Sustainability is going to be more important to large companies as a result of Covid-19, according to new research.
Over 70% of companies interviewed for the research commissioned by the Carbon Trust said environmental management and/or sustainability priorities are likely to become ‘somewhat more important’ or ‘significantly more important’ for them as a result of Covid-19.
Even those companies that have been significantly impacted by the pandemic still believe sustainability is going to become more important. Of those experiencing significant disruption, 69% expect environmental management and/or sustainability to become ‘somewhat’ or ‘significantly more important’.
The Carbon Trust commissioned B2B International to undertake the ‘Corporate attitudes towards sustainability’ research for a second year. It conducted 453 interviews with large companies (minimum 1,000 employees and over a quarter with more than 5,000 employees) in the following countries: Germany, France, Mexico, Singapore, Spain, and the UK.
The research was undertaken in July of this year so does not reflect business confidence following more recent ‘second spikes’ in Europe especially, however our experience suggests that the findings are likely to still be accurate.
Business priority
Hugh Jones, Managing Directory, Advisory at the Carbon Trust commented: “The findings of this research are consistent with what we are seeing in the market.
Sustainability is rightly a growing business priority and the increasing demand for our services aimed at helping corporates to decarbonise and adapt for the future demonstrates that, despite extremely challenging market conditions, this is one area that businesses are continuing to prioritise.
“The global health crisis is perhaps elevating the need for action on risk in boardrooms globally, and the climate crisis presents risks that no business can afford to ignore.”
The global health crisis is perhaps elevating the need for action on risk in boardrooms globally, and the climate crisis presents risks that no business can afford to ignore.
Three quarters of organisations interviewed had been negatively impacted by Covid-19 – with 4% saying it represented an existential threat to their organisation from which they may not be able to recover, while 32% said they had been significantly impacted by the pandemic, with operations heavily impaired, or sales/revenue badly impacted.
The worst disruption was experienced in Spain but the impact was reasonably consistent across all geographies.
Large companies in Germany and Mexico are most likely to think their sustainability priorities will become more important as a result of the pandemic (82% and 79% of those interviewed in each country respectively) with sustainability covering the use of natural resources and the reduction of environmental impact across the organisation.
The sectors that are most optimistic about the growing importance of sustainability as a corporate priority are wholesale and retail, construction, engineering and mining, manufacturing, and healthcare. No matter what the sector, only around a third of companies expect there to be no change or that environmental management/sustainability will become less important.
Green recovery
Hugh Jones, Managing Directory, Advisory at the Carbon Trust added: “Organisations around the world are considering their role in delivering a green recovery – achieving net zero targets at the same time as fostering economic activity.
“We know from working with corporate clients on their net zero targets and strategies, that many will be leading the way when it comes to achieving green growth and these research findings support this. Without corporate commitment a green recovery will be challenging to deliver so the research is great news.”
Budgets for sustainability are also expected to increase as a result of Covid-19 – 63% of those interviewed said their budgets will get ‘significantly’ or ‘somewhat bigger’ and only 16% said they would be ‘somewhat smaller’.
Organisations around the world are considering their role in delivering a green recovery…
The majority of companies (74%) believe that sustainability will become more important to their customers as a result of Covid-19 – with almost a third saying it will become ‘significantly more important for their customers’ – and this is especially the case in Mexico (82%), Germany (81%) and Spain (79%).
This is the second year that the Carbon Trust has commissioned research on attitudes towards sustainability, although this year has seen the addition of companies from Singapore, Mexico and the UK to the research.
Compared to 2019, all trackable markets have seen environmental management/sustainability become more of a priority for organisations, especially in Germany.
More organisations also have dedicated sustainability professionals than in 2019 (39% in 2020 compared to 35% in 2019), although now half of companies say that this role is combined with other duties (up from 46% in 2019).
Decarbonization is becoming a higher priority. Here is how it can be done—and how much it might cost.
The power sector is undergoing a global transformation. Over the past decade, the costs of renewables have dropped substantially—solar power by as much as 80 percent and wind power by about 40 percent—making them economically competitive with conventional fuels, such as coal and natural gas, in the vast majority of global markets. As a result, renewables are growing fast: they accounted for the majority of new power-generation capacity in 2018. In most markets, they are now the least expensive option to add marginal capacity. In addition, renewables make up an essential element of any country’s plan to cut greenhouse-gas (GHG) emissions.
