The World Bank's 2030 Water Resources Group and Ceres' Valuing Water Finance Taskforce are among groups coordinating collective action to address water scarcity as a systemic risk. Angeli Mehta reports
“Water, water, everywhere nor any drop to drink,” vividly sums up the sorry situation of a ship’s crew becalmed near the Equator. That often-quoted line from Samuel Taylor Coleridge’s poem about an ancient mariner who disregards nature could well stand for our predicament today.
Our fast-changing climate is bringing rising sea levels and flooding, but it’s also making fresh water an increasingly scarce resource – another layer to add to the crisis already caused by pollution and over-consumption. By one estimate, if it’s business as usual, global demand for water could outstrip supply by 40% by 2030.
Freshwater ecosystems are crucial for our survival. They are also biodiversity hotspots, and that biodiversity is being lost at an astonishing speed. The International Union for Conservation of Nature estimates that almost a third of freshwater species face extinction.
In September, 26 financial institutions signed the Finance for Biodiversity Pledge and called on world leaders to reverse nature loss
Discussions are under way through the Convention on Biological Diversity to get countries signed up to restoring freshwater habitats as part of a drive to have 30% of the planet in a natural state by 2030.
The finance sector can’t afford to ignore the imperative. In June, De Nederlandsche Bank (DNB) analysed biodiversity risks in a portfolio of more than €1.4tn worth of investments made by Dutch financial institutions. It found that 36% of their investments are highly, or very highly, dependent on ecosystem services – with the highest dependence on the ecosystems that provide groundwater and surface water. Of every euro invested, approximately one quarter is dependent on these ecosystems.
In September, 26 financial institutions – together managing over €3 trillion (£2.7tn) of assets – have added their voice, calling on world leaders to reverse nature loss in this crucial decade. In signing the Finance for Biodiversity Pledge, they’ve committed to shouldering their share of responsibility through their financing activities and investments. They say they’ll share methodology and metrics that will have a positive impact on biodiversity, and engage with the companies they invest in.
The organisations will also assess their portfolios for both significant positive and negative influences on biodiversity, and come up with targets to address those impacts, by 2024 at the latest.
Behind the pledge sits a set of principles developed over the past year by the Partnership for Biodiversity Accounting Financials. Dutch asset manager Actiam is one of the partners. It already screens companies based on both their water consumption and strategies for managing water, and engages with those who don’t measure up.
There's not one institution, or even one set of stakeholders or actors that can solve water challenges
But more can be done to address biodiversity. “I think a lot of investors are now looking at the basics… climate and being carbon neutral – because this is demanded from them by the outside world. But next to that, I would hope that more investors are going to look at water, land use, species [loss] – although it's a bit more difficult – as well as pollutants,” says responsible investment officer Colette Grosscurt.
“To really integrate those aspects into the screening of companies and investments could be very valuable to mitigate risks and benefit from opportunities.”
Getting up-to-date data as well as unpicking supply chains are key challenges to be tackled. Last year, Actiam teamed up with satellite imagery and artificial intelligence (AI) firm Satelligence to check on whether companies are meeting deforestation targets, and to investigate deforestation in their supply chains, starting with palm oil.
Water, specifically, is a typical public goods dilemma, suggests Grosscurt. “Even if a company may take up that responsibility [for a water basin] it’s not going to solve the issue. It has to be a collaborative approach, but with someone actually having the ultimate responsibility for it.” Her colleague, Nadja Franssen adds: “In many countries, water rights are allocated to a specific company. So then it's also really easy to just shift the responsibility, because then you can say ‘the government has allocated me these rights, and they will take into account the environment, so I can just do whatever I want with these rights’. Well, that's not always the case.”
Karin Krchnak, programme manager of the 2030 Water Resources Group (WRG), believes collective responsibiility is crucial: “There's not one institution, or even one set of stakeholders or actors that can solve water challenges.” The group, hosted by the World Bank, aims to mobilise the private sector, government and civil society to work in partnership on water security and help achieve the Sustainable Development Goals.
