Episode 2: Saving the world’s water supply

Transcript: Season 3, Episode 2: Saving the world’s water supply

Disclosure: The opinions expressed by Eurasia Group analysts in this podcast episode are their own, and may differ from those of Citigroup Inc and its affiliates.

Franck Gbaguidi: Water scarcity doesn't work in silo. It's often times an aggravating factor that compounds many other risks.

Harlin Singh: The crux of the issue isn't just about hydration, but really about how much of our economy depends on water for everything, from food to vaccines, to mining and energy, right? So every single economic output does rely on access to water.

Mikaela McQuade: Welcome to Living Beyond Borders, a podcast from Citi Private Bank and GZERO Media. On this program, we examine global risks and opportunities from the angles of both politics and economics. I'm Mikaela McQuade, Director of Energy, Climate & Resources at Eurasia Group.

You can't avoid the images and the headlines of just how much severe weather events are impacting people around the globe and how frequently. Frightening developments in the natural world around us are changing the way we live, work and play. And no one is immune. One of the most significant threats that billions of people are facing isn't coming just in the form of large, intense disasters, but short events accumulating slowly on a dangerous trajectory. It's a daily occurrence impacting lives, little by little, drip by drip. The problem is water scarcity.

Most of us in the developed world are immune from even thinking about water scarcity. We can trust that at home, at work and everywhere in between we will have access to as much water as we need or want whenever we need it or want it, but that's certainly not true everywhere. In fact, nearly half of the world's population currently lives in areas that face water scarcity for at least one month out of every year with the situation worsening in many of those geographies, day by day.

As we speak to you today, over 1.2 billion people, lack access to the clean drinking water they need. Without access to water for drinking, for cooking, for cleaning and other daily uses, we know that much of the rest of society can fray creating, not just public health issues, but economic problems and geopolitical ones. So what does the issue of global water scarcity look like today and what are the global business nonprofit and government leaders doing to change things?

Joining us now are two people who can give us some fantastic insights on the global picture of what water insecurity means for all of us, both politically and economically. First, we have Harlin Singh Global Head of Sustainable Investing at Citi Global Wealth. We also have Franck Gbaguidi, Senior Analyst of Energy, Climate & Resources at Eurasia Group. Welcome to both of you.

Harlin Singh: Hi Mikaela. Thanks for having me.

Franck Gbaguidi: Hi Mikaela. Thank you so much.

Mikaela McQuade: We're going to launch right into our conversation about what water scarcity means. Frank, we gave some high-level numbers about the issues of water scarcity globally, but I'm going to ask you to give us some more granular detail. What do we even mean when we say water scarcity? How big is the problem and how fast is it growing? How concerned should we really be?

Franck Gbaguidi: Yeah, that's a good one to start the conversation. And I think here, I want to make a distinction between physical water scarcity and economic water scarcity. So, let me start with the most obvious one, physical water scarcity. It's exactly what it sounds like, meaning that the actual access to water is physically limited. So when water demand exceeds what the land is able to provide, well, you have physical scarcity and you tend to see it in the driest parts and regions of the world.

Now economic waters scarcity is due to two things. So it's either a lack of water infrastructure in general or when infrastructure is already there. It's a lack of proper water management. And the issue here, Mikaela, is that oftentimes both physical and economic water scarcity overlap, particularly in emerging markets. So if I go back to your second question, how big is the problem, the short answer is, as big as it gets and it's growing faster than expected.

The gap between global water supply and demand is expected to reach 40% by 2030. This will add a new layer of stress, a new layer of urgency to the water scarcity crisis across the world and that's just in what like eight years. If you look beyond say, mid-century the UN estimates that global population will grow 2 billion by 2050, related to that food demand will increase 50% by 2050. So if I take these two forces, this will intensify pressure on water supply, especially when you know that agriculture already accounts for 70% of water use. So beyond the physical waters costly challenge that I mentioned earlier, you have the water management challenge, you have the demographic challenge and you have the agriculture and food production challenge. And so this is what many water experts see as kind of a recipe for a perfect storm if you will.

Mikaela McQuade: Now, one of the crises that we talk almost every day about here at Eurasia Group and in every headline that we read is climate change. How directly linked to climate change is the issue of water scarcity?