It is not possible to control when the sun shines or the wind blows, however. Therefore, 24/7 matching of the supply of wind and solar power to demand cannot occur the way that baseload-generating plants fueled by coal, natural gas, or nuclear power can. That creates a conundrum. Utilities, municipalities, states, and nations want low-cost, reliable electricity. Many have also set goals to decarbonize1 their power systems. How can they do both?
Few utilities or governments have yet compiled a detailed, quantitative pathway to decarbonizing the power sector substantially.
Flexibility—the ability to manage the intermittency of nondispatchable power, such as wind and solar power—is crucial to integrating significant levels of clean power. There are different ways to ensure the real-time matching of supply and demand.2 For example, gas and coal plants can adjust production up or down to smooth out fluctuations in the output of wind and solar power. Transmission lines can balance production across geographies. Well-designed incentives can encourage users to modify their consumption via demand-side management programs. Battery storage can act on the power system as both a generator when discharging and a consumption point (or “load”) when charging. These approaches all exist and have been well documented. Even so, few utilities or governments have yet compiled a detailed, quantitative pathway to decarbonizing the power sector substantially.
No two markets are identical. Even so, some principles apply widely, depending on the desired level of decarbonization. And in every decarbonization scenario, managing the intermittency of wind and solar power will be crucial. In this article, we describe, in general terms, how integrated power systems—across bulk-generation, transmission-and-distribution, and direct-customer offerings—can achieve up to 100 percent decarbonization by 20403 and the approximate costs.4 Then we consider possible pathways in four types of markets.5 Finally, we suggest how technological breakthroughs could affect these pathways.
On the basis of our research, we conclude that getting to 50 to 60 percent decarbonization is not that difficult technically and is often the most economic option. Getting from there to 90 percent decarbonization is generally technically feasible but sometimes costs more. And getting to 100 percent is likely to be difficult, both technically and economically.
Potential pathways
Reaching 50 to 60 percent decarbonization of the power system by 2040
In most markets, reaching 50 to 60 percent decarbonization can be done with little or no investment beyond that determined by purely rational economic behavior. The costs of solar and wind power and storage—three important elements in all deep-decarbonization scenarios—have fallen so far and so fast that decarbonizing is often the lowest-cost option.
Wind and solar power tend to be complementary, with wind blowing more strongly at night and in the winter, when solar energy is weaker.
The daily cycle of the sun fits well with midrange (four- to eight-hour) storage. The energy stored during the day can be released at night, ensuring a steady supply of power—thus, “solar-plus storage” (the same cannot be said of “wind-plus storage,” because wind is not as predictable). In fact, wind and solar power tend to be complementary, with wind blowing more strongly at night and in the winter, when solar energy is weaker. Markets that have both solar and wind resources are therefore better positioned to manage intermittency.
Achieving this level of decarbonization generally would not materially affect the performance of the power system. Almost all the power created would be used; we estimate curtailment6 of 2 to 5 percent. The utilization level—meaning the percentage of time a plant produces power—of individual fossil-fuel plants would also not be significantly affected, staying at 50 to 60 percent. Some of these assets would be retired, though, displaced as cheaper renewables come on line. Little to no new transmission would be needed. In short, the power system would not need to change much to get to 50 to 60 percent decarbonization.
Reaching 80 to 90 percent decarbonization of the power system by 2040
Getting to 80 to 90 percent decarbonization will generally be more expensive, more complicated,7 and require more market-specific actions. Although no new technologies are required, storage would have to be used for longer periods, and demand might need to be managed more tightly, including through active management of building heating and cooling and industrial-load shifting. Some markets may need new transmission interconnections to pool renewable assets and to share baseload resources across a larger geographic area.
At this level of decarbonization, the system would look noticeably different from how it looks now. We estimate curtailment of 7 to 10 percent because there is so much renewable power being produced to meet demand during lower-production periods. As renewables become more prominent, fossil-fuel plants are utilized less (20 to 35 percent), but many are kept available as backup to cover periods when renewables cannot meet demand.
Getting to 80 to 90 percent decarbonization will generally be more expensive, more complicated, and require more market-specific actions.
At the 80 to 90 percent level, the costs of decarbonization vary widely. In markets with above-average costs of power, there might be a modest decline (1 to 2 percent a year) in total system costs. Other, lower-cost markets might see increases.
