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First assessment of the impact of water scarcity on US municipal power bonds

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Amid growing concerns about water scarcity and climate change globally, PricewaterhouseCoopers LLP (PwC) is to work with CERES, America’s largest coalition of investors and environmental groups, and Water Asset Management LLC to conduct the first study of the impacts of water scarcity and climate change on US municipal bonds.

PwC’s UK sustainability and climate change practice will lead the firm’s involvement in the collaboration.

US municipal bonds are typically considered safe investments and are highly sought after by institutional investors including life insurers and pension funds in the US. The collaboration team brings together institutions with complementary expertise in the areas of climate change, water infrastructure, and investment to develop a framework for modelling water risk in the fixed income market.

“The United States has hundreds of billions of dollars invested in water infrastructure, not to mention investments in water-intensive sectors,” said Dr. Celine Herweijer, Director, PricewaterhouseCoopers LLP (pictured). “Many of these systems are designed assuming that future water patterns in the US will not change.

“We know that with climate change, the past is not the best guide to the future. Alongside the stresses on water resources from growing populations, industrialisation and land-use change, climate change will affect the availability and quality of the US’s water, with negative implications in some regions and positive in others. Investors and businesses currently lack a framework to identify, plan for and adapt to water-related risks.

"The risk modelling work we are undertaking with CERES will investigate multiple issues of physical water risks, regulatory water risks and socio-economic drivers of water availability, and crucially, it seeks to quantify such risks in monetary terms. Such research could prove helpful to water or energy utilities, water intensive companies and investors alike, providing much-need information to support more informed decisions going forward.”

The bonds of both US municipal-owned water and electric utilities will be included in the study because of the growing conflict between water and electric utilities drawing from the same water supplies in water-stressed regions of the country, such as the west and the southeast.

The collaboration aims to drive sustainable investment in water-intensive sectors and the development of a resilient water infrastructure in the US. The US Environment Protection Agency estimates that USD68billion will be needed over the next two decades to restore and maintain existing utilities assets in major US cities.

The collaboration comes in the midst of US energy legislation intended to tackle growing carbon emissions and pursue increased energy independence. Water shortages will be a critical determinant of America’s energy security, as transport and treatment of water controls a growing proportion of the US’s kilowatt hours, and electric power production accounts for nearly half of the nation’s water withdrawals, primarily for plant cooling. 

Climate change is expected to exacerbate existing supply-demand imbalances driven by population growth, especially for water and electric utilities drawing from the same water sources. 

Energy production currently accounts for about 39% of all water withdrawals in the US and 31% in the EU. Under business as usual, energy production in the US is forecast to grow by about 50% between 2000 and 2025, and 50% in the EU between 2000 and 2030. Under business as usual, water consumption for energy production is expected to grow by as much as 165% in the US, and 130% in the EU over the same period.

In the UK, a recent report by the Environment Agency showed that electricity generation is one of the largest users of water at 10,000 mega litres a year, second only to the public water supply of over 16,000 mega litres a year. About 3400 litres of water per person per day is used to produce the food and goods the UK uses. The UK’s water footprint is global, with only 38% of total water the UK uses every day coming from rivers, lakes and ground water reserves in the country.

Globally, by 2030 the OECD predicts a 65% increase in water for industrial use and a 30% increase in water for domestic use in Asia, against a five per cent increase in water for agriculture. Similar ratios apply across the EU, Latin America, the US and West Asia.

“The world’s economy runs on water,” said Mindy Lubber, Executive Director of CERES. “Yet climate change and over-use are conspiring to place at risk this most critical economic resource. Working with PwC and Water Asset Management demonstrates our strong commitment to enabling action by investors and companies committed to sustainable prosperity."

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