SRI: Water shortage a significant threat for China’s economic growth

28th January 2011

A little-explored side effect of China's economic growth is an increased demand for water. A new white paper from Schroders suggests that the Chinese government's response to the water shortage could have serious consequences for the strength or weakness of its long-term economic development.

China's growth is straining already limited water supplies. Creaking infrastructure also means that it uses water inefficiently. In the coming years, this may decrease China's internally-produced food supplies and create even greater pressure on global agriculture.

Although global food shortages and soaring agricultural prices have been higher up the international agenda in 2010, water shortages are a significant long-term threat. The problem was brought to the attention of investors when the giant Norwegian sovereign wealth fund – one of the biggest investors in the world – said in 2009 it would require that all the relevant companies in which it was invested had a long-term strategy for dealing with water shortages.

The SRI team at the Norwegian fund believes that access to water could differentiate between the winning and losing companies of the next generation.

In this Reuters article, British scientist John Beddington highlights some of the contributing factors to water shortages. In many cases it is the same things that are contributing to soaring agricultural prices: Climate change is disrupting rainfall patterns, creating both droughts and floods and weakening the supply of fresh water. At the same time, population growth and urbanisation is creating increased demand.

Investment groups are seeing this as both a risk and an opportunity. As the Norwegian sovereign wealth fund has done, pension funds and other long-term investors are increasingly factoring it into their risk assessment and monitoring often as part of wider SRI programmes.

There are also investment opportunities. For example, the Schroders white paper talks about the need for better infrastructure for the collection and distribution of water. There will be companies that are significant beneficiaries of this demand. Groups such as Pictet and Thames River have dedicated funds in this area and a number of specialist investment trusts have also emerged over the past couple of years. It is also an increasing part of broader SRI and Agriculture funds.

There have been apocalyptic suggestions that the next generation will fight wars over water. This may be stretching credibility, but it is certainly a problem that needs to be addressed. Just as the crisis in agriculture has created a requirement for investment capital and therefore opportunities for investors, the water crisis is likely to do the same. It will certainly be a vital risk management measure in future.

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