So far it has created 14 multi-stakeholder platforms in Asia, Africa and Latin America, involving over 800 partners. These cover sectors such as urban water management, mining and agriculture. Having government at the table also addresses legislative obstacles and enforcement. In Mongolia, for example, where mining and manufacturing industries foul diminishing groundwater supplies, introduction of the “polluter pays” principle, together with national standards for wastewater reuse, have encouraged industry to invest in treatment and recycling.
Investors need a framework and to come together on this issue
The 2030 WRG is also making the investment case for water, and developing new financial instruments to address the funding gap. One such success is in creating a new public-private partnership model to finance three wastewater treatment plants in India’s Ganga basin. Now the Indian government is looking at 15 more plants to tackle the 8bn litres of untreated wastewater that flows daily into India’s mightiest river.
Krchnak also wants to work with investors on best practices and metrics, which she said would “help drive greater understanding amongst the investor community on water-related risks and opportunities, including best practices in portfolio monitoring from a water perspective.”
US sustainability non-profit Ceres, which was founded in the aftermath of the 1989 Exxon Valdez oil spill, is also working with investors to develop tools to assess water risk. According to its research, around half of industries in the US economy face significant water risks. “There really needs to be a wake-up call,” asserts Kirsten James, programme director for water.
“The financial sector often thinks of water as a local issue, or an individual company [issue]. and they tend to look very narrowly. However, risks around water scarcity and water quality are systemic issues. And, across the board, there isn't that clear sense of material or financial value of the freshwater resources at risk,” says James.
On water, she says, “we don’t really have the foundational thinking and business case that we do on the climate side, [or] clear universal language for companies around responsible water use.”
Together with the Dutch government, Ceres has launched the Valuing Water Finance Taskforce to draw attention to the scale and urgency of the challenge and to bring others to the effort. Fifteen founding members range from Nordic banking group SEB to superannuation and pension fund AustralianSuper, as well as a strong US presence including state comptrollers from California, New York and Illinois.
Kelly Christodoulou, listed ESG and stewardship manager for AustralianSuper, says: “Investors need a framework and to come together on this issue. This initiative will provide the assessment framework and tools for us to adequately assess water risks.” She said that AustralianSuper, which invests over A$180bn (£99bn) globally, recently had its equities portfolio assessed for physical risks. In addition to the on-going water stress in Australia, it identified flooding from typhoons in Asia as having an impact on the supply chains of Australian companies.
The other side of the coin is to for investors to have a positive influence on water resources and biodiversity. While Actiam’s impact investing arm is using microfinance loans to support specific local projects, it’s also looking into restoration finance. “There's plenty of projects out there … but often they're projects with a relatively low-ticket size. And then it’s challenging to channel money for that from our typical institutional clients,” says Grosscurt. However, she adds, “we strongly believe that by bundling various of these projects we can turn them into an investable product.”
When we look at water, so many challenges are really around governance and policies
Krchnak agrees that scale is an issue. “When we look at water, so many challenges are really around governance and policies. So you can have a great project, but if you don't have the policies in place that enable its scaling or replication, then you're stuck.”
One success is a pioneering drip-irrigation scheme for sugarcane farmers in Karnataka in south-west India, which began with 24,000 hectares. It is being scaled up to create an entire and sustainable supply chain from technology to market, across several hundred thousand acres and supported by a new financing model.
For Krchnak such advances give cause for optimism. “What we've been able to create are not just talk shops. They’re really delivering results. So I think we can turn things around. Will it happen in the next year or two years? I think probably not. But honestly, from the dedication I see from our partners, and governments, private sector, civil society all speaking together and working together, that really does make me hopeful.”
Angeli Mehta is a former BBC current affairs producer, with a research PhD. She now writes about science, and has a particular interest in the environment and sustainability. @AngeliMehta.
This article is part of our in-depth Water Risk briefing. See also:Actiam biodiversity loss DNB Finance for Biodiversity Pledge Actiam ethical investing Satelligence 2030 Water Resource Group WRG SDG6 Ceres Valuing Water Finance Taskforce