Countries can lessen the water footprints of their trade by promoting supply chain disclosures and due diligence, using standards for market access and addressing water considerations in trade agreements.
Many high-income countries rely on imports from areas with severe water scarcity. As climate change impacts worsen, this dynamic will likely compound environmental and social problems in producer countries – from water and food shortages to social unrest and intensifying conflicts. Business as usual in the trade of water-intensive products will potentially compound supply risks, jeopardize investments and conflict with the commitments of both importers and exporters to peace, development and climate resilience. This research paper shows that businesses, states and citizens concerned about the water footprint of their imports have the capacity to push for more sustainable supply chains that link trade and environmental policy.
Policy options to achieve this include mandatory disclosures and due diligence on the environmental and social impacts of supply chains; the use of standards to promote trade in responsibly sourced goods; and trade agreements that aim to raise sustainability ambition bilaterally. The UK and EU are both beginning to use these mechanisms to different extents, with the EU taking steps that could put it on a path towards greater environmental disclosures and due diligence in global supply chains, including for water. This could enable financial actors and consumers to better understand the risks of a company’s strategy or the processes that produce items they consume.
These approaches come with their own trade and political challenges. Reporting can be complex and burdensome especially for smaller firms. Capacity-building in order to comply with new policies is especially important for suppliers in developing countries. In addition, trade is often a politically sensitive topic and policy measures to boost sustainability may be unpopular with international trading partners. Building trust between importers and exporters will be an important long-term diplomatic process running parallel to any trade measures. It is crucial that partners understand that new measures are designed to promote global sustainability and not to protect domestic industries.
The case studies of Morocco–EU and Malawi–UK trade reveal that there are opportunities for importing states to boost transparency and sustainability. In both cases, supply chain governance policies such as disclosure requirements or sector-specific regulations (for example in forest-risk commodities such as palm oil) could explicitly promote sustainable water use for key traded goods. In the longer term, UK and EU trade agreements should follow the example of the 2022 UK–New Zealand trade agreement, which included dispute settlement and enforcement mechanisms to promote environmental measures in trade.
Developing supply chain disclosures and due diligence
The EU, UK and other governments that are interested in developing climate due diligence and disclosure regulations should consider how these can be streamlined and coordinated to lessen the reporting burden. They can also join WTO discussions on the coordination of social and environmental disclosure measures, and the larger question of how to combine trade and climate issues.
UK: Mandate supply chain disclosures and due diligence
The UK Environment Act could lessen pressure on water systems through its attempts to address illegal deforestation in overseas supply chains. However, there is currently insufficient additional legislation to comprehensively achieve this goal. It is therefore necessary to enforce compliance and mandate more detailed disclosure and due diligence, aimed at ensuring that the UK’s imports are environmentally and socially sustainable. To give disclosure and due diligence legislation teeth, policies should include enforcement measures for non-compliance and requirements for third-party auditing. Mandatory reporting requirements can also ensure that there is sufficient detail to understand water risks. For example, companies could be asked to disclose basic information such as supplier locations and import volumes. Providing disaggregated data on purchases from water-stressed areas and information about how degrees of water stress are monitored would be one way to begin to understand the water impacts of UK trade. Companies could also be required to record and make publicly available legal complaints or violations brought against them or their suppliers in other jurisdictions.
EU: Strengthening existing environmental reporting and due diligence requirements
The EU’s CSRD and CSDDD policies are promising starting places for disclosing environmental impacts of trade and holding firms accountable for non-compliance or harms to victims. Recent setbacks on CSDDD illustrate that these policies are also politically controversial and difficult to implement; to be truly effective, the CSDDD will need to widen its scope beyond the largest companies, particularly in the high-risk areas of agriculture, textiles and mining as had previously been proposed. In the absence of strong EU legislation, ambitious member states may still push forward by making reports on water impacts mandatory for firms operating in these high-risk sectors. Such legislation could also make reporting mandatory rather than voluntary in areas where the EU has loosened its regulation, such as biodiversity and employment conditions for contracted workers. In addition, the EU’s standards for market access that are employed in other high-risk sectors for conflict minerals, batteries and forest commodities could in some cases be used to address water issues when these are related to deforestation and mining.
