Introduction

Virtual water — the water embedded in supply chains to produce and deliver goods — plays a major but largely unrecognised role in the global economy. Trade frequently has negative impacts on water security: among Global North-headquartered companies that disclosed water use data to CDP in 2025, almost 80 per cent of supply-chain facilities with substantive water-related challenges were in the Global South (p.7). By 2030, the world could face a 40 per cent shortfall in freshwater supply (p.7). Despite being a critical input across virtually all traded commodities, water is effectively the ‘forgotten input’ in global trade, with its true costs not adequately reflected in supply-chain policies.

The ‘virtual water’ trade conundrum – how local and remote agendas collide

Food systems account for around 70 per cent of global freshwater withdrawals (p.18). Some 81 per cent of ‘blue water’ embedded in international agricultural trade is associated with consumption in upper-middle-income and high-income countries (p.19), with the G20 responsible for 55 per cent of the blue water embedded in all international trade in agricultural commodities (p.19).

Virtual water flows disproportionately benefit countries with greater financial resources, while increasing water stress in countries less equipped to manage such risks. Companies trading internationally seldom consider the true cost or impacts of water use in their sourcing decisions.

In the critical minerals and electronics sectors, 16 per cent of critical mineral deposits and mines are located in highly water-stressed areas (p.20). Over half of global lithium reserves are found in South America’s ‘lithium triangle’, a region experiencing severe water stress (p.20). Over 40 per cent of data centre facilities are projected to face high or extremely high water stress between 2030 and 2040 (p.21).

A crisis in need of global solutions – water governance as a challenge of geopolitics

Geopolitical fragmentation is reshaping the conditions under which collective action on water risks can occur. Annual global military expenditure reached an all-time high of $2.7 trillion in 2024, with defence budgets rising across more than 100 countries (p.26), squeezing fiscal space for development and water resilience investment.

Key regulatory frameworks have been weakened. The EU’s Corporate Sustainability Due Diligence Directive (CSDDD) has been narrowed in scope, with its roll-out delayed to 2027 and smaller companies excluded. The EU–Mercosur trade agreement, concluded in early 2026, prioritised geo-economic positioning over environmental provisions, despite the substantial water footprints of the sectors it covers. The World Economic Forum’s Global Risks Report 2026 identifies geo-economic confrontation as the most severe short-term risk, while environmental risks continue to dominate the long-term global outlook.

Looking forward – models for more cooperative water governance

The paper presents 10 recommendations targeting governments, international institutions, corporations, financial institutions and civil society organisations (CSOs). These include: expanding plurilateral Trade and Environmental Sustainability Structured Discussions (TESSD) to explicitly address embedded water in trade; leveraging WTO technical committees to integrate water considerations; strengthening water provisions in bilateral and regional trade agreements; and enhancing supply-chain due diligence under frameworks such as the CSDDD.

On the demand side, governments should align public procurement with water sustainability goals — in OECD countries, government procurement accounts for up to 20 per cent of GDP (p.35). Corporations should integrate basin-level water stress into procurement and sourcing decisions, while financial institutions should treat water security as a material factor in lending and investment portfolios. CSOs are encouraged to monitor compliance and advocate for a just transition to water security, with particular attention to marginalised groups.