Water Risk Neglected by Investors

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    Stockholm (NordSIP) – Directors of financial institutions that ignore water-related risks may be neglecting their duties, according to environmental disclosure non-profit CDP.  A newly published CDP report Navigating Troubled Waters sets out the case for a much greater scrutiny of companies’ contribution and exposure to water-related risks.

    CDP identifies water as the dominant nature-related risk, accounting for up to 9% of global GDP at risk that is not currently priced in by financial markets.  The report highlights the breadth of sectors that are highly dependent on water, along with the expected 40% global shortfall in supply based on current rates of consumption.  According to CDP, more than two thirds of financial institutions are still failing to assess their exposure to water risks.  The implications of this are evident in a study of Asian industrial corporates conducted by the Cambridge Institute for Sustainability Leadership (CISL) and HSBC, which showed how a third of the companies’ credit ratings would be downgraded from investment grade to speculative in a scenario wherein water access was restricted for just 3 months.

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    The tech industry’s inexorable thirst

    Against a backdrop of increasing climate change related water stress, demand for the commodity from the food, clothing, and consumer goods sectors continues to rise.  However, the CDP report points to even greater problems arising from the ongoing digital revolution.  For example, global motor industry supply shortages in 2022 were the knock-on effect of the Taiwanese government’s decision to prioritise the water supply of semiconductor manufacturers during the country’s worst drought in half a century.  The current boom in artificial intelligence (AI) investment is compounding the problem, with large language models relying on immense computing power that requires vast quantities of water for power plant turbines, as well as cooling for nuclear energy generation and ultimately the data centres themselves.

    Only 1% of European financial institutions reporting via CDP have set water-related targets, and the organisation is calling for directors to urgently include this systemic risk withing their planning and risk management.  CDP believes too many organisations are operating with a narrow carbon-based focus when it comes to sustainability matters.  The suggested approach involves recognising the interconnected climate and nature crises, with water playing a major part in the latter.  The report highlights not only the potential financial consequences of water-related risks, but also the reputational and litigation risks of neglecting water’s significance in the value chain.

    Commenting on the publication of the CDP report, the Green Finance Institute’s Director of Nature Programmes & GFI Hive Helen Avery said: “This briefing provides Boards with a much-needed primer on how their financial institutions are exposed to systemic water-related risks. Recent analysis published by GFI found that the highest risks across sectors are derived from nature’s provision of water and that nature-related risks are as detrimental to the economy as those from climate risks.  We welcome the actions outlined in this brief as necessary steps for financial institutions to take in minimising their exposures and building resilience across the global economy.”

    Image courtesy of Rob Martin from Unsplash
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