Franck Gbaguidi: I see climate change as a multiplier, right? So if you take into account, the current pace of population growth, each degree of global warming is expected to decrease water resources by at least 20%. And it's a mutually reinforcing relation. And that's why the international panel, the inter-environmental panel on climate change, IPCC is now covering in extensively in its reports. Take the 1.5 global warming target that the global community, international community has. Above 1.5 degrees, people living on small islands can no longer adapt to climate change. And that's because of the lack of access to fresh water. In a two degree scenario, more than one third of Southern Europe will be exposed to water scarcity. In a three degree scenario, the ability to adapt to climate change by using irrigation will be significantly limited by water availability. So you can look at the current water and climate relation as some sort of downward spiral with first climate change that is increasing droughts, that is disrupting rainfall patterns, and then the impact on water scarcity and then how that's reducing crop productions for farmers.

Franck Gbaguidi: And then of course the impact on food prices, but also the increase in urban migration because those farmers and their families they now have to move to the cities. And this is then putting pressure on local temperatures and then the cycle starts again because that impacts climate change and that then impacts water scarcity. So, obviously here I'm oversimplifying things, but I find that it's a very helpful way to kind of grasp the relevance and the ties of the water and climate nexus, but also of the water, climate, and food nexus.

Mikaela McQuade: It may be oversimplified, but I think it's a very stark picture in terms of the very human impacts. And with that, Harlin, I'm going to turn to you because there are beyond those human impacts, there are very clear economic implications here, both locally and globally. So I'll put the question to you: Why is water scarcity on your radar in your role at Citi?

Harlin Singh: Yeah. Thanks Mikaela. And you and Frank touched a little bit on this, but you know from an economic standpoint, I don't think too many people actually think of water scarcity as an economic problem at the outset, right? It's generally thought of as a hydration problem, access to clean water. And if we just step back for a second here, the misuse of water is truly a classic tragedy of the commons, right? There's over consumption as Frank mentioned, under investment on the economic side and eventual depletion of a shared resource. And when we see this demand overwhelming supply before you know it, every person who consumes water harms others who cannot readily access it. And so the crux of the issue isn't just about hydration, but really about how much of our economy depends on water for everything, from food to vaccines, to mining and energy, right? So every single economic output does rely on access to water.

And when we think about and Frank touched on migration and the impacts of migration, but migration health outcomes, the impact on food production, the spread of disease, right? We all know how important access to clean water was to the slowdown and the spread of COVID over the last couple of years. And Frank mentioned as well, the growing problem, right? So we're expecting that half of the global urban population by 2050 will be expected to face water scarcity with the greatest impacts in economies like India and China and the economic impact has been estimated to be quite significant. So according to the world bank water scarcity could cost certain regions in the world up to 6% of their GDP by 2050. So it's a pretty big impact, right? Without water there's really no local business or industry. Unmanaged water related risks, such as floods and droughts can cost an economy billions of dollars, not to mention the tragic loss of life.

And water is poorly managed in many places. Frank touched on this a little bit as well. It's underpriced, it's subsidized and in some cases given away for free. And in many regions, the unsustainable water use is usually acknowledged when a crisis occurs such as a flood or drought, right? It's not something that we're thinking about on an ongoing basis. And an example of the economic impacts if we just think about California for a second, where groundwater use has been largely ignored. And we talked a bit about, how in the developed world, we don't really think about our use of water. In 2021 alone, drought directly costs the California agriculture sector over a billion dollars and almost 9,000 jobs. And so the economic impact can be quite severe and in areas where water is abundant, many forward looking companies are starting to assess their dependencies and the impacts on the natural environment, right?

They're starting to assign a much higher value to raw clean water and uncovering ways to manage it both responsibly and to protect it. So, this will ultimately be good for business and good for the environment, but there are certainly severe economic implications to consider along the way.

Mikaela McQuade: Now, Frank, I'm going to ask you to reflect on Harlin's comments there and ask you, what are some of the regions and economies globally that are most affected by water scarcity? Obviously, we're not immune if we're talking about California droughts and their economic impacts, but I want to talk about how those impacts show up around the world in different places so that we have a sense of kind of the political ramifications of these increasingly alarming trends.

