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 agriculture, mining, utilities, technology companies, consumer staples and energy production. 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 economy 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 severe water stress 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 risk disclosure 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.
Join us at SB'22
At SB’22 San Diego, join us to Recenter & Accelerate: Find a unique mix of inspiration, thought leadership, unparalleled community and connections.
That is about to change.
Proposed SEC rule signals a landmark moment in reducing corporate climate risks
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 invest.
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 are estimated 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 California’s drought and New Mexico’s wildfires continue to impact communities daily as drought extends across sub-Saharan Africa, northern China, and vulnerable areas of Latin America.
Climate change is also accelerating and exacerbating water quality risks, which in turn increase risks to economic development: a CDP report 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 quality impacts.
As the latest IPCC reports 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.