Water scarcity was once treated mainly as a local environmental problem. Global trade now transmits its consequences far beyond the rivers, aquifers and watersheds where it originates. As both our climate and geopolitical environment become more volatile, these risks are intensifying.
Global supply chains are a major driver of both water pollution and water scarcity. This is known as “virtual water”: the water required to produce, process and transport the goods that move through trade.
The effects of decades of unsustainable use, now aggravated by climate change, are becoming visible: empty supermarket shelves when floods disrupt harvests, higher prices when scarcity impedes manufacturing and disrupted freight when rivers run low. In Europe this year, record-low water levels on the Danube have choked off a key inland trade route, raising transportation costs and inhibiting power generation at critical nuclear plants.
The United Nations has warned that the world is entering an era of water bankruptcy, as freshwater systems are depleted faster than they can be replenished.
The economic consequences are becoming harder to ignore. In exposed regions and sectors, water stress is reshaping economic stability and long-term growth.
A new initiative from the OECD has framed water risk as a financial-stability issue, drawing attention from central banks and financial supervisors for the first time. Leading companies are also starting to respond: the number of firms disclosing water data to the environmental-disclosure non-profit CDP has doubled year on year.
A void of multilateral solutions
The geopolitical context makes these problems harder to tackle collectively. The global order is moving from relatively open trade and multilateral co-operation towards one defined by rivalry, resurgent industrial policy and strategic competition. Companies and governments are responding through friendshoring, nearshoring and onshoring. These choices may reduce exposure to tariffs or distant disruption, but they do not eliminate water risk. They redistribute it, including into basins where scarcity, pollution and weak governance are already acute.
The rewiring of global trade is therefore changing where water risk becomes visible, where it accumulates and who is expected to manage it. Collective risk reduction is becoming harder just as the need for it becomes more urgent.
No quick fixes for water
This is where water must enter both industrial policy and corporate supply-chain strategy. Our Chatham House report, Making water use in trade more sustainable, was written from that practical concern.
Corporate disclosure is beginning to show what this looks like in practice. For example, Kimberly-Clark de Mexico has warned that proposed changes to national water rules could restrict concessions in low-availability regions attracting nearshoring investment, while tighter wastewater standards would require additional treatment spending. Constellation Brands shows the same issue from the input side: grapes, barley, malt, hops and maize are exposed to tariffs, geopolitical disruption, droughts, storms and wildfires, with reduced water supplies capable of causing crop losses and product shortages.
Companies and suppliers need to understand the water on which they depend: the quantities used, pollution risks, seasonal shortages, competing users and harms to vulnerable groups. These factors affect surrounding watersheds and ecosystems. Water challenges are shared; they cannot be solved in isolation, and technology can take businesses only so far.
How companies can take control
For companies, the starting point is visibility. Water exposure often sits deep in the value chain, beyond direct operations and first-tier suppliers. CDP data show more companies mapping supply chains, but most still stop at Tier 1. As trade routes and sourcing strategies are redrawn by geopolitical pressure, advantage will lie with firms that understand where water risk is being redistributed: which upstream basins are under stress, which suppliers are exposed and where local governance to mitigate these risks is weakest.
That means integrating basin-level water stress, pollution risk, ecosystem health and local governance conditions into procurement, supplier selection, due diligence and investment planning. Without value-chain data, much of the real risk drops out of view: the water equivalent of trying to tackle a carbon footprint while ignoring Scope 3 emissions.
Visibility is necessary, but not enough. In water-stressed regions, companies often need to work beyond the factory gate with suppliers, municipalities, communities and civil-society partners on shared infrastructure, monitoring, reuse, pollution control and ecosystem restoration. In a fragmented world, co-operation is more likely to emerge from practical coalitions among actors with shared interests than from grand multilateral bargains.
The commercial case is becoming clearer. As public authorities face tighter fiscal and political conditions, resilience will become a competitive differentiator. Companies able to show robust exposure mapping, credible mitigation plans and alignment with local water strategies will be better placed to protect production, maintain market access and signal resilience to investors.
It would be a mistake for companies to hedge against geopolitical insecurity by unwittingly creating new exposure to water insecurity. Sourcing decisions made in response to tariffs, disruption or distance need to account for basin-level stress, wastewater requirements, competing local demand and the capacity of local institutions to manage shared resources. Otherwise, a move designed to improve resilience can simply shift exposure to places where water is already contested.
Technology has an essential role, especially where it reduces withdrawals or enables reuse. But it must sit within a wider resilience strategy, not as a substitute for understanding the basin context. Companies that move early will be better positioned as investor scrutiny and physical water limitations escalate in the years ahead.
Best practice for financial portfolios
For financial institutions, the first step is to stop treating water as a secondary sustainability theme. Water insecurity affects credit risk, operational continuity, asset valuation and long-term portfolio performance. It belongs in credit assessments, scenario analysis, stress testing, underwriting and risk pricing, especially in water-intensive sectors and high-stress basins.
Investors should require better disclosure from portfolio companies on water dependencies, basin exposure and mitigation plans, and engage where companies are not building credible resilience. They should also look for opportunity: financing wastewater treatment, reuse technologies, circular water systems and catchment-level resilience can reduce both systemic and firm-level risk and capture a resilience premium.
Nor should they wait for water to send a clear price signal. It is local, politically sensitive and often underpriced; scarcity will not resolve through a neat market-clearing mechanism. Financial institutions that understand this sooner will be better placed to protect portfolios and capture upside in a water-constrained economy.
Views or opinions expressed are those of the author and any individuals cited, and do not necessarily reflect those of Economist Enterprise or any other member of The Economist Group.