What’s the connection between droughts, chips and inflation?
Sponsored Content, Julia Warrander and Russell Waite, of Affinity Private Wealth, reply:
THE Taskforce on Nature-related Financial Disclosures is an international initiative aiming to build a framework to provide guidance for organisations to report and act on evolving nature-related risks.
Its goal is to support a shift in the flow of capital away from nature-negative outcomes and towards nature-positive outcomes, the latter enhancing the resilience of our planet – and, with it, our livelihoods and prosperity.
This is undoubtedly an admirable ambition – but why do organisations need to be thinking about nature-related risks? To answer this we need to recognise a significant amount of global economic output depends on properly functioning natural systems, such as stability of climate and food production. Risks arise when these natural systems are compromised.
To explore this further, let’s think about water. Life on Earth relies on H2O – but so too does industry and commerce. As countries develop and populations increase, the demand for water often approaches or exceeds supply, leaving economies vulnerable to variations in rainfall. This creates the risk that water supply will be curtailed. It is the manifestation of this very risk which has – in part – resulted in the global shortage of semiconductors, or chips, as they are more commonly known.
In 2021, Taiwan endured a severe drought. Accounting for over 60% of total revenues globally, it dominates chip manufacturing. Large amounts of ultra-pure water are needed in the production process and the lack of rain last year strained water supplies, prompting the Taiwanese government to start rationing water for more than a million businesses and residents.
One manufacturer uses, on average, more than 150,000 tons of water per day to maintain operations.
So what nature-related risks materialised for this business? Due to the water shortage, it had to start relying on water trucks to keep foundries functioning. This significantly increased the costs of production, just at a time when global supply chains are also impaired as a result of the pandemic.
A drought contributed to chip shortages, leading to inflation in goods such as cars, televisions and mobile phones. Who would have thought this?
