The financial community increasingly understands and accepts that the global climate and biodiversity crises are a systemic and financial risk. This has spurred action. Similar efforts to address the global water crisis have been slower to gain ground.
Persistent gap in funding for water security
The warning bells have risen in recent months, with the world’s leading scientists from the Intergovernmental Panel on Climate Change lying how dramatically the climate crisis is aggravating and accelerating the water crisis. a new overall evaluation identifies the critical sectors and industries, as well as business activities, that most significantly affect the availability and quality of freshwater, while another recent analysis underscores the persistent gap in financing for a water-secure future.
These messages make it clear that key financial players, such as institutional investors, banks and development finance institutions, urgently need to step up to address the water crisis.
Water risk is a systemic and material risk which is causing significant economic and social costs right now, from supply chain disruptions caused by climate-driven floods and droughts to food and water insecurity caused by declining water supplies.
By failing to factor water security into financial decision-making, financial markets are contributing significant financial flows that increase exposure and vulnerability to water-related risks across the global economy. This ranges from urban development that does not take into account new climate risks, changing weather patterns and aging infrastructure to investments in water-intensive economic activities such as agriculture and mining.
Key sectors that are contributing most effectively to the water crisis. Image: Ceres.
What’s more, these investments have a blind spot when they don’t take into account how the water crisis may affect them, contributing to the risk of future stranded assets. This threatens asset prices, economic activity and undermines progress towards the United Nations Sustainable Development Goal 6 on water and sanitation, and broader environmental and economic priorities.
Finance, a key pillar to solve the water crisis
The longer finance takes to elevate water security into decision-making, the more we put society and the economy at risk. At least half of the industries in the US economy face significant water-related risks. That is illustrated by the find that 50 percent of the stocks listed in each of the four major US stock indices are in industries with medium to high water-related risks.
Some 69 percent of globally traded stocks face about $300 billion of corporate value at risk and billions more in locked-up assets. The cost of water-related risks to businesses could be more than five times the cost of acting now to address those risks, a gap that dramatically increases financial exposure.
The cost of water-related risks to businesses could be more than five times the cost of acting now to address those risks, a gap that dramatically increases financial exposure.
Prominent voices in the financial sector are calling for action on the water crisis to ensure financial and economic stability and security. The Network for the Greening of the Financial System, the group of 108 central banks focused on climate and environmental risk management, explicitly called for the need to focus on water risk in a 2020 report.
The United Nations specifically identifies finance as a key pillar for achieving water security, as called for in Sustainable Development Goal 6 on water and sanitation, and the European Union is seeking to require water-related reporting through from his Sustainable Finance Reporting Directive.
Four steps to having a positive impact on water security
There are practical steps financial institutions can take right now to protect themselves from the risks created by the water crisis and have a positive impact on water security. Here are several ways capital market players can act:
1. Assess and disclose the impacts and risks of water finance
Disclosure of the steps that financial institutions are taking to measure and manage the impacts and risks of water in their portfolios, loan books or underwriting movement markets. A study sample that investors subject to climate reporting cut their fossil fuel financing by 40 percent.
In April, CDP made the first water-related information request available to 1,200 publicly traded financial institutions to highlight portfolio water impacts and shift capital allocation away from water-negative investments. Right now, more than a third of financial institutions that disclose information do not factor water-related issues into their investment decisions.
2. Interact with companies
Investors can commit to companies in their portfolios to mitigate water risk. To escalate corporate action, investors can sign up for the Ceres Valuation Water Financing Initiativea global, investor-led engagement effort that is developing bold action steps companies must take to improve water stewardship.
Investor commitments have led companies to address the operational and supply chain activities responsible for the most serious and systemic water impacts.
3. Invest in solutions to the water crisis
Financial institutions have the capital to underpin investments and reduce risks associated with floods, droughts, aging infrastructure, and water pollution.
For example, they can partner with development finance in blended finance models that offer technical assistance and guarantees to create opportunities to attract commercial capital for water-related investments.
4. Advocate for stricter regulation
Financial regulators around the world are exploring ways to adapt current climate-related reporting policies to include water risks. Financial institutions can advocate for these changes. For example, financial institutions can comment on the US Securities and Exchange Commission’s proposed new rule on climate disclosure to ensure that water risk is part of the subsequent rule.
Regulators are key to avoiding a further disconnect between the economy, which is increasingly exposed to water risks, and the financial system, which is artificially protected against them.
Creating a more water secure world
Financial institutions can help ensure universal access to clean water supplies and improved sanitation, the sustainable management of water resources, and the prevention of further floods and droughts. But they can’t wait any longer to act. The water crisis will not wait.
Now is the time to take advantage of your unique position and start factoring water safety into your decisions. Together, with the right solutions, as described above, these institutions can be a central driver towards a more water-secure world.