Water Risk in Supply Chains: A Rising Priority for ESG-Focused Investors

As climate change and population pressures intensify globally, water is emerging as a material investment risk. Water risk in corporate supply chains is no longer a peripheral concern for ESG-oriented financial institutions. Recent events, such as shipping restrictions through the Panama Canal due to record-breaking drought and operational disruptions for manufacturing firms in Taiwan and Arizona due to urban water shortages, highlight that water risk is a central driver of long-term value and a core element of risk management.¹

Water risk is financial risk. According to the CDP, the financial services sector alone faces over $300 billion in potential business value at risk from water-related issues in the coming years. It could be persistent drought in California, flooding in Southeast Asia, or depleted groundwater levels in India, but multinational firms with complex supply networks are vulnerable to any disruption related to water availability, pollution, or regulation. A significant portion of these exposures are not within direct operations; they are hidden in agricultural or manufacturing supply chains, impacting key financial metrics like revenue at risk, increased capital expenditures, and higher costs of goods sold.

UN statistics reveal that agriculture consumes about 70 percent of the world’s freshwater.² This renders agribusiness and food supply chains especially susceptible. However, they are not alone. The mining, semiconductor, apparel, and beverage industries all heavily depend on water. Investors now perceive water risk as a systemic problem, particularly in water-stressed areas with weak governance.

A report by the World Economic Forum (WEF) has continually listed water crises as one of the top five global risks by impact. Yet, the majority of financial institutions have not adequately incorporated water metrics into their existing ESG risk models.³

Read more: Investing in Water: A Critical Opportunity for Sustainability

One of the biggest obstacles is that most water-related risks exist outside corporate boundaries, in Tier 2 and Tier 3 suppliers.

The PRI stresses that firms only report on water usage in their immediate activities. This overlooks the greatest risks, such as agriculture in low-rainfall regions or procurement in places with unclean or contested water.

For example, the water footprint of a T-shirt begins in water-scarce areas in India or China, where irrigation and dyeing of cotton are of concern. Similarly, coffee, largely produced in Latin America and East Africa, is under strain from water scarcity, deforestation-related loss of rain, and fertilizer runoff contamination. To illustrate, consider an apparel company’s supply chain: the brand (Tier 1) sources finished garments from a factory (Tier 2), which in turn buys cotton from a farm (Tier 3) in a water-stressed basin. A drought at that farm could halt production for the entire supply chain, regardless of the Tier 1 company’s own water management practices.^{<a href="4}

While many investors now recognize water as a material risk, engaging companies effectively remains difficult. The PRI’s work with institutional investors has identified several barriers:

• Lack of supply chain transparency: It’s difficult to trace water use beyond direct suppliers, especially in fragmented agricultural chains.
• Weak internal awareness: ESG teams struggle to convince CFOs or boards that water risk is financially material.
• Limited influence: Companies often claim water is “out of their control” if it lies with growers or third-party vendors.
• Complexity of context: Water risk varies drastically across basins, making global benchmarking difficult.

These challenges make it clear that ad hoc engagement is no longer sufficient. A more structured investor framework is needed.

A growing infrastructure exists for investors seeking to quantify and mitigate water risk:

• PRI-WWF Investor Water Toolkit: A practical guide for integrating water into portfolio analysis, stewardship, and decision-making.
• Ceres Aqua Gauge: Assesses corporate water management across governance, strategy, risk assessment, and performance.
• Valuing Water Finance Initiative: Helps investors push companies to align with six core water stewardship expectations.
• CDP Water Security: Enables company-level disclosure and benchmarking on water use and risks.
• WRI Aqueduct: Maps physical water risk globally to help identify investment vulnerabilities.

These tools allow investors to identify hotspots, engage companies with better data, and prioritize action where risk is most acute.

Water risk is no longer theoretical—it’s appearing in earnings and investment theses.

PepsiCo has committed to a “net-positive water impact” by 2030, focusing on watershed restoration and reuse in water-stressed markets like Guatemala and Arizona. Its approach includes replenishing 100% of the water it consumes in manufacturing operations.⁵

Intel and TSMC, two of the most water-intensive chipmakers, are investing in closed-loop water systems and wastewater recycling at scale, reducing dependence on vulnerable municipal sources.⁶

Kering, the luxury group behind Gucci, launched the industry’s first dedicated water strategy, aiming to be water-positive by 2050. Their approach includes regenerative cotton sourcing and watershed restoration programs.⁷

Investor action is also scaling. According to Ceres, more than 90 global investors, representing $16 trillion in AUM, are participating in water-focused initiatives that target corporate supply chains.

Read more:Circular Economy: Transforming Supply Chains Through Sustainable Innovation

How can financial institutions go beyond awareness and make water risk a core part of ESG investing?

• Map Exposure Across Portfolios: Identify which holdings are in high water-use sectors (agriculture, apparel, mining, etc.) and located in water-stressed regions.
• Embed Water in ESG Ratings & Analysis: Explicitly include basin-level water risk in ESG scores and risk registers, tying it to potential revenue and profitability impacts.
• Use Scenario Analysis: Model the impacts of future water stress, flooding, or regulatory changes on key business metrics like capital expenditures and production volume, especially in agriculture and manufacturing.
• Engage Systematically: Focus on companies that score poorly in CDP Water Security or WRI Aqueduct assessments. Ask for location-specific supplier data, targets, and action plans.
• Support Collective Initiatives: Join investor-led groups that advocate for stronger water governance and transparency.

Beyond risk mitigation, water stewardship presents investment opportunities in efficiency, reuse, and infrastructure:

• The water technology market including treatment, reuse, and monitoring is expected to reach $797 billion by 2030, according to Bluefield Research.⁸
• ESG-themed funds are beginning to allocate capital to companies with innovative water-saving technologies or circular systems.

Being ahead on water means more than avoiding losses, it could mean finding the next wave of sustainable growth.

Water risk has long been a niche environmental issue. However, as the effects of climate change intensify, water is set to become an increasingly material factor influencing both investment risk and opportunity.

When financial institutions incorporate water risk into their supply chains and decision-making processes and back it with action, they will be able to capitalize more effectively and contribute to systemic resilience. The future of ESG investing requires a holistic approach that integrates water security, supply chain transparency, and operational resilience.