Franck Gbaguidi: Yeah, no, I mean, a couple of regions stand out. One that we haven't mentioned yet, the Middle East, right. Nine out of 10 countries, most affected by water scarcity are in the Middle East, which is pretty huge. A lot of it has to do with what I mentioned earlier, physical water scarcity.

Then of course you have Africa where one in three people is facing water scarcity. And there it's more of a mixture of both physical and economic water scarcity. But I'd like to bring some nuance here because in a way water scarcity doesn't fully discriminate. It doesn't just affect rural areas but also big cities like Cape Town, like Sao Paulo.

So when you take the case of Santiago, the capital of Chile, so they're having this mega drought that's been going on for 13 plus years. And the governor just recently announced a plan to ration water, which includes measures to limit water pressure, to rotate water cuts among customers.

Those are things that never happen in Chile, let alone in Santiago. If I want to build on what Harlin said about California. Well, now the state of California is paying farmers to not farm this year. We're paying them to not do their job specifically because they're trying to preserve and save water resources because of the ongoing and severe droughts. And that's a big issue in the US because farmers in California produce one fourth of the country's food, which is huge.

So those are the types of kind of real concrete impact of water scarcity that are forcing policy makers, whether it's in developed economies or in more emerging markets to take immediate and often times drastic actions right now and right away.

Mikaela McQuade: Harlin, I'm going to go back to you because both you and Frank have mentioned agriculture, you mentioned vaccine dependencies on water and different kind of industrial crossovers. And I wanted to ask you how much of this issue is about agriculture and industry using water versus large numbers of people going about their day to day lives and taking long showers or not fixing leaky tanks. How much is industrial versus maybe behavioral?

Harlin Singh: Yeah, I mean, look, I think when we first started to talk about these large intractable problems, everything from emissions to water usage, most individuals think about what they can do themselves. And when we look at water use, 70% of the world's fresh water is actually used by the agricultural industry. That's the vast majority, right? And after that comes industry. So electricity production, for example, is another major consumer of fresh water, which is - in which water is needed to cool equipment. So domestic use or long showers are actually a relatively small part of the pie. And when we think about agriculture, the biggest issue with it isn't necessarily the water that's required to produce the crops. It's really the water that's wasted in inefficient irrigation systems. And so that's a huge challenge and a huge opportunity in terms of how water is managed in the agricultural system, as well as the production of meat products, right?

Cheese, beef, pork, chicken, all big consumers of water. So really food is a huge contributor to this issue and also a big opportunity for innovation. As well as one other area that we don't talk about as much is the negative impact on water that maybe agriculture is not necessarily using. So ag is a huge polluter of water, right? So not just fertilizers and pesticides, but also the sediment that's polluting fresh water sources.

So we saw this in the Aral Sea, which was once the fourth largest in the world. It's now shrunk by almost 75% due to the knock on effects from using water for irrigation that eventually led to pollution from fertilizer and increased salinity and now is causing a whole host of other issues from destroying the fishing industry to leading to greater disease and cancer because chemicals from weapons testing in and around the area and salts left to dry on the land from the receiving sea is now airborne, right? So there's just so much knock on effect from not just the users of water, but what that does to the remaining water supplies.

Mikaela McQuade: With that big picture in mind, I want to shift back to the very human perspective here. And Frank, maybe I'll put this question to you in terms of what scarcity looks like for the average person living in a region with a lack of access to water?

Franck Gbaguidi: Let me try to make it as concrete as possible. So, take the case of say a farmer in Somalia. East Africa is currently experiencing its worst drought in over three decades, I think. So for this farmer in Somalia, it becomes difficult to field crops. It becomes difficult to cook. It becomes difficult to eat, but also to wash and to drink. And now on the health side, as Harlin mentioned earlier, depending on where you are, up to 80% of illnesses are linked to the lack of clean water and sanitation access in the developing economies. And that's definitely the case of Somalia. So if I go back to my farmer in Somalia, you have the economic impact on his livelihood and his job. Then you have the health impact for him and his family. And then on top of that, you have the impact of the war in Ukraine.

And it's not necessarily something that comes to mind immediately, but Somalia imports most of its wheat from Egypt and then Egypt itself imports 85% of its wheat from Russia and Ukraine. So we can only imagine the implication for that farmer in Somalia, who's already dealing with the drought. And so my point here really is that water scarcity doesn't work in silo. It's often time an aggravating factor that compounds many other risks and that exacerbates, which we're seeing here with the case of the Ukraine crisis, many other crises. And that's really why it's an issue worth tackling.

