Sustainable Investing

Understanding the Water-Energy-Food Nexus

Maria Elena Drew, Director of research for Responsible Investing

Executive Summary

Insights into the Water-Energy-Food Nexus (WEF-Nexus) provide a valuable lens from which we can better understand the potential impact of environmental dynamics on company performance. When one WEF-Nexus component falls out of balance, knock-on effects can be seen on other nexus components and the companies that operate within them.

Understanding the WEF‑Nexis

Water, energy and food are three vital components for sustainable development. The interaction of these factors is commonly referred to as the Water‑Energy‑Food Nexus (WEF‑Nexus).

As the figure below illustrates, a multitude of factors work to drive demand for food, water and energy—including changes in population, urbanization, diets and economic growth. These dynamics are creating complex challenges around the globe.

The Water‑Energy‑Food Nexus

The factors driving demand for water, energy, and food

The Water‑Energy‑Food Nexus

Sources: Water and Energy (UN Water 2014), Food and Agriculture Organization of the United Nations, UNESCO World Energy Outlook (IEA 2017).

As we seek to understand the effect of these complex interactions on companies and industries, a key indicator is the nature and pace of resulting regulatory reform.

China represents a powerful example of how a WEF‑Nexus imbalance works to drive environmental reform. Environmental regulation in China has tightened substantially as the government encourages restructuring of the country’s industrial sector. China’s environmental reform program began nearly a decade ago and, if successful, will drive a structural shift in the economy—with significant investment implications.

Key reforms include:
 

  • Scaling down “non‑circular” industries—The imposition of water caps and pollution targets makes it more difficult for businesses that “overdemand” energy and water usage or cause waste management issues. Key industries in these crosshairs are steel, nonferrous metals, petroleum and petrochemicals, chemicals, building materials, paper, and textiles.
  • Energy sector reform—The Chinese government is orchestrating a gradual shift in the power generation mix from coal to renewables and natural gas, as well as a shift in transportation infrastructure.
  • Agricultural reform—Growing water shortages and soil pollution in China’s main agricultural regions are driving efforts to sustainably improve agricultural yields and reevaluate the range of crops grown.

The WEF‑Nexus Social Impact

While this paper largely focuses on the effects of the WEF‑Nexus on the environment, it is important to recognize its significant social impact.

Two of the most important social factors affecting environmental reforms are employment and public health. In China, for example, the planned shift to a “circular economy” will stimulate growth in better‑quality jobs. The ability of the government to put pressure on “non‑circular” industries has been made easier as the growing service sector has created new employment opportunities.

Blue Line

1.b billion

Number of people currently exposed to water scarcity. The figure is set to double over the next two decades.

Meanwhile, as China’s air, soil, and water pollution problems have prompted public health concerns, the government’s regulatory agenda has evolved to place a greater emphasis on ecological factors. As in the developed world, public health is often a good catalyst for environmental reform—particularly in countries with universal health care.

The Rise of WEF‑Nexus Pressures Globally

Between 2000 and 2016, 1.2 billion people around the world gained access to electricity and many emerging markets experienced rapid industrialization. Between 2000 and 2015, global electricity production increased 57% (3.0% CAGR). The overwhelming majority of this growth came from emerging markets, which grew by 135% over the period. Electricity production in China and India increased 332% and 143%, respectively, while water withdrawals increased 24% and 25%. These rapid changes have had a significant impact on each country’s WEF‑Nexus, which has been further compounded by the fact that neither is water rich.

Water scarcity isn’t only an issue for China and India. Today, nearly a quarter of the world’s population live in water‑scarce regions. In the next two decades, the number of people exposed to water scarcity is expected to double from the current 1.6 billion, largely due to economic growth and urban migration. Regions and countries facing the greatest water and pollution stresses include:
 

  • Asia (Afghanistan, China, India, Pakistan, Philippines, Sri Lanka)
  • Middle East (Bahrain, Iran, Israel, Jordan, Lebanon, Oman, Qatar, Saudi Arabia, Turkey, UAE)
  • Latin America (Chile, Peru, Mexico)

It is typically easier for politicians to mobilize around locally impactful issues (like water scarcity, rising food prices, or pollution) than a globally focused, long‑term issue like climate change. However, as the impact of climate change intensifies, scientists predict more regions will encounter water scarcity. This means WEF‑Nexus pressures will become a local issue in more and more countries over time. Key indicators of looming environmental reforms include:

  • More frequent droughts and rising food prices
  • Consistent overdraws on river systems and aquifers
  • Agricultural inefficiency—low yields and/or tilts to nonfood crops
  • Impact of pollution on public health and quality of life
  • Low unemployment—politicians can address ecological issues when there is less economic pressure

As the pull on this finite resource forces more regions into water scarcity, we expect greater intervention by governments as they struggle to manage their water, energy, and food resources. This in turn will likely have a downstream effect, impacting the energy, utility, and transportation sectors as well as other sectors indirectly exposed to the WEF‑Nexus.

Download the full white paper.

Understanding the WEF Nexus

The Water-Energy-Food Nexus is a valuable lens to analyze the impact of environmental dynamics on company performance.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of April 2019 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.

T. Rowe Price Investment Services, Inc.

© 2019 T. Rowe Price. All rights reserved. T. Rowe Price, INVEST WITH CONFIDENCE, and the Bighorn Sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc.

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