Analysts warn markets are mispricing water as world enters ‘global water bankruptcy’ and drought costs hit $307 billion annually

(SeaPRwire) –   While the world is not literally submerged, it is facing a severe metaphorical water crisis. Natural water reserves, including basins and aquifers, have been depleted beyond our lifetimes, and experts are warning that financial markets are not adequately acknowledging the gravity of the situation.

A significant report released earlier this year by the United Nations University Institute for Water, Environment and Health (UNU-INWEH) declared a state of “global water bankruptcy,” indicating that humanity has overdrawn water resources from the natural environment.

Kaveh Madani, director of UNU-INWEH, framed the crisis in economic terms within the report, stating, “In finance, when you spend more than you earn for too long, you go bankrupt. We have done exactly that with our water ‘checking’ and ‘savings’ accounts.”

This environmental emergency has substantial economic repercussions. The World Wildlife Fund’s 2024 Living Planet Report estimates the value of water and freshwater ecosystems at $58 trillion, representing approximately 60% of global GDP. Projections indicate that within 25 years, about 46% of global GDP could originate from regions facing the highest water risks, a significant increase from the current 10%.

Sana Ur Rehman, a market analyst at EBC Financial Group, has observed that despite the clear threats posed by water scarcity to economic growth, markets are failing to price in the costs associated with water-related risks. She emphasizes the overlooked necessity of investing in resources to replenish and sustain this vital element.

Ur Rehman noted in a statement on Tuesday, “Water has no globally traded futures contract. It has no liquid benchmark price. It has no standardized risk metric that flows into credit models, equity valuations, or sovereign debt assessments. The result is a systematic mispricing of water risk across nearly every asset class.”

Approximately half of the world’s food production occurs in areas experiencing declining total water storage, and these regions are home to three billion people. The UN report highlights that drought alone, often exacerbated by human activities such as deforestation, pollution, and climate change, incurs an annual cost of $307 billion.

Beyond its fundamental role in agriculture and hydropower, water (H2O) has become indispensable for AI data centers, where it is used to cool servers and prevent overheating. Some technology companies are exploring the use of treated wastewater for data center cooling.

Ur Rehman contends that insufficient action has been taken to invest in solutions that ensure a sustainable water supply, even as human consumption continues to escalate.

He stated, “The gap between what water systems need and what they receive in capital investment is widening at exactly the moment when climate variability is accelerating the depletion of natural water storage.”

Global water woes

Ur Rehman points to several water-related disputes that are negatively impacting economic gains. One such example is the Nile River, which provides 97% of Egypt’s water supply. Egypt’s agricultural sector is substantial, employing over a quarter of its workforce and contributing around 15% to its GDP. However, per capita water availability has drastically decreased from 2,526 cubic meters per year in 1947 to less than 600 today, falling below the UN’s water scarcity threshold of 1,000 cubic meters.

The Grand Ethiopian Renaissance Dam could worsen these issues. A 2021 study from the University of Southern California predicted that filling this dam would reduce Egypt’s downstream water supply by approximately one-third, leading to a 72% decrease in arable land and an estimated $51 billion in agricultural economic losses.

Challenges also persist in the American Southwest, where the Colorado River, supporting $1.4 trillion in economic activity in the region and northern Mexico, has faced a structural deficit for over two decades. Key economic drivers like Lake Mead and Lake Powell, situated along the river, rely on recreational visits. A 2023 University of Arizona study projected potential negative economic impacts of nearly $90 million due to reduced visitor numbers resulting from lower lake levels.

In other parts of the U.S., the effects of water shortages are tangible. Corpus Christi, Texas, is nearing a water emergency after a seven-year drought, which could significantly impact its refineries and petrochemical plants.

The agricultural sectors in Kansas, Oklahoma, and Texas have experienced reduced crop yields, increased feed costs, and the necessity of selling livestock due to ongoing drought conditions. Between 2020 and 2024, drought-related cutbacks are estimated to have cost the region $23.6 billion. In addition to drought, U.S. farmers are grappling with falling crop prices and rising input costs, partly due to tariffs and the ongoing conflict in Iran, which have made fertilizer unaffordable for some.

Ariel Ortiz-Bobea, a resource economist at Cornell University, previously commented, “It’s kind of an unprecedented confluence of things. Some naturally occurring, some geopolitical, and then some domestic policy that is all kind of converging.”

Missing investments

From an economic perspective, Ur Rehman finds the lack of private investment in water management particularly concerning. He suggests that markets have underinvested in maintaining water supplies because water has historically been viewed as an environmental issue rather than an economic one.

Conversely, the UN advocates for legal and governance bodies to take the lead in safeguarding water resources, proposing comprehensive policy and legislative reforms as part of a broader global dialogue on climate change.

Earlier this month, the World Bank Group launched “Water Forward,” a global initiative aimed at enhancing water security for one billion people. This program will collaborate with development banks and financial institutions to improve water systems’ resilience to droughts and ultimately foster job creation in water-intensive industries.

World Bank Group president Ajay Banga stated, “When water systems work, farmers produce, businesses operate, and cities attract investment. Our task now is to align reform, financing, and partnerships to deliver reliable water services at scale.”