Mikaela McQuade: And I think we know that in many places, without running water, women and girls are the ones that have to spend hours a day going to get it, which means limiting other things that they can do with their day. Harlin, tell us more about how a lack of water can disproportionately impact some groups of people and on the converse how increasing access to water can really change their lives.

Harlin Singh: Sure Mikaela, and you know this kind of continues to build on Frank's bleak view of what's happening and why this is an issue that operates within silos to your point, women and girls do bear the greatest burden because in the developing world, at least they're the most likely to be responsible for bringing water back to their homes. So they spend an estimated 200 million hours collecting water every day. The average African women walks six kilometers to haul 40 pounds of water every single day. And the more scarce water becomes the further that walk becomes. And the longer that time takes and the less, then, economic productivity and output you have because you're spending so much time going to collect water. And so this daily grind, right, doesn't allow women and girls to participate in other parts of the economy, to spend time with their families, to pursue school and income activities, to improve their overall lives.

Many girls in the developing world are forced to choose between, do I collect water or do I go to school? And that's really quite unfair and when we think about the knock-on economic impacts of that pretty extraordinary. And so, unless schools, unless communities have access, easy access to clean water, latrines, sanitary supplies and support for hygiene, behavior change, these girls will be, continued to be left out. And when you think about even further on, Frank mentioned some of the health outcomes and the reliance for vaccines and sanitation for disease prevention, but also at childbirth. The lack of clean water and sanitation facilities and hygiene they're contributing to significant rates of disease and death amongst mothers and newborns in the developing world. So really in order to fight extreme poverty and investment in clean water, adequate sanitation and hygiene behavior change are really the most effective ways to improve lives as they will result in families becoming healthier, children receiving better nutrition and education, income improvements as families are able to spend less money on negative healthcare outcomes due to lack of water and are able to pay for things like school supplies.

So, there are certainly parts of the economy that are facing disproportionate impacts. And this is true for anything in sustainability. Even in the US where you look at where we've had problems with water, it's in the underserved communities; in the lower income communities. And so these are communities that are already at risk because they have less economic opportunity or access to jobs and education and now we're pushing another burden on them.

Mikaela McQuade: Now that we have a sense of the problem Harlin, what are some of the solutions that we see businesses investing in to try to increase access to clean drinking water or at the very least to try to manage the rate of change in areas that deal with water scarcity?

Harlin Singh: And this is exactly why I'm in the investment space and not in public policy or scientist because the investing community does provide solutions. And I think that, the water issue is something that is solvable and we're starting to see a lot of really interesting innovation in the space already. Market estimates say that the opportunities for investment could reach a trillion dollars by 2025. This was a recent research report that we did at Citi.

The investment opportunity exists across water, businesses that are involved directly in providing clean water, the conservation of water, the purification of water and these innovations will allow us to use water more efficiently, create fresh water and recycle wastewater. There's a huge opportunity there and create a more sustainable economy.

And so when I think about what are the opportunities, I really could segment it into three main categories: using water more efficiently, creating freshwater and recycling wastewater. And so when it comes to using water more efficiently, Frank touched on the Middle East. Israel has emerged as a leader in agriculture and water management, even though the country is 60% desert. There is a lot of innovation happening in that area, drip irrigation, AI, big data. They are allowing for more efficient ways to irrigate, grow plants and crop and increase the yield. So, we're seeing some really interesting innovation in aquaculture. Vertical farming, I think is incredibly interesting space that's been growing significantly. Also, addressing the multitude of other problems that we've talked about today around food deserts and access to a variety of jobs, smart water technology, another area that's really interesting to revolutionize agriculture involves even if we're able to really address the issues in agriculture and improve crop yield as a result of this technology, it really does as lead to national food security and generates potential export industries for economies that may not have had them previously.

