Global droughts: the price of water does not reflect its real value

If water is priced wrongly, it will be valued wrongly. Widespread droughts are energising that proposition. Water is a new front in ESG investment, even as a battle rages over carbon. The Valuing Water Finance Initiative, an investor grouping, plans to scrutinise water-glugging corporates such as Nestlé, Chiquita and Levi Strauss.

Moves may follow to allocate water better via trading schemes. But these will fail if they ignore elementary differences between carbon dioxide and H2O. The gas adds to a global excess. The liquid is prone to local shortages, however widespread.

Property rights, essential for competitive markets, are often non-existent for water. There may be moral objections to assigning them. Pricing policies must recognise access is a human right. Shanty towns should not lose out to golf courses.

To be sure, there are successful examples of schemes where users buy and sell surplus water. Water trading is well-established, though controversial, in Australia’s Murray-Darling Basin. This has evolved into a market with an annual average value of more than $1.8bn.

Trading schemes are hard to establish partly because water is generally undervalued. Analysts at Barclays say the “true cost” is three to five times more than the price companies pay at present.

Headline participants in the VWFI include Franklin Templeton and some big retirement funds. They want companies to pay closer attention to water risks. These are exemplified by Constellation Brands taking a $666mn impairment for suspending a Mexican brewery project amid disputes over water rights.

Dwindling supplies will strand some assets, as faltering power from Yangtze hydro plants implies. Non-profit organisation CDP estimates $15.5bn is at risk.

Carbon pricing and accounting are in their unregulated infancy. Water pricing and accounting will be trickier and even more controversial. But governments, businesses and investors must embrace both. When humans do not assign monetary value to natural resources, they waste them.

The Lex team is interested in hearing more from readers. Please tell us what you think of the challenge of water resource allocation in the comments section below