look at the essential role of risk mitigation and insurance solutions as businesses adapt to the new normal of water stress and build resilience for the future. Part 1 of the series, "Water Scarcity Part 1: Cause and Casualty," considers the key drives of water scarcity and its direct and indirect impact on business and society.


    Disclaimer

    CONDITIONS AND LIMITATIONS Gallagher's global operations, including a network of correspondent brokers and consultants, offers client-service capabilities in more than 130 countries around the world. This report and supporting information is not intended to provide legal or financial advice and reflects our understanding as of June 2024. It should not be regarded as a comprehensive statement of the law and/or market practice in the regions covered. You should not act upon information in this publication nor determine not to act, without first seeking specific legal and/or specialist insurance and risk management expertise. Should you require advice about your specific insurance arrangements or claim circumstances, please contact your Gallagher account representative.

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