Every drop counts: water scarcity becomes a business risk

"We never know the worth of water till the well is dry” – Thomas Fuller, Gnomologia, 1732.

Water provision, management and investment has for many years been overshadowed by climate risk in terms of disclosure and reporting. However, like climate, there is a dedicated UN Sustainable Development Goal (#6) [1] which is to ensure availability and sustainable management of water and sanitation for all. Sadly however, as at 2021, the world is “off-track” [2] on its course to achieving this SDG. According to the UN, water use has been growing globally at more than twice the rate of population in the last century, and an increasing number of countries are reaching the limit at which water services can be sustainably delivered [3].

How niche is it, really?

If you really think of how water is central to a number of industries (and societies), you can quickly understand how something that sounds somewhat niche in an investment context, is actually at the heart of many global corporations. The financial sector needs to tune into what the international development sector has been flagging as a key risk for years. Water has a variety of values, ranging from the pricing of water units, to a basic human right for sustaining life [4], hence the importance and justification for why water must be treated as a scarce resource and better factored into investment decisions.

Whilst many may consider water from a pollution perspective, looking at it from a risk angle, water management is closely linked to agriculture, energy and food production, population growth and climate change. CDP’s most recent global water report [5] emphasises how companies reported maximum financial impacts of water risks at US$301 billion (five times higher than the cost of addressing them). Of the sectors identified, manufacturing and power generation are expected to have the highest potential financial impact:

Source: CPD, 2020

Investors need to recognise water management as a key risk and one that will increasingly underpin investment decisions, especially as water scarcity increases and becomes more prevalent.

How are organisations addressing water risks?

The European Sustainable Finance Disclosure Regulation (SFDR) aims to facilitate transparency and standardisation, and amongst other things, covers environmental reporting whereby water features in seven specific reporting metrics [6]. One improvement that should follow from the increasing pressure and scrutiny on the reporting, is better water disclosures over time, as we’ve seen with climate, and recently biodiversity, while highlighting the connectivity between these issues. Increased disclosure and awareness around these risks will hopefully result in improved decision making.

The impact of water is starting to get noticed. Reports [7] are highlighting that existing investment frameworks focus primarily on water quantity and do not put adequate focus on water quality and pollution, or the ‘net’ water impact of investments. The role of water stewardship and the engagement of investors remain critical to improve (investment) outcomes. Impact Assessment Management’s Water Report, in conjunction with the Swedish pension fund, AP7, concludes that there is currently not enough publicly available information for investors to assess the impacts of their investments on water availability and management, making it difficult to accurately assess water-related risks.

That said, it’s not all bad news. As the materiality of water issues are better understood, there are a number of investment opportunities too, particularly as they pertain to water intensive industries and technical solutions or part of the broader low carbon transition efforts and biodiversity considerations.

How important is it for ESG metrics?

Sustainalytics, who themselves have introduced several water metrics, found in a research paper [8] that empirically, when computing the correlation between the Risk Score of the Material ESG Issues (MEI) Resource and Water Intensity Weighted Score, it was found to be +27.7%. Similarly strong and positive is the correlation between the Risk Score of the MEI Resource and the ESG Risk Score at +36.4%. Hence, water-related metrics are an important determinant of the MEI Resources which itself appears to have significant direct and indirect impacts on the ESG Risk Score.

Why should you care?

Water is a strategic issue that needs to be part of any sustainability framework, yet it is harder to quantify than carbon and needs to be considered relative to the local water scarcity context. Measuring genuine impact of water requirements and supply is key to catalyse investment into the required companies and technologies to avoid a negative impact on investments if not considered or evaluated.

Much like climate in the past, globally agreed/understood comparable metrics or standards are needed to improve how the financial sector can measure, understand, invest in and ultimately improve water solutions. It should also have significant societal benefits, as water management becomes increasingly important in communities globally.

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