Reaching 100 percent decarbonization of the power system by 2040
The path to 100 percent decarbonization gets even more complex, and the lowest-cost options will vary, depending on the market. Most geographies will need to rely on newer technologies to match supply and demand when wind- and solar-power production are depressed. While reaching this level is technically feasible, it could cost up to 25 percent more than the lowest-cost option.8 The path to complete decarbonization of the power sector is fundamentally about filling longer-duration gaps. Accordingly, the cost to decarbonize the last 10 percent of a power system could be significant.
Here are some existing technologies that could help markets close the gap and build a 100 percent decarbonized power system:
The path to complete decarbonization of the power sector is fundamentally about filling longer-duration gaps.
Biofuels. Biofuels, such as landfill gas and biomethane, are net-zero-carbon renewables. But they are expensive, and their supply is limited, so they can only serve as part of the solution, in most cases.
Carbon capture, use, and storage (CCUS). CCUS refers to capturing the GHG emissions produced by burning fossil fuels and then either using the CO2 for other processes, such as enhanced oil recovery, or storing it somewhere safe, such as in deep-rock formations. CCUS has been proven to work but is expensive. Reducing its cost will require finding and making technological improvements and achieving scale efficiencies. Moreover, CCUS cannot capture every carbon molecule, so other technologies will still be needed to get to 100 percent decarbonization. CCUS will likely work best in highly interconnected markets, where space for renewables is at a premium, clean power has value across a larger geography, and CCUS plants can be run at or near full utilization.
Bioenergy carbon capture and storage (BECCS). BECCS is a technology in which carbon-neutral biomass, such as wood pellets and agricultural waste, is burned for fuel, with capture or storage of the resulting CO2 emissions. The net result is negative emissions—meaning that the GHGs are removed from the atmosphere. It is not clear to what extent biomass can be scaled up, and the technology itself is relatively new. One advantage is that retired coal plants can be converted into BECCS plants, lowering capital costs and taking advantage of existing interconnections.
Power to gas to power (P2G2P). P2G2P technology involves using excess electricity to produce hydrogen that can be stored in the gas network and later converted into power again. The “clean gas” created through P2G2P technology enables storage of extremely long duration—weeks or even months. But it is also expensive and inefficient. Ten megawatt-hours of generated power in the beginning makes about three megawatt-hours of usable power by the time it is reconverted back to electricity for consumption. If there is demand for clean gas outside the power sector, however, the flexibility provided by P2G2P technology could go a long way toward integrating intermittent renewables.
Direct air capture (DAC). DAC separates CO2 from the air. It is another negative-emission technology that could be used to eliminate the last few percentage points of carbon-intensive power. The technology has been demonstrated but tremendous amounts of energy are needed to capture, separate, and then sequester the CO2. And doing so is very expensive. Therefore, our findings generally suggest it is not part of the solution for 100 percent decarbonization.
Compared with the scenario for 80 to 90 percent decarbonization, fossil-fuel-plant utilization would need to fall sharply (down to 4 to 6 percent) to decarbonize the power sector entirely. Each market would also need to net its carbon emissions, likely via biofuels, P2G2P technology, or by finding additional offsets. Curtailment would be about the same.
Decarbonization pathways in four types of power markets
Given differences in climate, natural resources, and infrastructure, different markets will need to take different pathways to decarbonize their power systems (exhibit). We have analyzed four types of markets. We selected these markets because they capture most of the globally relevant salient features, including transmission potential, quality of clean resources (both intermittent solar and wind energy and dispatchable hydro and nuclear energy), the starting point of a market’s carbon intensity, and the potential for the distributed network to provide flexibility.
Source: McKinsey & Company
Source: McKinsey & Company
‘Islanded’ markets
“Islanded” markets, as the name implies, refer to islands, such as Hawaii, as well as to places that are unusually remote or isolated. These markets are expensive because they usually must import fuel and lack interconnections. But many islanded markets also get a lot of sun. Because of the falling costs of solar power and the high prices of conventional fuels, most islanded markets do not need incentives or targets to decarbonize. In fact, we estimate that they can get up to 82 percent decarbonization just by transitioning to the lowest-cost power mix available.
Pathway to 90 percent. Ninety percent decarbonization can be attained in islanded markets mostly through a combination of solar-plus storage and wind. Relying so much on intermittent sources, however, would lead to a fairly high level of curtailment (10 percent) and to underutilized fossil plants (9 percent), which would function mostly as stopgaps when renewable generation falls short. Given the relative prices of wind, solar, and fuel imports, this pathway likely represents a substantial decline in costs over the period to 2040.
