If climate change is a shark, water is its teeth. And we are already feeling its bite as extreme floods and droughts ravage cities and communities — and companies’ bottom lines.
Across the globe, businesses are losing revenue or being forced to increase their capital expenditure as a result of water-related natural disasters, crises, regulation and events impacting their reputation. Cape Town has managed to significantly delay #DayZero so its taps will not run dry for now. But the drought has nevertheless had a huge impact on local businesses. One of the area’s major industries — wine — was very badly hit with the grape harvest falling by 20% in 2018, leading to a 9% decrease in the volume of wine sold. Overall, revenue from agricultural commodities in the Cape region fell by around US$500 million.
Globally, respondents to the CDP Water Questionnaire indicated that droughts, floods and water pollution had cost their businesses US$14 billion in 2016 — a five-fold increase over 2015. Incredibly, 43% of those companies said that exposure to water risks could generate a substantive change in their business and operations. If they are not already paying close attention, this statistics represents a signal every bit as clear as a shark fin slicing through the sea for the finance, investment and insurance industries that back these businesses: it’s time to assess and respond to water risk.
And disclosure is key. In June 2017, the Task Force on Climate related Financial Disclosure (TCFD) issued its recommendations for voluntary, consistent climate-related disclosures for investors, lenders, insurers, and other financial companies. Six months later during the One Planet Summit in Paris, 237 companies (including 150 financial companies) with a combined market capitalization of more than US$6 trillion and US$82 trillion assets under management committed to TCFD.
Since then financial regulators and companies have made a start on implementing the TCFD recommendations. Most of the focus has been on scenario analyses and the assumptions that need to be built into those analyses to make them truly helpful for the financial institutions conducting the analysis, as well as for the investors who need to understand what the disclosures mean.
There is nowhere near the same level of awareness of the systemic risks to the financial system from water risks as there is of risks from exposure to fossil fuels. But the TCFD framework does provide an opportunity to examine water-related risks and opportunities in relation to climate change more closely. Better disclosure of material water issues will provide critical information for investors in companies exposed to water risks in their supply chain, as well as opportunities to invest in business models that contribute to water security and climate resilience.
It’s a major opportunity to transform corporate and financial approaches to water — both in terms of mitigating risks and seizing opportunities. That’s why WWF is hosting a panel discussion during the Environmental Finance conference on Water: Risk, Opportunity and Sustainability at the London Stock Exchange, bringing together panelists from banks, pension funds, OECD and the TCFD Secretariat to discuss how to ensure that the TCFD process helps tackle the shark in the pool — the water-related impacts of climate change.
And it is not just a case of disclosure for disclosure’s sake. There are an increasing number of financial solutions that corporates can use. This summer WWF will launch a significantly enhanced version of our Water Risk Filter. With better data and new response and valuation functions, the Water Risk Filter tool will, uniquely, enable financiers, investors and insurers to assess water related risks, analyze scenarios of water related events, estimate their impact on the value of companies and suggest measures to mitigate against these risks.
In addition, WWF is working in coalition with financial institutions and corporates to create bankable projects contributing to climate resilience and river health. We believe that by creating a pipeline of freshwater bankable projects we can help to de-risk exposure of portfolios to water-related climate risks for investors and lenders.
Although there is a growing community that sees the materiality of water risks and opportunities, we are not there yet on how to implement TCFD when it comes to water. WWF and others are keen to seize the opportunity and the momentum TCFD has created to get water integrated in financial decision making.
