By Emily Briggs, Executive Director
A slew of recent research has shown us the scale of the damage human behaviour is having on global freshwater systems – relevant of course because freshwater systems keep us alive, make all economic activity possible and hold geopolitical tensions about access to water at bay. The financial risk for companies is also laid bare in new figures, as we explain below.
There is a bright spot though: unlike the early days of trying to measure and mitigate carbon emissions, water use is something companies often already monitor. Many companiesThey will already have a lot of the underpinning data they’re likely to have to present to investors or regulators in future. What needs to change is how organisations use the data they have, to fully understand their impact and dependencies on water. Emerging guidance, such as the Taskforce on Nature-related Financial Disclosures (TNFD), provides a blueprint for how organisations can start to manage and assess nature data including water, to understand and address such risks.
There’s good reason to believe corporates are already starting down this route. In a recent conversation I had with a client in Australia, they acknowledged that their biggest water risk was their own usage. This realisation comes not a moment too soon, as several new reports show.
Time for a downgrade
Researchers from the University of Cambridge Institute for Sustainability Leadership (CISL) and HSBC assessed the potential impact of a three-month period of drought on the credit risk of heavy industrial companies in an East Asian country with areas of very high water stress. The results were dramatic: there was a “significant deterioration” of the average portfolio credit risk rating, and a third of the companies were demoted from investment grade to speculative.
The research found that the financial threat posed by a lack of water is such that water-related risks should be included in the risk frameworks used by financial institutions. At Pollination we support this view, and believe that investors will move quickly in this area. Companies will be well served by starting work now to understand their nature-related risks, including water insecurity.
Economic growth dries up
Water risks are resulting in stranded assets for oil and gas, mining, and electricity generation companies, research for the Swiss Federal Office for the Environment by Planet Tracker and CDP shows. Stranded assets typically refer to fossil fuel resources that have become too expensive to extract during a dip in prices, but in this case, the risk is that companies simply won’t be able to access the supply of water they need to extract them. In areas of high water stress, they may also lose the acceptance of the local community to drain scarce resources to drill or mine for their own financial gain.
Investors and the private sector have a massive role to play in preventing this by driving transparency, the authors of CPD’s report make clear: “Disclosure and increased water transparency across the financial sector will help to avoid the worst consequences of the water crisis and may contribute to actively stemming it.”
Water threats in detail
Finally, the Stockholm Resilience Centre recently published a planetary boundary framework assessment, finding that freshwater had exceeded safe limits. What does this mean? In the simplest terms, these frameworks assess limits of what the earth’s systems can handle. Until recently, freshwater had been within the ‘sustainable’ boundary, but has now breached the limit of what the earth can sustain. As a result, researchers have issued a stark warning: “these changes are potentially pushing the Amazon closer to a tipping point where large parts could switch from rainforest to savannah-like states.”
Without being alarmist: water underpins all life on earth. Without enough of it, we face a whole range of critical issues, from biodiversity loss to social unrest. The time for action is now. The cause for hope is that companies and governments are aware of water’s importance and already gather the kind of data they need to start changing corporate behaviour.