Pathway from 90 to 100 percent. Unlocking the final 10 percent of decarbonization in islanded markets requires finding carbon-free, dispatchable generation to manage periods of low sun or wind. We believe the best solution for this market archetype is P2G2P. Despite a high marginal cost, P2G2P technology is the cost-effective option for providing dispatchable generation in instances when it is infrequently required. Because the technology can use excess solar or wind power to generate clean fuel, curtailment could drop to 6 percent and power-plant utilization to 4 percent. We estimate that moving from 90 percent to 100 percent decarbonization would increase total system costs 3 to 5 percent by 2040.
Thermal-heavy, mature markets
Thermal-heavy, mature markets typically have large populations, good interconnections, and significant fossil-fuel assets. Their power systems are reliable and accustomed to managing significant load. Germany and the PJM Interconnection, the largest regional transmission organization in the United States,9 are two examples of such markets.
Pathway to 90 percent. Reaching the level of 90 percent decarbonization can likely occur in thermal-heavy, mature markets by building more wind capacity, complemented by significant storage. Curtailment rates should be low (1 percent), while thermal utilization of the remaining plants will likely fall to 20 to 25 percent. The downside, however, is the cost of the transition. Because these markets have substantial existing thermal infrastructure, unwinding the asset base means they are also likely to incur the highest cost of decarbonization of the four market types.
Pathway from 90 to 100 percent. Reaching the level of 100 percent decarbonization in heavy-thermal, mature markets probably means investing in CCUS,10 which is an effective technology when it can run continuously, or nearly so. But the associated capital costs are high. In markets with insufficient physical space to support enough renewable power, CCUS technology may be able to provide a large fraction of baseload power needs. In this approach, thermal-plant utilization would hold steady, around 48 percent, and curtailment would be negligible. But because CCUS plants are so expensive to build, moving from 90 percent to 100 percent decarbonization could increase total system costs 12 to 16 percent by 2040.
Baseload clean markets
Baseload clean markets are those that already have significant zero-carbon baseload power—such as France, with its vast nuclear assets, and Brazil and the Nordic region, with their hydroelectric resources. This gives them a structural advantage. Given their foundation of dispatchable, clean power, they can choose additional generation from lower-cost resources. As a result, these markets are likely to be able to pursue significant decarbonization at little or no cost.
Pathway to 90 percent. Given the availability of clean, dispatchable power, progress toward decarbonization should be relatively inexpensive in baseload clean markets. This archetype builds the most cost-effective source of decarbonized generation—in this case, wind—to reach 90 percent decarbonization. Because of the system’s inherent flexibility, curtailment would be only about 1 percent, and thermal utilization would be 12 percent. The cost of power would rise less than 1 percent over the period to 2040 as wind power replaces some existing thermal capacity.
Pathway from 90 to 100 percent. Unlocking the final 10 percent of decarbonization can be done in baseload clean markets by investing in negative-emission technologies as offsets11 to a small amount of peaking gas capacity that is dispatched when wind production is low and baseload resources are not enough to supply peak demand. DAC is likely to be the lowest-cost option because it is most effective in markets where it is needed only rarely. Curtailment would remain at around 1 percent, while thermal utilization would fall to 3 percent. We estimate that moving from 90 percent to 100 percent decarbonization would increase total system costs 10 to 12 percent by 2040.
Large, diversified markets
“Large, diversified markets” refers to places like California, Mexico, and parts of eastern Australia. Such large markets cover extensive territory and have good potential for renewables—typically, a mix of wind, solar, and, sometimes, run-of-river hydroelectric power. On the other hand, these markets often do not have much clean baseload power.
Pathway to 90 percent. The key technology for 90 percent decarbonization in large, diversified markets is likely to be solar-plus storage, complemented by gas power to help manage intermittency. Thermal utilization would fall to 13 percent, and curtailment would be 14 percent. Our modeling suggests that many of these markets could achieve 90 percent decarbonization by 2040 at a net decline in total system costs, as the costs of solar and storage continue to fall.
