Background and goal

The report highlights the importance of water risks for the real economy and financial sector, the synergy with other natural resources and the regulatory policies. It identifies key risks in physical, regulatory, and reputational aspects of water. The challenge, however, is to understand their materiality and timing on specific asset classes, sectors, and industries. In comparison with climate change, water conditions can strongly vary over time and location.

Overview of water risks and opportunities

The report illustrates the interdependences between water risks and financial markets, where water risks not only impact the real economy, i.e. physical water scarcity, but also lead to implications in the financial system due to decreased revenues and increased costs within invested companies, and the interdependency of affected financial institutions. The report provides a table of relevant organisations in this field.

Research and analysis

The report provides an overview and evaluation of the different data, scenarios, models, and tools that assess water risks. Such evaluations covered different levels of direct and indirect effects of water risks on the financial market, including tools that display water risks in the real economy, asset classes, portfolios, and financial institutions or even the entire financial system. The report analysed 13 different databases, scenarios, models, and tools to quantify and qualify water risks in financial products, financial institutions, and the financial system.

Existing investment strategies and possibilities for action

The report examines existing investment strategies that align with international water goals. Such strategies could occur at different levels, including a transaction level, whereby asset managers and investors scrutinise companies’ water risks as part of their overall attention to environmental, social, and governance (ESG) issues. The analysis of water risk issues can be carried out through environmental or water bond assessments. The report proposes the “Corporate Bonds Water Credit Risk Tool,” which integrates exposure to water stress in corporate bond credit analysis in the beverages, power, and mining sectors. The report also suggests investment strategies that focus on companies’ water stewardship and the qualitative analysis of operating costs.

Conclusion

The report concludes that water is strongly intertwined with climate change and other natural resources, and a more holistic approach is necessary to manage water risks effectively. The report highlights the need for companies and investors to consider water-scenario analyses in their long-term strategy, growth, and cost considerations. The report suggests water risks are a nascent area, and investors could help generate innovative solutions that support international water goals and the sustainable management of water.