Published 1 year ago.
About a 4 minute read.
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For too long, investors have lacked the data and analytics to make well-informed investment decisions around the financial risks of water impacts. That is about to change.
Writing in 1756, Benjamin Franklin noted what is now evident to many
investors: “When the well is dry, we know the worth of water.” The scale and
increasing severity of water risk is percolating through financial markets and
the stakes are high.
According to an analysis by sustainability nonprofit
Ceres, more than 50 percent of the
companies listed on the S&P 500, Russell 3000, MSCI World and MSCI
EM indices are exposed to medium to high water risks. These risks affect
sectors as diverse as
mining, utilities, technology
consumer staples and energy
The impacts range from declining levels of aquifers globally, pollution of
ground water, vulnerability to flooding and sea level rise as extreme weather
events bring new risks to companies and communities. Our own analysts have been
exploring how water risks impact the
and investment portfolios, highlighting the need for urgent action on water.
There is also opportunity, as the investment needs for securing global water for
human need are evident, with half of the world’s population expected to face
by 2030. In short, the worth of water is in urgent need of calculation. This
makes the US Securities and Exchange Commission's proposed rules on climate
more than a matter of counting carbon. That matters, but the references to water
risk — which flow through the extensive discussion provided for comment — put
water risk onto the docket. That is necessary and welcome.
For too long, investors have lacked the data and analytics to make well-informed
investment decisions around the financial risks of water impacts. The US
Chamber of Commerce Center for Capital Market Competitiveness reviewed a wide
range of company reporting on sustainability and found that close to two-thirds
of companies discussed water. However, as with other aspects of climate change,
there is lack of standardized, consistent, timely and reliable data that would
give investors decision-making useful information.
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That is about to change.
Investors have been increasingly effective in engaging companies to demonstrate
that addressing the risks and opportunities of climate change underpins their
fiduciary responsibility to generate long term value creation. Climate Action
100+, the world’s largest investor engagement
on climate change, is forging a path toward the companies that generate 85
percent of global industrial emissions.
The initiative mobilizes the power of capital by bringing together 700 investors
responsible for $68 trillion in assets, to ensure company boards develop the
strategies and set targets to ensure a just transition to a net-zero emissions
economy. Disclosure is the foundation to that work; and the role of investors in
calling for mandatory disclosure in US and international markets has been a
formidable force to ensure corporate reporting fully captures the drivers of
sustainable, risk-adjusted returns on behalf of the people whose money they
The need to hold global warming to the Paris targets is well understood. The
related impact on companies through water risk also needs to be fully assessed
and disclosed. Water-scarcity risks
to cost food and beverage companies alone as much as $200 billion — roughly
three times more than carbon-related risks. Climate-related water risks such as
and New Mexico’s
continue to impact communities daily as drought extends across sub-Saharan
Africa, northern China, and vulnerable areas of Latin
Climate change is also accelerating and exacerbating water quality risks, which
in turn increase risks to economic development: a CDP
found that $13.5 billion in assets are potentially stranded and a further $2
billion are at risk due to water issues, including those related to water
As the latest IPCC
and the proposed SEC rule rightly argue, disclosure is fundamental to investor
protection, capital formation and the public interest. The inclusion of water
risk in the climate change reporting proposals gives us the running start we
need to provide investors with the data that can inform capital allocation and
stewardship to ensure sustainable, risk-adjusted returns. However, the data are
only a start. Investors also need analytical models and engagement strategies to
ensure that water risk is reported, assessed and understood.
That help is on the way with the pending launch of the Ceres Valuing Water
Finance Initiative, which will provide this vital element to investors’
appraisal of risk and opportunity. Backed by a set of science-based expectations
for corporate water management, investors are positioned to engage with their
portfolio companies more effectively around water. Following the model laid out
by the Climate Action 100+, we believe a groundswell of investors — and their
capital — will rally behind this critical issue. If not, we will be left without
any true sense of what water is worth — at a time when its role for communities,
for companies and their investors could not be more vital.
Published Jul 5, 2022 8am EDT / 5am PDT / 1pm BST / 2pm CEST
Anne Simpson is the Global Head of Sustainability at Franklin Templeton. She also serves on the Board of Directors for Ceres and is a founding member of the Climate Action 100+ Steering Committee.