Pathway from 90 to 100 percent. Achieving 100 percent decarbonization in large, diversified markets will require overbuilding solar-plus storage, a technology that becomes increasingly inefficient as more power is lost through storage cycling and curtailment. Even when there are high-quality solar resources, the need for consistent day-to-day production challenges the system during occasional low-production periods. P2G2P technology could be the best option for replacing fossil fuels in this type of market. Although it is expensive, it works well when peaking capacity is not needed often. Thermal utilization would fall to 6 percent to cover multiday periods with below-expected solar production; curtailment would increase to 16 percent. We estimate that moving from 90 percent to 100 percent decarbonization would increase total system costs 10 to 12 percent by 2040.
What could change the pathways?
Power-system operators need to think decades ahead. That is never an easy task, and it is even more difficult now, given the fast pace of technological advances and business-model innovations. The pathways we have described, then, are not meant to be narrowly prescriptive. Adaptability and a willingness to change direction will be important in achieving high decarbonization at the lowest possible cost.
If high-cost resources, including those that play little or no role in our scenarios, come into the money and are scaled up, that could change these pathways. In some cases, a cost reduction that puts a higher-cost technology in play could also displace traditional sources of generation. Here is our analysis of how some of these technologies could affect the costs and operations of power systems that seek to achieve full decarbonization by 2040:
Nuclear. If new nuclear plants could be built 20 to 40 percent less expensively, that could translate into 20 percent lower total system costs. At that price, nuclear power could supplant investment in both thermal and renewable sources of generation. We see a clear tipping point at a new-build capital cost of $4,000 to $5,000 per kilowatt compared with $6,000 to $7,000 per kilowatt today.12 At that price, nuclear power begins to outcompete the combination of storage and renewables otherwise needed to reach 100 percent decarbonization.
Transmission. Improved siting, land acquisition, and permitting processes could cut the cost of siting interregional transmission by as much as 40 percent. That could translate into 5 percent lower total system costs.
P2G2P. Improving round-trip efficiency—meaning how much energy is generated up front compared with how much is available for consumption after the conversion cycles—is the most important factor with P2G2P technology. If this improved to 60 percent, from today’s average of 30 percent, system costs could fall 5 percent.
Adaptability and a willingness to change direction will be important in achieving high decarbonization at the lowest possible cost.
Electric vehicles (EVs). Envision a market in which vehicle-to-grid-enabled EVs account for a third of light-duty vehicles on the road. This level of penetration would displace a meaningful fraction of the stationary battery storage that would otherwise be built. Perhaps surprisingly, though, total system costs would only decline about 5 percent because displacing battery storage does not do much to solve the puzzle of achieving the transition from 90 percent to 100 percent decarbonization. The solutions required to reach full decarbonization are of a longer duration in nature than EVs can provide. While EVs are beneficial in overnight balancing, they generally fail to address multiday reliability resources.
CCUS. The potential of CCUS is considerable because it can extend the use of existing thermal-power infrastructure, provide baseload power, and substitute for some generation from renewables. A 60 percent reduction in the cost of CCUS—to $1,050 per kilowatt—could cut 2040 total system costs by 10 percent.
BECCS. The biggest single factor in the use of BECCS is the availability and cost of the biomass-input fuel. If this cost could be cut by 40 percent, BECCS could be commercialized and scaled up. At this price, the negative emissions from BECCS allow unabated-gas plants to run when renewable production is low and still achieve net-zero power-sector emissions, resulting in a total-system-cost reduction of 9 percent.
DAC. DAC technology is nascent and could come down in cost to $1,200 per kilowatt by 2050. That cost needs to go down sharply for DAC to scale up. We estimate that if DAC were 60 percent cheaper, its deployment could reduce total system costs by 3 percent.
Executing a strategy for deep decarbonization
A variety of stakeholders will need to work together to make the decarbonization transition happen.
Utilities and system planners must develop more sophisticated ways of incorporating projected energy flows and consumption patterns into their scenarios. They need to understand how a future energy system could work with the natural-gas network; the potential of behind-the-meter resources, such as distributed energy; the full potential of more complicated resources, such as storage; and the ability to trade off different types of assets, such as transmission, hydrogen, P2G2P technology, and CCUS. In addition, they need to figure out the delicate balance between the investments needed to serve their customers now and the longer-term risk of leaving expensive assets idle—or of massive, last-minute spending to reach decarbonization targets in 2040.
For regulators, navigating this territory means creating market signals and compensation structures that are effective and transparent. This is particularly important given that power systems will be increasingly complicated, with marginal assets dispatching at nearly zero marginal cost and the value of “firmness”—or reliable capacity—growing in significance.
