Investing wisely in water requires much better information
In advance of this week’s FT WWF Water Summit, Margaret Kuhlow, WWF’s Finance Practice Leader, urges the financial sector to get serious about water risk and calls for the disclosure of asset-specific location data to help realize water investment opportunities.
Business needs nature
WWF is in the business of saving life on Earth. And even though we don’t like to put a price on nature, we can.
Every year, the services that nature delivers, such as freshwater, pollination, soil fertility and climate regulation, are worth an estimated US$125 trillion to the global economy.
Yet as WWF’s forthcoming Living Planet Report 2018 will show, we are using up our natural capital faster than the Earth can replenish it. To sustain our current global levels of consumption, we would need 1.7 planets — but we only have one.
In many countries, climate change and demographic pressure are set to worsen water shortages, jeopardize food production, put businesses at risk of drying and drowning assets, undermine the license to operate, and pollute and degrade natural ecosystems.
In WEF Global Risks Report 2018, four of the top five risks in terms of impact are environment-related, including water crises, which are both an environmental and human tragedy as well as a business risk.
Businesses are already feeling the effects of too little, too much, or too dirty water, either through a fall in revenue or an increase in capital expenditure.
The recent IPCC special report on Global Warming of 1.5°C shows the heatwaves, flooding and extended droughts we previously expected to see with a 2°C increase are likely to manifest through a 1.5℃ change or less.
And while the proportion of the global population exposed to water stress could be 50% lower at 1.5°C than at 2°C, a 1.5°C increase will still expose 250 million urban residents to severe drought and increase flood risks by 100% by 2100.
With a 1.5°C change, freshwater reserves could fall by 9% in the Mediterranean, 10% in Australia and 7% in north-east Brazil while 800 million people in Asia who rely on the continent’s mountain glaciers for water could have to deal with a third less.
Globally, corporate respondents to the CDP Water Questionnaire indicated droughts, floods and water pollution cost business $14 billion in 2016 — a five-fold increase over 2015. Almost half expect a substantive change in business operations, and in 2017, reporting companies committed $23.4 billion to tackle water risks.
As we transition into a world of uncertain extremes, climate risks that manifest through water are real and growing — relevant to investment decisions we make not in a decade but today.
It is time for the finance, investment and insurance industries that support these businesses to assess and respond to water risk. Financial scenario analysis must account not only for carbon transition but also water-related risks and opportunities on the ground.
Water-related risks, whether reputational, regulatory or operational, offer opportunities for profitable investment in areas such as irrigation, wastewater treatment, water supply, leakage prevention, flood defense, wetland restoration and clean technology.
At this week’s FT Water Summit, a new report from WWF, ING and BCG, Seizing the Water Opportunity, will demonstrate how blended private and public finance can help achieve SDG 6 on ‘water and sanitation for all’ and secure economies and bottom lines.
In fact, meeting the estimated US$1 trillion investment needed for water infrastructure means private sector involvement is essential.
In Turkey’s Büyük Menderes basin, for example, textile manufacturers around Denizli are implementing cleaner production methods, reducing costs and cutting pollution in an area that is rich in biodiversity and a vital source of water for communities; and the government is planning a ‘green industrial park’ as part of a global initiative with the International Finance Corporation (IFC).
In Portugal, Lisbon’s water company, EPAL, cut water losses from more than 20% to less than 10% between 2005 and 2015, achieving total savings of €68 million for an initial investment of €2 million followed by €500,000 per year over the same period.
More broadly, freshwater is key for delivering almost all the SDGs and realizing economic opportunities in food and agriculture, energy and materials, cities, and health and well-being worth at least $12 trillion by 2030.
Disclosure, disclosure, disclosure
Supporting investments in bankable water projects can help companies gain a competitive advantage and benefit from lower costs, more resilient supply chains, and a better reputation with customers and regulators.
The key to realizing financial return is disclosure of meaningful data.
In June 2017, the Task Force on Climate-related Financial Disclosures (TCFD) issued recommendations for voluntary, consistent climate-related disclosures for investors, lenders, insurers, and other financial companies. Over 500 companies have so far expressed support for the recommendations, and the first reports are starting to appear.
Both the TCFD and CDP offer frameworks with which we can start quantifying material water-related risks that pose systemic risks to the financial system as serious as those driven by exposure to fossil fuels, as well as identifying opportunities for investment. And in many cases, water and climate risks and opportunities are related.
Better disclosure of material water and climate risks would make critical information available for financiers, investors and insurers, enabling them to assess risks more accurately and invest in business models that contribute to both water security and climate resilience.
Without access to additional, more specific and more standardized data, investments will languish in pilot and testing stages.
Location, location, location
We must evaluate exposure to water risk and identify opportunity for response at both basin and operational levels.
WWF’s Water Risk Filter will soon offer enhanced features, enabling financiers, investors and insurers to asses water risk, analyze TCFD-linked scenarios, estimate impacts on company value, and evaluate the appropriateness of mitigation measures.
But there is a crucial gap.
What the Water Risk Filter needs, and many investors lack, are asset-level location data on the specific whereabouts of operational and supply chain factories and farms. Some information, such as mining asset location, is openly available but assets of the Global 2000 are not comprehensively covered.
Without this information, context is lost. And without context, accurately evaluating both water risk and opportunity is impossible.
This is the single biggest impediment to better integration of water risk within financial decision-making.
The TCFD has created momentum for disclosure. Now we need a clear signal from the financial sector that accounting for water risk is also ineluctable, and the provision and disclosure of high quality, consistent and specific asset-level data, fundamental.
The FT Water Summit will examine how companies can collaborate to solve shared water challenges and generate return on investments through water stewardship.