Are Asia’s Savings Exposed To Water & Climate Risks?

By Dharisha Mirando 18 April, 2019

Our Mirando shares key takeaways from a new report CWR co-authored with Manulife Asset Management & the AIGCC

Asian asset owners are uniquely exposed to water & climate risks as a large share of their investment portfolios, up to 80-100% in some cases, tend to be concentrated in domestic markets
These markets will bear the brunt of climate change losses yet only 8% of climate finance is for adaptation globally; plus Asian asset owners already face consequences of ageing populations
As these investment risks are manageable, check out our latest report for a list of recommendations from mapping your water & climate risk exposure to pricing in new “water-nomic” regulations

Climate change is multiplying the risks investors face. Therefore, we are pleased to have worked with Manulife Asset Management and the Asia Investor Group on Climate Change to co-author a new report on how water and climate risks could impact Asian asset owners. This report expands on our previous report on Asia’s water challenges.

We focus on Asian asset owners because they are uniquely exposed.

1. They have highly concentrated portfolios in vulnerable domestic markets

Asian asset owners are uniquely exposed to climate and water risks as a large share of their investment portfolios tend to be concentrated in their domestic markets, which will bear the brunt of global climate change losses” said Emily Chew, the global head of ESG Research and Integration at Manulife Asset Management.

The report reviewed 30 large Asian asset owners in 12 Asian markets

The report reviewed 30 large Asian asset owners in 12 Asian markets and found that on average 64% of portfolios are invested in domestic equities and bonds, and in some cases this is as high as 80-100%. In addition, a number of these asset owners cannot diversify geographically for regulatory, political and economic reasons.

2. We are heading to a 3°C world, but we are not investing in adaptation

Our assets and people are exposed to water and climate risks that are imminent and material. Yet 92% of climate finance does not protect assets globally; this leaves people and businesses vulnerable to climate impacts already baked into the system.

3. Asia is highly exposed to water transition risks

Asia is facing a triple threat: 1) limited water resources to support development under the current economic model; 2) climate change will exacerbate water scarcity; and 3) assets are clustered along vulnerable rivers. As the flow chart on the right shows, this triple threat then causes government action, which will have knock-on effects globally, for businesses and investors. These risks are inter-linked and complex – please click on the chart for an expanded view.

4. Asia also faces the highest carbon transition risk, but can also benefit the most from opportunities

This is the case in all the scenarios and it is important to note that in each case, the opportunities related to low-carbon transition technologies could outweigh the policy costs.

5. Asian asset owners are already facing the consequences of ageing populations

This means that more people will draw from the pension pool than contribute to it, leading to shortfalls in funds in the long term.

As it can be difficult to see how these water risks and water-related climate risks can impact portfolios, the report explains them with case studies related to capital markets:

  • Rising sea levels & storm surges will cause logistics disruptions and ports in Asia need to spend between USD28bn to USD47bn to adapt. Without this, Asia’s highly export-oriented economies and companies will suffer severely.
  • Increasing urbanisation means more is at risk, in terms of assets and people’s lives and livelihoods. For example, 13 of the top 20 cities with the largest growth of annual coastal flood losses from 2005-1050 will be in Asia, which could amount to USD30bn of losses annually from these cities.
  • Material and imminent regulations will change current business models, impacting bottom lines of businesses and investors. We have already seen disruptions in the textile industry in China due to stricter environmental policies.
  • Global trade and supply chains could be disrupted as a knock-on effect of the impacts above. The report explains how the high-tech industry, which makes up a large percentage of the Nikkei 225 and KOSPI, is vulnerable as its supply chain can be impacted by water and regulatory risks.
  • The financial sector makes up a large part of the indices in Asia as can be seen in the figure below, but banks and insurers in the region are yet to embed water, climate and clustering risks in to their credit evaluation process.

As it can be difficult to see how water & climate risks can impact portfolios, the report explains them with case studies related to capital markets…

… from material & imminent regulations to global trade disruptions

Now worried and wondering what you can do? Check out the report for a to-do list of things to do today. This ranges from mapping to assess your water and climate risk exposure, pricing in the prospect of new “water-nomic” regulations, building truly diversified portfolios to engaging investee companies and fund managers, and using your voting rights.

“If Asian pension funds and other asset owners start to act on their water & climate risks, it would lead to improved resilience & better outcomes in their investment portfolios”

Rebecca Mikula-Wright, Director of AIGCC

Actions taken by Asian asset owners can be significant as the ratio of asset owners’ domestic investments to country GDP can be as high as 25-45%. “If Asian pension funds and other asset owners start to act on their water and climate risks, it would lead to improved resilience and better outcomes in their investment portfolios. In addition to strengthening returns, this would also ultimately benefit all communities in the region,” said Rebecca Mikula-Wright, Director of AIGCC.


Further Reading

  • 3°C Transition Risks: It’s H2O, Not Just CO2 – 3°C is happening. This means we need to invest so we are ready for longer droughts, more intense & frequent floods, more damaging typhoons, as well as changing monsoon patterns and river flows. China Water Risk’s Dharisha Mirando & Debra Tan warns.
  • India’s Water Policies: Just Feel Good Documents? – Chetan Pandit, former #2 of India’s Central Water Commission, joins Professor Asit Biswas from the National University of Singapore in a “no holds barred” review on what’s gone wrong with India’s water management in the past 31 years
  • More From Less: Building Water Resilience – Water and climate are really two sides of the same coin so what are the holistic solutions that can build resilience? Bluetech’s Paul O’Callaghan sat down with Ecolab & Aquatech experts to explore these and more
  • Confronting Storms & Climate Risk In HK – Typhoons Hato and Mangkhut have wreaked havoc in the Greater Bay Area but Dr. Faith Chan from the University of Nottingham Ningbo believes these climate risks can be confronted, with Hong Kong leading the way
  • Modern Water Dispensers: Shifting Consumers Off Plastic – With Hong Kong throwing away 5.5 million plastic bottles every day, Urban Spring’s Jennie Wong explains how their network of water refill stations could be the way forward
Dharisha Mirando
Author: Dharisha Mirando
Dharisha Mirando hails from the finance industry and joined CWR as she believes that climate and water factors are downplayed by the sector despite being significant investment risks. To tackle this, her ambition is to help build consensus, bridge the gap between finance and science, and engage with investors to incorporate these risks into their due diligence and portfolio management. This could in turn lead to innovative Green Finance instruments becoming more prevalent. She has already made strong headway as the lead author of a recently published report with Manulife Asset Management and the Asia Investor Group on Climate change, which highlights the imminent threats to Asian asset owners' portfolios from climate and water risks. Dharisha has also undertaken a number of speaking engagements on these pressing issues at investor and insurance conferences. Prior to joining CWR, Dharisha worked for a long-only public equities fund. She has also worked in the impact investment space in London and Singapore where she provided technical assistance to social enterprises, helped them raise equity investments, and managed a debt portfolio.
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