The priority for developers and investors is to think through the implications of deep decarbonization as they plan and build future capacity. They will need to evaluate an increasingly broad range of technologies and infrastructure offerings—from stand-alone solar and wind power to hybrid renewables to transmission to multiple storage types to CCUS and BECCS to P2G2P technology. At the same time, the contracts under which developers operate are likely to be of shorter duration as these markets become more competitive, which will further complicate underwriting.
The road to deep decarbonization will be complicated, and there will be both winners and losers along the way. If decarbonization is done well, however, the benefits could be momentous. Customers will find their costs optimized, companies will create new value from decarbonization, and society will benefit from cleaner air and lower emissions.
Jason Finkelstein is an associate partner in McKinsey’s San Francisco office, David Frankel is a partner in the Southern California office, and Jesse Noffsinger is an associate partner in the Seattle office.
The authors wish to thank Amy Wagner for her contributions to this article.
Water is the lifeblood of humanity. With it, communities thrive. But, when the supply and demand of fresh water are misaligned, the delicate environmental, social, and financial ecosystems on which we all rely are at risk. Climate change, demographic shifts, and explosive economic growth all exacerbate existing water issues.
However, hope is not lost. Businesses can play a leading role in mitigating the water issue to limit not just their own risk but also the risk of all stakeholders relying on these systems. This can be accomplished by directing action through three spheres of influence: direct operations, supply chain, and wider basin health.
Water today
Water is as important to the world’s economy as oil or data. Though most of the planet is covered in water, more than 97 percent of it is salt water. Fresh water accounts for the rest, although most of it is frozen in glaciers, leaving less than 1 percent of the world’s water available to support human and ecological processes. Every year, we withdraw 4.3 trillion cubic meters of fresh water from the planet’s water basins. We use it in agriculture (which accounts for 70 percent of the withdrawals), industry (19 percent), and households (11 percent).
These percentages vary widely across the globe. In the United States, industrial usage (37 percent) is almost as high as agricultural (40 percent); in India, on the other hand, agriculture claims 90 percent of water withdrawals, while only 2 percent is put to work for industry. China’s withdrawals are 65 percent agriculture, 22 percent industrial, and 13 percent for household use. Considering that some of the agricultural usage is directed toward industry—for example, half of the production of maize, which is one of the top five global crops by total acreage and water consumption, is used for producing ethanol—the figures may understate how critical water is to business.
All industries rely on water in some way. A company’s water footprint can be seen in four key areas of its value chain: raw materials, suppliers, direct operations, and product use. Consider, for example, a T-shirt across its value chain—raw materials (cotton), suppliers (cotton-to-fabric processer), direct operations (final manufacturing, shipping, and retail), and product use (washing the shirt at home). Food and beverage companies use water a
s an ingredient in the products they sell, of course, but they also use it to irrigate, rinse, and clean crops, and to feed livestock. Metals and mining companies need water for dust control, drilling, and slurry when transporting products. In the tech industry, suppliers require ultrapure water for certain manufacturing processes, and data centers require water for cooling. Forest-products companies rely on water for making pulp and paper. Apparel companies rely on water to grow raw materials and wash garments. Even insurance companies are affected by water through claims related to water, such as crop-production insurance. Water’s uses and effects are as varied as business itself.
The availability of fresh water also varies greatly by location. The majority of the world’s fresh water is divided among 410 named basins, which are areas of land where all water that falls or flows through that region ultimately ends at a single source. These include the Huang He, Nile, Colorado River, Indus, and many others. Of these 410 named basins, almost a quarter (90) are considered “high stressed” (meaning that their ratio of total annual withdrawals to total available annual supply exceeds 40 percent). These 90 highly stressed basins account for just 13 percent of the total area of named water basins but account for 51 percent of withdrawals (Exhibit 1). About half are located in three countries with enormous water needs and high economic activity: China, India, and the United States.
The water crisis is here, and it’s getting worse
Water risk is not a worry to be addressed in some nebulous future. The supply of fresh water has been steadily decreasing while demand has been steadily rising. In the 20th century, the world’s population quadrupled—but water use increased sixfold. The strain is already apparent. In 2018, in the midst of a severe drought, Cape Town, South Africa, came close to experiencing a so-called Day Zero, where the city would have literally run out of water. To avoid that peril, the city government put quotas on agricultural, business, and domestic usage. The government also got lucky: rain replenished its basin just in time. All in all, the drought drove at least 5.9 billion rand (approximately $400 million) in economic losses across the Western Cape.
