A Transformational Framework For Water Risk

By Francesco Curto, Michael Lewis, Murray Birt 25 February, 2021

DWS's Curto, Lewis & Birt share their latest report's findings on how investors should address water risks

The is the summary of a DWS’s report published in Dec 2020. Click here to read the report.

An estimated US$670 billion of annual spending is required until 2030 to meet the sustainable goals associated with water. Yet, water is the risk where the least progress has been made. DWS is part of a working group, organised by the World Economic Forum (WEF), on ‘Transformational Investment’. The initiative targets new approaches to convert global systemic risks into a sustainable return. Water is one of the six systemic risks identified by the WEF.

How water has become an important risk

Water is a finite resource with only 2.5% potentially being usable for life on earth. In the past 100 years, water per capita has decreased significantly as a result of population growth while water quality has deteriorated. Today, 785 million people lack a basic water-drinking source and two billion people use a contaminated drinking water source.

WEF identified water as 1/6 systemic risks…

…yet, 2030 UN water targets not likely to be met

Two of the seventeen SDGs are directly related to water, with water linked to many of the other SDGs, yet the 2030 water targets outlined by the UN will most likely not be met without stronger new actions.

While the European Environment Agency 2020 report paints an upbeat picture regarding greenhouse gas emission targets stating these are largely on track, the EEA cites that for 2020 most water-related targets will be ‘largely missed’ with many displaying a deteriorating trend. That 60% of European surface water is polluted 50 years after the first European Water Charter was declared in 1968, is a sign of how public policy to date has largely failed.

Water risk is understood at the macro level

Over the past two decades, a significant body of research has taken place to understand water risks. The polyhedric nature of water, its importance to humanity and the risks we face are clear, but, progress on addressing such risks is slow.

Our failure to properly address water risks is likely due to factors, including (i) the fragmented nature of water regulation, (ii) the characteristics of water investments, and (iii) our misplaced belief that water is plentiful and cheap. Further, population growth, climate change and our inability to redress the damage created by past action have the potential to make a bad situation even worse.

How to address water risk

The investment community could have an important role to play in addressing water risk. In the end, our fiduciary role is about looking after the capital, deploying that capital and ensuring sustainable returns. In this report, we propose an ambitious, but, pragmatic approach to addressing water risk. However, many challenges exist.

Need to move from an ‘outside-in’ focus to an ‘inside-out’ approach

A ‘transformational investment’ requires a solid foundation, requiring investors to move from an ‘outside-in’ focussing on how sustainability issues affect financial risk management, to an ‘inside out’ approach of using investor influence for a positive, transformational change.

But this is not enough, as investors currently face a hodgepodge, characterised by:

1. Ambiguity about the definition of risks,

2. Incorrect alignment of roles along the investment value chain

3. Too much onus on the investment community to identify, measure, manage risks and use their influence to

4. Doing the right thing is expensive both for individual consumers and investment firms.

“‘transformational investment’ should start with a ‘transformational framework’”

The result is a tower of Babylon of ideas and approaches, marring progress on water risk and ESG altogether.

A ‘transformational investment’ should start with a ‘transformational framework’ that:

1. Ensures that the person on the street, the end consumer/citizen/retail investor, as well as institutional investors, are clear about sustainability and water risk

2. Reassessing the roles of the different functions along the ‘investment chain’: by bringing back Aristotle and Montesquieu’s concept of the separation of powers:

• Governments should legislate: using the EU Water Charter to guide policies
• Accountants should measure: We need a full ESG Globally Accepted Accounting Principles (GAAP) with auditing of countries, companies and investors 6 In the future, we will examine the merits and challenges of taxation versus supporting credit regarding their entire environmental and social impacts
• Investors should invest: implement an investment framework across all asset classes with a clear distinction between ‘do nothing’, ESG integration (outside-in) and impact/transformational investment (inside out)

3. The investment products that truly address water and/or other ESG risks ought to have lower fees than nonESG/transformational investment products. Governments should apply a ‘sustainability fee’ to investment products that are not addressing the sustainability challenge. The highest fees should exist for ‘do nothing’ investment products, the intermediate fee for ESG integration investment products and lower/no government sustainability fees for impact investments. An alternative could be a tax credit, like for investors in US municipal investments, to make true ESG investments truly competitive. An alternative could be a tax credit, like for investors in US municipal investments, to make true ESG investments truly competitive.

Failing will likely condemn water

Failing to achieve a transformational framework will likely condemn water and possibly other ESG factors to risks that investors simply try to avoid even though they become a major challenge for humanity by the end of this decade.

Further reading

• COVID-19 Heightens Water Problems Around The World – Is water access and quality only a problem of developing countries? Global water gurus Asit Biswas and Cecilia Tortajada rebut this as COVID-19 & the lack of political leadership reveal vulnerabilities worldwide
• COVID-19 Heightens Water Problems Around The World – Is water access and quality only a problem of developing countries? Global water gurus Asit Biswas and Cecilia Tortajada rebut this as COVID-19 & the lack of political leadership reveal vulnerabilities worldwide
• The Water Footprint Versus The Water Handprint – Corporate water stewardship is stalling. It is time to adopt a water handprint strategy with its positive and broader impact focus, seen already in the ICT sector, says William Sarni, Water Foundry CEO
• Treading Water: Corporate Responses To Rising Water Challenges – From setting water targets to engaging value chains, companies are improving key aspects of water management but incremental action is no longer enough. CDP’s James Lott brings us key findings from their latest report
• Role Of Businesses In Water Conservation – With the backdrop of Singapore’s industrial water challenges, Professor Asit Biswas & Dr Cecilia Tortajada show what Unilever & Nestle are

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