Kirsten James, Senior Program Director of Water at Ceres, and Jay Famiglietti, Executive Director of the Global Institute for Water Security at the University of Saskatchewan, outline the financial risks of the water crisis.
The climate crisis and the water crisis are two sides of the same coin in private sector efforts to protect our planet and global economy. While it took decades for corporate and investor action to scratch the surface in terms of cutting greenhouse gas emissions – and those efforts must continue – we don’t have the luxury of time when it comes to water stewardship.
Water is the lifeblood of the global economy – yet it’s been chronically mismanaged by the private sector and other stakeholders. Business leaders and policymakers alike have tried, for too long, to pass the buck on water responsibility – and the risks associated with the water crisis continue to climb rapidly. In fact, US$4.2 billion in major worldwide cities’ annual economic activity is now at risk due to water stress. Because water management is both a local and global issue with a complicated ecosystem of stakeholders, the crisis is often ignored. Investors must act now to ensure water risks are addressed by portfolio companies before it is too late.
The water crisis is systemic and immediate: it is not only harming the daily quality of life for 2.1 billion people who do not have access to safe drinking water, but also exposing companies and investors to far-reaching financial risks.
The relationship between industries and freshwater systems should be broadly viewed as a two-way interaction, meaning that freshwater resources affect industry just as industry affects freshwater. As Kate Brauman, Associate Director of the Global Water Security Center at the University of Alabama, stated, “Every facility is downstream from some other facility.” Business losses of up to US$333 billion could be incurred if water risks aren’t mitigated – this fact alone should spark investors to react instantaneously. Furthermore, data analysis from Ceres and CDP, respectively, paints a compelling case for companies to better manage water risk, lest they face the financial implications of not doing so:
- 50% of stocks that are held by four major stock indices have medium to high water risk;
- In 2020, 2,934 companies reported US$301 billion in water-related financial risks.
While the cost of addressing water impacts varies across sectors, it pales in comparison to the cost of inaction, which could be up to five times as large. Water is an interconnected system that requires dynamic, cross-sector – and often intricate – approaches to properly manage. It also needs to be considered in the context of other related threats, such as social justice.
The recently-released Global Assessment of Private Sector Impacts on Water identifies the most critical threats to freshwater systems and makes evident that the systemic impacts are clearer than ever. Industries including food products, agriculture, textiles, and high tech and electronics are the biggest contributors to undermining the functioning of freshwater systems that underpin economic and societal stability.
Connecting the dots
Unlike climate change, fewer investors are aware of corporations’ impact on, and financial risk from, freshwater. Investors must educate themselves and hold companies accountable. The first step is connecting the dots as to how these damaging impacts pose long-term financial risks and evaluating these impacts based on severity and their systemic nature.
Food and agricultural production accounts for 70% of water withdrawals globally, while other industries such as energy, mining, and manufacturing account for another 19%. Given this, it will be impossible to significantly advance global water security without stronger private sector leadership, both from companies and investors. Some of the threats that inform these risks include:
- 91% of metals and mining companies are exposed to water-related risks, resulting in an estimated financial impact of US$24.9 billion;
- The total cost of damages (direct physical damages across numerous industries and residential properties, as well as public infrastructure) from water disasters (droughts and floods) in the U.S. is estimated to be nearly US$1 trillion since 1980;
- The financial impact from the food and beverage sector on water risks totals US$200 billion, roughly three times higher than carbon-related risks.
The statistics drive home the fact that water is the new carbon. We cannot continue to treat water as if it is infinite and lacks monetary value, as this will result in poorly managed and inefficient water use by industries in most parts of the world.
How investors can act
Once armed with science-based insight into the private sector’s impact on water and the resulting financial risk, investors will have the leverage they need to spur companies into action. There are several ways investors can integrate the scientific evidence of water risk into investment and engagement practices:
- Awareness – Share the synthesis of scientific evidence to help raise awareness of water impacts among investors;
- Identification – Identify impacts, sectors, and associated industries causing the most harm;
- Collaboration – Collaborate with and support a variety of stakeholders in efforts to measure and address water risks;
- Application – Apply scientific evidence in investment practices to reduce impacts on water resources;
- Transformation – Advance large-scale change in corporate water practices and water-related financial risks through investor-led engagements.
As California State Controller Betty Yee said, “If we misvalue water, we’re due to mismanage it.” Along with the points above, tackling the water crisis must be complemented by regulation and policy advocacy. Informed by a diverse group of stakeholders, Ceres’ forthcoming Valuing Water Finance Initiative will provide investors with more tools to ‘make the case’ for acting on water risk, including science-based, corporate expectations on water. Investors can immediately take an actionable step by joining the initiative and committing to engage the highest impact corporate water users and polluters to act.
Focused efforts from investors, companies, and governments to drive change in these unsustainable practices will make a significant positive impact to protect global water security, economic development, and the lives of millions.