In 2018, South Africa’s Western Cape experienced its worst drought in decades.
This event, and others like it, are just a taste of what’s to come. As McKinsey’s 2009 report Charting our water future: Economic frameworks to inform decision-making made clear, climate change, population growth, and changing consumer habits are increasing water stress for many regions. The recent McKinsey Global Institute report Climate risk and response: Physical hazards and socioeconomic impacts notes that many of the world’s basins could see a supply decline of around 10 percent by 2030 and up to 25 percent by 2050. By 2050, according to UN estimates, one in four people may live in a country affected by chronic shortages of fresh water. The World Bank estimates that the crisis could slow GDP by 6 percent in some countries by 2050 as well.
Water stress is a risk multiplier. Alone, it is a powerful risk with the potential to upend socioeconomic and ecological systems. When compounded with other risks, such as those related to food and energy systems, politics, and infrastructure, it becomes detrimental.
The clear and increasing business risk
Two-thirds of businesses have substantial risk in direct operations or in their value chain. As water stress grows, they will experience that risk in four forms: physical, regulatory, reputational, and stakeholder.
Physical risks can be critical and costly. In some locations, key water sources may be inaccessible or unfit for use. A primary physical risk is having too little water, which can be a costly problem. A 2015 drought in Brazil drove up General Motors’ water costs there by $2.1 million, and its electricity costs rose an additional $5.9 million.
By 2050, one in four people may live in a country affected by chronic shortages of fresh water.
As the crisis worsens, companies may find themselves increasingly beholden to the whims of government regulators. When Chinese regulators mandated in 2015 that papermakers cut water consumption by 10 percent, Chenming Group, one of the top ten players in the global paper industry and the leading player in the Chinese market, responded by upgrading its assembly line with advanced equipment that reduced daily water consumption by 45 percent. In 2017, the state government of Kerala, India, facing a severe drought, restricted PepsiCo’s groundwater consumption by 75 percent.
A company’s pro-environment reputation is becoming increasingly critical. A 2018 Nielsen survey found that 81 percent of global customers say it is important for companies to improve the environment.1 Consumers are voting with their dollars for companies that align with these principles. The same survey found that 73 percent of customers would change their purchasing habits to reduce environmental impact. In the age of single-tweet public-relations crises, the best defense is getting ahead of issues before they strike.
Stakeholder risk is rapidly growing as more companies and influential bodies become aware of the other types of business risk. These significant players are able to exert outsize influence on other businesses to nudge them toward practices that are consistent with their own sustainability and business ethos. BlackRock CEO Larry Fink cited water risk in his 2020 letter to CEOs, stating, “What happens to inflation, and in turn interest rates, if the cost of food climbs from drought and flooding?” BlackRock, which has nearly $7 trillion in assets under management, was a founding member of the Task Force on Climate-related Financial Disclosures (TCFD) and is engaging with the companies it invests in to ensure that they follow these guidelines. Moreover, BlackRock is working internally to continually improve the standards of its own reporting in this domain as well. In addition to BlackRock, more than 600 other investment firms with $69 trillion in total assets under management now urge their companies to report on water-related risks and act to mitigate them. (For more, see “‘Bring the problem forward’: Larry Fink on climate risk.”)
How businesses can tackle the problem
The water issue is the reverse of the carbon problem; the cause is global, but its manifestation is highly spatial and can be addressed in a concentrated way. Not all basins have equal priority. In fact, several basins have water withdrawals that are well within sustainable limits. Rather than tackling water use across every geography, a more efficient route is for companies to understand how they are interacting with basins that are projected to become water stressed and focus efforts there. Apple, for example, anchors its water stewardship policies by mapping its global water use against regions with heightened water risk. As a result, it focuses its efforts on three regions accounting for 52 percent of its total water use: Maiden, North Carolina; Mesa, Arizona; and Santa Clara Valley, California.
There are three spheres of influence that companies can affect to help mitigate water stress: direct operations, supply chain, and wider basin health. Some companies are already taking action in all three areas.
Direct operations
Within their four walls, companies have several levers they can use to reduce water stress. They can implement water measurement and reporting practices, even including water use in relevant company key performance indicators (KPIs). They can aggressively identify and eliminate water leaks in their operations and introduce new technologies that reduce water stress.
