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Commentary

Water + Indigenous Peoples Rights = Risk

Investors are currently under-estimating the correlated risks that Indigenous Rights can pose to their portfolios, according to Rebecca Adamson, Founder of First Peoples Worldwide.

Investors face four hard truths in today’s finance markets: massive global demographic shifts; unprecedented demands on natural resources; trillion-dollar capital shifts taking place worldwide; and the accelerated spread of increased market volatility. Many forms of risk – risk identification, risk management, downside risk, risk pricing and risk mitigation – are becoming important drivers in this market.

Collective risks

Investors are still looking at their portfolios as an aggregate of individual businesses or even sectors without acknowledging the collective risks to their underlying asset base driven by the actions of their individual holdings. For example, last year Montana did an assessment of the state’s financial system, titled ‘Access to Finance in Montana’. Although 62% of Montana land is used for agriculture – and water demands are increasing due to uncertain precipitation patterns, higher temperatures, and longer growing seasons – not a single prediction of higher business risk or unanticipated market changes was mentioned. Yet these weather changes will increase the risk individual ranchers and the agriculture industry face.

The erratic weather patterns and uncertainty of our water supply, coupled with an unprecedented growing demand for water, raises the potential for new kinds of risk and higher volatility. There is frequent debate as to whether ESG ratings tell us anything meaningful but while there is significant qualitative data there is very little if any quantitative evidence. More empirical evidence and quantitative data should become part of the debate.

Better risk-based analytics such as the database on climate patterns and risk matrixes maintained by the insurance industry (especially in Europe) include empirical evidence on risks regarding water, the environment and now conflict and famine. The four hard truths in today’s finance landscape suggest correlated risk and expanded quantification of costs should be part of the risk framework.

Environmental and social

Indigenous People rights and water have been historically under-addressed by investors. Due diligence for water investments is classified as an environmental risk. However, water and community is just as much of a social risk especially when the rights of Indigenous People are considered. For example, for years Montana’s water future was tied to over 10,000 outstanding tribal water rights claims.

The intensity of mounting demands for water led to the largest tribal water settlement in history. In 2021, US$1.9 billion was awarded to the Confederated Salish and Kootenai Tribe. Throughout the Southwest and much of the Western region, water use and access is subject to tribal rights. Globally 50% of all inland waters are located on Indigenous Peoples’ territory. Like US tribal rights, Indigenous waters are protected by legal frameworks that range from national to international, such as ILO Treaty 169, the Convention on Biological Diversity and UNDRIP. Under these, Indigenous People have the right to free, prior and informed consent for any operations taking place on their lands and territories.

In addition to 50% of the world’s inland waters’ Indigenous Peoples’ territories encompass at least 30% of the earth’s land surface and if Indigenous Customary Rights are recognised it totals 50% of the land. Currently, conservationists have designated 15% of the remaining wilderness as Protected Areas of which over half are located within Indigenous lands. In fact, 80% of the planet’s remaining biodiversity is within Indigenous territories along with 40% of the terrestrial areas, 33% of the intact forest landscapes and 70% of tropical forests.

Material impact

Climate financing, which is 61% debt and 33% equity faces high risk in ecoservice investing when you consider 56% of carbon storage and 50% inland waters are represented. Indigenous Rights can materially impact investor risk, credit events and company operations.

A recent study by Wharton, titledESG Material Credit Events and Credit Risks’, found that projects operating on Indigenous lands or within a 10km distance had as high as 500% higher material events than those operating farther away. Additionally, it was found that the individual projects of companies with poor or low capacity to manage Indigenous risk incurred between three to 66 times higher risk. Yet research found no evidence for the 1,444 projects in the study having factored this potentially 500% higher credit risk into credit ratings, risk mitigation, or the cost of capital.

As illustrated above, in contrast to the conventional idea that Indigenous conflict is primarily with the extractive sector, it now includes natural resources ecoservices, new transition minerals, and clean energy. In January 2024, the San Carlos Apache Tribe and the Tohono O’odham Nation filed a complaint against the Department of the Interior for failing to consult them about Pattern Energy’s SunZia Southwest Transmission Project. Billed as the US’s largest clean energy infrastructure project, construction began last September — only for the Bureau of Land Management to order an “immediate temporary suspension” after the tribes objected. According to Pattern Energy, “The delay would likely put SunZia’s commercial viability at risk.”

Conflict events

Vast amounts of the new transition minerals are being found on Indigenous lands: including 50% of the lithium reserves (which do not include the McDermitt Cadera deposits on Paiute and Shoshone lands in Nevada) and up to 70% of the nickel, copper, and other transition minerals. The first evidence-based global research on foreign direct investments (FDI), the correlation to Indigenous Peoples conflict and material concerns for investors found that FDI increases armed conflict across all sectors (Henisz, W.J, Jamison A.S., & Tadmor D – Indigenous Land Claims and Foreign Direct Investment: Evidence of Conflict Impacts from Geo-Spatial Media Event Data (Wharton, 2023)).

Tracking over 3,000 Indigenous conflicts, the study found that where both IP lands and investments exist, there will be an additional 6.7-armed conflict events in the following year. The potential is for conflict to increase given in the current decoupling or de-risking of the US-China supply chain as low- to middle-income countries are brought into the chain.

From 2012 through 2016, I consulted on social performance with one of the largest corporations in the world achieving reputation accolades, mitigation of protests, resumption of project operations, and de-risking a potential joint venture’s exposure to human rights violations. Because the company lacked an internal audit system to track and quantify its social costs and benefits all the data remained qualitative. This same firm tracked the exact tyre pressure for any vehicle in its fleet because safety was a priority.

A huge fundamental risk

As far as life goes priorities can’t get much bigger than water. As far as the market water is such a huge fundamental risk that it could cause another recession or financial crisis when we reach a tipping point. Both Wharton studies mentioned above found that companies with poor Indigenous Peoples risk management also had low ESG social performance ratings and higher risk. Applying the ESG framework to capture the correlated risk and expanded quantification of water can position investors to absorb the new risks and volatility of today’s finance landscape.

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