by Nawar Alsaadi
In 2020, no typhoons made landfall in Taiwan. It was the first time this had happened since 1964, or more than half a century ago. Tropical cyclones, often associated with flooding, are an essential source of precipitation for Taiwan’s water reservoirs. Yet, as climate change takes hold, scientists believe weather patterns are changing in the region, and that continued warming could reduce annual rainfall in Taiwan by 40 to 60% by the end of the century. It goes without saying that water is essential to life, and a sharp reduction of rainwater will have a significant negative impact on the life and livelihood of Taiwan’s 23-million people. But what you may not know is that recurring droughts in Taiwan could impact your portfolio, not to mention the price and availability of many consumer goods you use every day.
The severe depletion of Taiwan’s water reserves has forced the government to restrict residential water use and industrial water use by up to 15%. This forced reduction has filtered through to Taiwan’s microchip industry, which accounts for 54% of the world chip supply (a number that rises to 90% for the most advanced chips). It is this global dependency on Taiwan’s chip production that has turned a seemingly local environmental issue into a global economic bottleneck.
An unquenchable thirst
The semiconductor industry is a notorious consumer of water. Companies including TSMC (the world’s largest chipmaker) consume 200,000 tons of water per day—enough water to fill 80,000 Olympic-sized swimming pools. To its credit, TSMC recycles over 80% of the water it uses and is currently building additional recycling capacity. Nonetheless, the lag time between building incremental water recycling capacity and the availability of this capacity means TSMC’s chip production, and that of other manufacturers in the region, will continue to be subject to water use restrictions. This in turn means the ongoing global chip shortage—which is both demand and supply driven—is unlikely to ease anytime soon, with major chip producers recently warning of the bottleneck lasting until at least the middle of 2022.
Apple, Ford, and Caterpillar, among others, have warned of reduced sales due to lack of chips. Ford is expected to sell 1.1M fewer vehicles this year. Apple has pointed to US$3 to $4B in lost sales in Q2/21 alone. Even home appliance and television makers are concerned about the situation. In our technology-dominated world, there is hardly any industry that does not depend on a steady chip supply in one way or another. But, as we have been training our eyes on the technology, it appears we have forgotten our dependence on the planet’s finite natural resources to meet our seemingly endless need for gadgets.
This cascading chip shortage is a perfect example of how a climate and natural capital issue can translate into or contributes to a major economic disruption. Semiconductor companies that have invested in sufficient water recycling capacity are not just better positioned to meet the growing demand for chips, they are also contributing to the resilience of the world economy and the preservation of our planet’s natural capital. The intimate relationship between water supply, climate change, and semiconductor production illustrates how ESG factors can be deployed to identify and mitigate potential environmental risks. This relationship extends beyond the semiconductor manufacturers to the myriad industries that depend on them as environmental challenges in their supply chain disturb their own business. Asking a washing machine manufacturer whether their chip supplier has sufficient water recycling capacity is not an intuitive question a traditional financial analyst would ask, but this is exactly the kind of risk a thorough ESG assessment can capture.
The interconnected nature of the global economy and the lean design of many companies’ supply chains calls for added attention to emerging sustainability-related vulnerabilities. According to McKinsey, companies can now expect supply chain disruptions lasting a month or longer to occur every 3.7 years. In a world where climate change is not contained, biodiversity loss is not addressed, and social inequalities and discontent are left unchecked, the rate of sustainability-related business disruptions will only increase.
The unfortunate drought in Taiwan and the ripple effects that have spread to remote industries and geographies speak to the importance of incorporating ESG factors in the investment process, not just for the purpose of identifying potential material risks, but as a foundation to engage with companies and encourage them to incorporate robust sustainability practices in their operations. Companies that embed environmental, social and governance best practices will not only become more resilient, they will also contribute to making the world a better place.