In 2010, Ford set a goal of using 30 percent less water per car by 2014. It reached that goal through a combination of new KPIs and operational improvements. The introduction of internal water metering alone drove conservation behaviors to the department level and helped save around $5 million worldwide. A dry-paint-spray system eliminated water from the car-painting process, and a new lubricant that replaced water in the manufacturing process saved about 280,000 gallons per production line.
The water issue is the reverse of the carbon problem; the cause is global, but its manifestation is highly spatial and can be addressed in a concentrated way.
Colgate-Palmolive partnered with a water-technology company to meet its sustainability goals for a plant located in a water-scarce basin in Mexico. Its processes require a significant amount of water to ensure proper sanitation for the toothpaste, deodorant, and soap products produced. The new solutions were able to reduce the plant’s water use by 1.8 million gallons annually while also significantly reducing the amount of time required for cleaning and sanitizing.
Supply chain
Companies can further reduce water stress by using their influence to ensure that their suppliers and their suppliers’ suppliers are equally rigorous about their own contributions to water stress. There are three critical levers to pull: reducing energy use and shifting to renewables, setting supplier standards, and sending water-expert teams to help key suppliers identify and implement efficient water-usage solutions.
Water is required to both extract many energy sources and generate energy through steam-powered turbines. The reduction of energy consumption and the market shift toward renewable sources has the dual effect of lowering greenhouse-gas emissions and reducing water withdrawals. With the transition to a more decarbonized world, new energy-investment decisions can consider water benefits alongside carbon, cost, reliability, and other lenses. The production and use of fossil fuels requires up to four times more water than the production of renewables. If the future energy mix of the planet remains the same as it is now, withdrawals from water basins for energy can grow by 25 percent by 2040. On the other hand, switching 75 percent of fossil-fuel consumption to renewables by that time, per individual countries’ Paris Agreement targets, can reduce the water footprint of energy by 47 percent (Exhibit 2).
Companies can also set reporting standards for suppliers. In 2014, Levi Strauss launched a Recycle & Reuse compliance program, which requires that each supplier meet certain limits; use a blend of at least 20 percent recycled water in its facility processing, landscaping, cooling, and plumbing; and provide flow-meter data that tracks the amount of recycled water used on Levi Strauss products.
Nike has successfully implemented a water-supplier initiative, which the company refers to as the Minimum Water Program. Teams work closely with the company’s largest materials suppliers and others to ensure good water practices by offering their own expertise to assist their suppliers. The program has been a success—in 2019, Nike achieved its initial goal of reducing fresh water used in textile dyeing by 20 percent, 18 months ahead of schedule.
Wider basin health
Some businesses may choose to go further by using their influence in partnerships that promote water resilience.
During the United Nations’ 2012 Conference on Sustainable Development, 45 of the world’s largest companies united to advocate for governments to implement sensible water policies. The companies (including Bayer, Coca-Cola, GlaxoSmithKline, Merck, and Nestlé) signed a special communiqué demanding that governments raise the price of water to a fair and appropriate price. The companies committed to ongoing lobbying to support water-positive policies, such as a fair market price for water. Without price increases, water users do not have feedback mechanisms that incentivize conservation and the development of new technologies to cut usage.
Another significant initiative is the Water Resilience Coalition, a creation of the UN Global Compact’s CEO Water Mandate. Launched in March 2020, it is built around a water-resilience pledge that binds signatory companies to a set of water goals to be addressed by collective action in water-stressed basins.
As with other key components of climate change, the time has come to address the water crisis head-on. Businesses have a key role to play.
The authors wish to thank Jonathan Glustein for his valuable content, analysis, and strategic contributions. In addition, the authors wish to thank Elaine Almeida, Maria Bernier, Katie Chen, Andrei Dan, Eduard Danalache, Annabel Farr, Philipp Hühne, Nico Mohr, Dickon Pinner, Laura Poloni, Martha Pulnicki, Rahim Surani, and Michael Zhang for their support.
water also varies greatly by location. The majority of the world’s fresh water is divided among 410 named basins, which are areas of land where all water that falls or flows through that region ultimately ends at a single source. These include the Huang He, Nile, Colorado River, Indus, and many others. Of these 410 named basins, almost a quarter (90) are considered “high stressed” (meaning that their ratio of total annual withdrawals to total available annual supply exceeds 40 percent). These 90 highly stressed basins account for just 13 percent of the total area of named water basins but account for 51 percent of withdrawals (Exhibit 1). About half are located in three countries with enormous water needs and high economic activity: China, India, and the United States.