When we think about also some of the water systems that are being built out. So net zero water systems and new building design, we've gone through the lean and the green building designs. And now thinking about how water systems may also be used in new buildings, as well as in retrofitting where rain from storm water can be used to supply necessary residential water and treatment systems are built in house in order to recycle as much of that water as possible. I think that's incredible. When we think about creating fresh water, I mean, some of this sounds a little pie in the sky, but there are technologies in desalination that have been taking off that are being used in many, many parts of the world now. Still expensive, but still something that are leading to opportunities, especially where there is extreme drought to have interventions, to create clean water out of seawater, and then dehumidifiers that are pulling moisture in air to create water in drought-stricken areas. Also really interesting technologies there.

And when we think about recycling wastewater, I talked about the net zero buildings, but also there are wastewater treatments turning underground aquifers and reservoirs, returning water to them to then be reused again. In Singapore now recycled wastewater meets 40% of their daily water demand. In LA, so here in the US, the city's recycling about 25% of its water and has a 2035 goal of recycling a hundred percent of its wastewater. So, with these technologies, with these new businesses that are addressing these issues around water, I do think that there is a lot of optimism. It's just, we need to put the investment dollars there and make these opportunities more commercially available and affordable to implement.

Mikaela McQuade: A lot of cause for optimism in terms of the comments that you just laid out. So it's great to hear. Frank, Harlin just spoke to the investor's role in this space and what they are excited about at Citi. Can you tell me what role nonprofits and microfinance organizations play here in terms of a pretty niche issue?

Franck Gbaguidi: Yeah, and I'm actually glad that you're bringing them up together because their role is actually complimentary. I would say on the one end you have nonprofits that are working to educate on water, that are engaging with policy makers and business leaders, that are sometimes even providing technical assistance to water providers, that are generating and updating data on water scarcity. Lots of the stats that I shared today and I knew and I could hear that it was the same for Harlin came from well-established non-profits that are tackling the global water crisis and that have been tracking these numbers for so long. So, that's what you have on the non-profit side. And then on the other hand, we have microfinance organizations that are providing access to financial services for small scale water providers and for households that are developing partnership with municipalities and private sector actors that are spurring innovations and adapting to local context because, and I cannot stress this enough, water is often times a local issue.

And this is particularly important in emerging markets where poorer communities often times lack access to bank loans, to insurance, to pension funds. So, here nonprofits and microfinance organizations, both work hand in hand to come up with a solution. Often time, they actually collaborate on specific projects and they tend to team up with multilateral development organizations as well to try to move the needle on water access, particularly in emerging markets.

Mikaela McQuade: With that, I think we've touched on a number of solutions providers in the area of water scarcity, but we've also talked briefly about the idea that as water becomes more scarce, conflicts can break out and that might start on a smaller local level, but can become an issue between nation states as well. So, Frank, what are governments trying to do to work on this issue and what is their role?

Franck Gbaguidi: Yeah, I'm going to try to stay on that hopeful and positive trend, but yes, it is true that because of water scarcity issues, we are seeing conflict emerge. So when you talk about conflicts between countries, since the 1970s, I think in the 1970s, we had about 25 conflicts related to water. Today, we have more than 460 conflicts related to water. So it's increasing by the day and it's showing no signs of slowing down, but there is hope here because for many governments, the answer is what we call water diplomacy. So governments work together to meet each other halfway. They work together to allocate transboundary water resources peacefully and equitably. A good example from the past that I can give is between Turkey and Armenia. So here we have two countries that managed to put their attention aside and to cooperate on water distribution from the Arpachay river.

But I think that's just one side of the issue when it comes to water related conflicts between countries. I think the other side is within countries. When you focus on just one country in particular, on a given country, water deficits are linked to percent of the increase of migrants since 1970. And so oftentimes for those migrants, that means that they have lower skills than other migrants, which means lower income. And which also means lower access to basic services when they move to new destinations, which tend to be a city. So here migration also increase pressure and competition on water use. And you can only imagine the policy implication and the tensions that would arise. We saw that in Mexico where a black market for water emerged. We saw that in the Kaveri basin in India where violent protests and legal battles also emerged. So to respond to this, I find that often times governments are focusing on things. One is promoting fostering, supporting new technologies and Harlin touched on it when she talked about wastewater.

