Industry Told to Address Water Risk Opportunities

Insurers and reinsurers have been urged to address the issue of water risks as investors continue to fail to factor the risk into the strategies.

Research by the Edison Group has warned despite being cited by the World Economic Forum as one the five biggest threats to global economic and political stability water risk is rarely in the business community’s radar when it comes to investment decisions.

Sectors most at risk include agriculture, food and beverages, energy, oil and gas, chemicals and mining. The firm said it believed investors need to integrate water risks systematically into the investment process to be able to assess properly the return potential of companies in these sectors.

“Water does not only represent risk but also offers big opportunities for investors given the infrastructure spending required and the need for private capital to play a strong role,” added the report. “The World Bank estimates that delivering the UN’s Sustainable Development Goal 6 by 2030 will require over $100 billion of additional capex globally every year on infrastructure and further development, circa 40% above current spending.”

The research report Water – the real liquidity crisis, highlighted only a small fraction (2.5%) of the global water supply exists as freshwater. An even smaller proportion (0.025%) is accessible as surface water. This water is unevenly distributed and its availability is neither predictable nor constant over time. Quality is an issue as much as quantity: pollution, either by nitrates, biological material or heavy metals, can further restrict availability.

Demand for water is rising globally (c.2% annually), predominantly driven by regions where the population is growing. The amount needed for drinking is just a fraction of this demand. The WHO estimates the average person requires just 2-3 litres per day for drinking. In contrast, residential consumption in developed countries is 100-300 litres per day. Substantial water resources are needed for cooking, washing, cleaning and sanitation. In addition to this, water is consumed ‘indirectly’, embedded in energy and particularly food production.

Shifting patterns of demand and supply are creating both acute and chronic water issues. The UN estimates that 800 million people (10% of the global population) don’t currently have access to clean water and a further 3.2 billion (40%+) face severe water shortages at least one month a year. It is estimated that by 2030 population growth will see global demand for clean water exceed supply by 40%. Half of this growth is expected to be in Africa, a region with limited surface water resources. Meanwhile, rapid urbanization is leading to acute shortfalls for many cities. China’s industrialization has driven dramatic increases in both demand and water pollution.

The report added: “Water risks are acute for certain sectors but are often ignored by investors who may regard them as long-term issues. Agriculture, food and beverages, energy and mining disclose these risks, which include floods and droughts, but they can no longer be discounted as one-off events. Their complexity and location-specific nature makes them difficult to assess and integrate into the investment process. When evaluating the different levels of risk water could bring into a portfolio, investors should keep three key considerations in mind. Ceres, a non-profit organisation focusing on encouraging investors to address sustainability, has created an investors’ water toolkit to help asses water risks.”

Dan Gardiner, Director at Edison Group said: “The water sector presents big opportunities for investors. Huge spending increases are needed over the next decade to both address underserved communities and upgrade existing infrastructure. The sector is particularly attractive to income funds and the growing pool of capital looking at sustainable and impact strategies. More broadly, looking at investments in a range of other sectors, water risks need to be assessed more seriously and systemically integrated into decision-making processes to ensure that investors maximise their potential returns and achieve their investment goals.”