Support trade partner compliance with disclosure and due diligence standards
Address challenges for local compliance, monitoring and enforcement
Smaller businesses may have more difficulty complying with international standards than larger operations with more resources. Both the case studies of Malawi and Morocco demonstrate that small businesses may struggle to meet certification and audit costs, as well as in getting enough money to invest in more environmentally friendly business models. Additionally, in buyer-driven supply chains, smaller producers also have less power to set prices and may therefore bear the cost burden of compliance. To prevent smaller businesses from dropping out of global supply chains, large buyers and importing country partner agencies should offer compliance support in the form of low-cost training and certification assistance for smaller businesses.
Supply chain governance measures also require monitoring, reporting, verification and enforcement. In developing countries such as Malawi, there are limited local financial and personnel capacities to enforce existing policies. Additional measures such as verifying sustainability claims or prosecuting violations would require extra funding and recruitment, which may not be realistic, nor necessarily a key priority for governments. The UK and EU should aim to balance policies to both push sustainable trade and provide the time and resources needed to make policies workable.
Be aware of the political consequences of due diligence laws
Measures to improve the environmental footprints of traded goods will not always be perceived favourably by trading partners. Taking the example of Morocco, due diligence standards that apply to human rights and sustainability have brought the Western Sahara issue to the forefront, making discussions around disclosure requirements more politically controversial. This in turn has had political implications for Morocco–EU trade. The EU and its member states will therefore have to carefully navigate diplomatic concerns when it comes to implementing trade measures for sustainability. Nevertheless, given that it is a major trading partner for many countries worldwide, the EU should have the sway and flexibility to find acceptable solutions.
Reactions to linking trade and climate policy, like the EU deforestation regulations, show that such measures can be perceived by other countries as protectionist or discriminatory. This highlights the need to take into account the concerns of trading partners in any policy shifts. Existing high-level forums, such as the Trade and Environmental Sustainability Structured Discussions at the WTO, where developing countries are leading dialogues on trade and the environment have a critical role to play in improving engagement between trade partners. Ongoing consultations can help to boost relations with partners for whom water-intensive goods make up a significant share of exports.
Improve environmental measures in trade agreements
The negotiation of bilateral trade agreements between the UK or EU and other countries is an opportunity to set priorities for trade relationships, including the environmental impacts of trade.
This should include enhanced sustainability mechanisms that take into consideration different sectors and allow for dispute settlement, as is the case with the 2022 UK–New Zealand trade agreement, which includes a mechanism for reporting and remedies for non-compliance with environmental commitments. Enhanced sustainability impact assessments that include key water-intensive sectors can provide important information for trade and sustainability policy. This can help to avoid issues like the dynamics in Peru, following the introduction of the Andean Trade Preference Act, where the reduction of tariffs on water-hungry crops like avocados exacerbated water scarcity. In the case of EU trade with Morocco, the 2013 sustainability impact assessment correctly predicted that increased trade with Europe would put pressure on water systems. However, the EU has yet to put in place measures to reduce this pressure.
If the EU or UK is to prioritize water and environmental sustainability it will be necessary to have ongoing environmental impact assessments. These should occur at periodic intervals, given that new information can come to light that changes the perception of environmental practices. An example of this is when farming that used drip irrigation was found to actually increase rather than reduce agriculture’s water-intensity. As has been outlined in this paper, any further agreements, for example on green hydrogen, should include sustainability impact assessments to protect the marine environment and support social sustainability. In addition, strong dispute settlement language and mechanisms with the potential to enforce penalties, such as suspending trade concessions in cases of non-compliance, are also key for future arrangements. The UK has an opportunity to put water systems on the agenda through the country’s current post-Brexit trade deal negotiations. To achieve this, it is necessary to assess the impacts of trade on water sustainability prior to negotiations, by enhanced transparency and disclosure as well as quantitative measurements about the true extent of the water risks associated with different goods and trade patterns. This information can then provide the basis to develop joint strategies for mitigating water risks brought about by increased trade.