Actually, Chile, that I mentioned earlier with this new plant ration water, Chile is the first capital in Latin America that treats 100% of its wastewater. So that also means that in the face of adversity and extreme kind of events, those local governments are stepping up and coming up with those solutions and the focus is technology. The other big focus that I'm seeing from a lot of countries is in setting up some sort of big, bold targets with a very short timeframe to reach universal access to water. And that's the case of countries that people don't even think about when it comes to sustainability related issues like Brazil right now, which has a very ambitious goal for the next few years. And the list goes on and on, but I really want to have that shift. So when we talk about water related conflicts, we focus on what's happening between countries, but also within countries.

Mikaela McQuade: It will be in interesting, if not scary to watch how water diplomacy stands the test of resource conflicts turning into water wars. But hopefully we won't get into that with investors like Harlin on the case. So Harlin, in terms of final thoughts, I wanted to test with you, what kind of approaches seem to be working so far? What are people most excited about? Can you tell us a little bit about that?

Harlin Singh: I think that, like I mentioned before, right, this is a very solvable problem if the key stakeholders come together on it. And I do think investors play a big role and entrepreneurs play a big role here in developing new technologies. And what gives me hope is the investors that we're talking to are really focused on this area. And Frank, to your point, it's not always talked about, right. We talk, we spend a lot of time on energy and emissions, we don't spend a ton of time on water, but it's becoming much more front and center for people as they're thinking about how to address the inequalities that exist in the world. And what we see on the solution side is that technology is developing at a really rapid pace. There's a lot of infrastructure enhancement that can be done that's very feasible and agriculture has been taken front and center for a number of sustainability reasons. And Frank touched upon this in his earlier comments on the interrelatedness between water scarcity, food, obviously on the ag side, emissions as well tied very heavily to ag.

Harlin Singh: And as we start to think about these problems, there's a growing desire for the investment community, for the policy makers to think about all of these interventions through a lens of what is just and that includes water. So I think that, I'm still pretty hopeful, I guess that's the eternal optimist in me that's tough to take out, but I'm pretty hopeful that we can start to deploy some of these technologies at scale. And some of this innovation, particularly where we've seen things, just like data and analytics in terms of advancing models for water management, I mean, simple tools that can really help at the bare minimum to improve efficiency.

Mikaela McQuade: And Frank, any last thoughts on the issue of water scarcity and how it impacts our geopolitical world?

Franck Gbaguidi: Yeah, I think with the increasing impact of climate change, it'll be interesting to see the trades offs for policy makers between addressing immediate water scarcity issues and implementing more coordinated measures to tackle structural water problems like those linked to management, water management. So if I think about a country like Morocco, which is now losing 50% of its annual crop because of the worst drought in four decades, that is happening now, like what is going to be the plan between tackling this immediate issue and also focusing on the long term water strategy for the country. So that's a space that I think will be interesting to watch, but I agree with Harlin. This is a moment in time, and I think that there are reasons to be cautiously optimistic. We have pressures stemming from global efforts.

We didn't mention it, but you have the sustainable development goal on water SDG 6. We have pressures stemming from local efforts, which is the level where issues are usually being handled. And increasingly we are having pressure stemming from national efforts, from governments that are setting targets on water and that are supporting new technology. And actually tech is an area where I think our geopolitical world, as we know it, might be slightly different if some countries or regions manage to ramp up some of the technologies that Harlin mentioned. So if they managed to ramp up desalination techniques, if they managed to ramp up smart irrigation, if they managed to ramp up wastewater recycling and most importantly, and Harlin briefly mentioned it, if they managed to reduce the price of these new technologies, which could really be a big change for and a game changer for many, many countries.

So if things move in that direction, then we could potentially see on water, some glimpses of what we saw on the climate and energy side with the uptake in renewables things to significant technology advancement. So, yeah, overall I think that there are reasons to be hopeful.

Mikaela McQuade: With that, I want to say thank you to Harlin Singh, Global Head of Sustainable Investing at City Global Wealth and to Franck Gbaguidi, Senior and Analyst of Energy, Climate and Resources here at Eurasia Group. Thank you both very much for your time today.

Franck Gbaguidi: Thank you, Mikaela.

Harlin Singh: Thank you, Mikaela.

Mikaela McQuade: That's it for this episode of Living Beyond Borders. Stay tuned for our upcoming episodes. This season we will also be exploring the real estate market, the China US relationship and much more. For more head to gzeromedia.com/living-beyond-borders podcast or subscribe wherever you get your podcast. I'm Mikaela McQuade. Thanks for listening.