Thirsty And Underwater: Rising Risks In Greater Bay Area

By Dharisha Mirando, Debra Tan 20 September, 2019

How will water & climate risks threaten the already water-stressed Greater Bay Area (GBA)? CWR's Mirando & Tan explain in their latest CLSA report

GBA’s faces a triple threat - not enough water, population growth & climate change; 8/11 cities are already as dry as the Middle East yet they also face extremely high risk of flood occurrences
Scenarios must be adjusted for the new base case of 3°C-4°C or extreme storm tides will hit GBA's key sectors by as early as 2030 - 4/7 airports, 43/50 ports, & half of Macao's casinos are at risk
Despite significant exposure, strategies to combat water & climate risks remain uncoordinated across the GBA; Adaptation must be seriously stepped up if not aggressively decarboning

CLSA U recently launched a report “Thirsty and Underwater” which China Water Risk (CWR) co-authored. The report is unfortunately only available to professional investors – contact CLSA to access this report. However, below is a quick review of the report’s findings. We recommend you to read this article in tandem with “No-sense Climate Strategies: From DSD to HSBC” to get a better understanding of the issues facing the Greater Bay Area (GBA).

As early as 2030, rising water & climate risks could threaten key sectors that drive GBA’s GDP (US$1.6trn in 2018)

The GBA is slated for ambitious growth in China’s 13th Five Year Plan (2016-2020) yet water risks and climate threats could sink its dreams. As early as 2030, these rising risks could threaten key sectors that drive the region’s GDP, which was US$1.6trn in 2018 – they are logistics & trade, real estate, finance and entertainment. With the GBA’s GDP estimated to grow to US$4.6trn by 2030, the report warns that careful water-nomic planning and cohesive resilience strategies are needed for a “thirsty & underwater” future.

“The problem with water and climate risks is that they feel far in the future, but evidently, these risks are here today. They are material and disruptive, which means we need to factor them in now, not later” warns CWR’s head Debra Tan, who co-authored the report.

Is there enough water for growth when 8 of the 11 cities in the GBA are as dry as the Middle East?

Too little water to grow will present too much risk, unless it is managed. Already, 8 of the 11 GBA cities are as dry as the Middle East (GBA Dry 8). These 8 cities’ per capita water resources fall well below the World Bank’s Water Poverty Mark, yet they account for 92% of the GBA’s 2018 GDP. The 4 Core GBA Cities of Guangzhou, Shenzhen, Hong Kong and Macao are part of this “dry” group, driving 68% of the region’s GDP.

GBA Dry 8 accounts for 92% of the GBA’s 2018 GDP

Moreover, the GBA’s population of 71 million people is set to explode with an influx of 17 million more people by 2030. This is the equivalent to the population of two more New York cities, thus putting more pressure on already stressed water resources. See infographic below – click on it to expand.

The region is also almost entirely at risk from “extremely high” flood occurrences. The Hong Kong Observatory has warned that the frequency of an extreme rainfall event (>200mm within 3 hours) increased to a once in 21 year event in 2000 from a once in 41 year event back in 1900. Changing weather patterns and high pollution levels in the Dongjiang River which provides water to 5 cities in the GBA including Hong Kong, will also impact the availability of freshwater.

Scenarios must be adjusted for the new base case of 3°C-4°C of warming instead of 1.5°C-2°C

CWR was commissioned by CLSA to write this report to also explore the impact of climate threats brought on by storm surges and sea level rise to key sectors as we are on track for warming of 2.9°C-3.4°C by 2100. The report finds that almost three quarters of Hong Kong’s GDP comes from sectors that could face disruptions from extreme storm tides as early as 2030. This would clearly devastate its economy, unless action is taken by the government to build resilience.

Had Mangkhut hit during high tide & taken a slightly different path, storm tides of 5.65m would have inundated Central, HK

As the map below shows, so far Hong Kong has been lucky. In 2018, when Super Typhoon Mangkhut, a T10 typhoon, hit the region, it brought storm tides of 3.88m in Victoria Harbour. Had it hit during high tide and taken a slightly different path, storm tides of 5.65m would have inundated Central, Hong Kong’s financial district. The storm tide would have reached past IFC and Exchange Square, all the way to the headquarters of HSBC and Standard Chartered.

Clearly, this would have been extremely costly and disruptive. Unfortunately, typhoons over the summer months will become more frequent. The report highlights that typhoon intensity has also been trending up – Hong Kong saw three T10 typhoons in the past six years compared to 12 in the previous 65 years.

Beyond Hong Kong, the GBA’s economic and population hubs are also clustered in low lying areas that are vulnerable. The report’s geospatial mapping shows that the GBA’s key sectors of logistics, real estate finance and entertainment will not be left unscathed.

By 2030, extreme storm tides of 5.87m would also disrupt 4 out of 7 GBA’s airports, 43 of its 50 ports, & half of Macao’s casinos

As Charles Yonts of CLSA points out, we “expect thermal expansion and glacial melt to add 22cm to sea levels by 2030. For Victoria Harbour in Hong Kong, this translates to a maximum storm tide of 5.87m, which would swamp large swathes of the city’s financial district.” Yonts also warns that “It would also disrupt four of the GBA’s seven airports, and 43 of its 50 ports. And half of Macao’s casinos would face flooding.” These surely curtail the region’s plans to be a major finance, trade and entertainment hub. The GBA’s plans to become a technology hub could also be hampered as ICT and electronic sectors are water intensive. For more on the impacts on ports and airports see “No-sense Climate Strategies: From DSD to HSBC”

Despite significant exposure, strategies to combat water and climate risks remain uncoordinated across the GBA

Government action can help alleviate these risks, but in the GBA actions are not yet cohesive, comprehensive or efficient, cautions the report. To address a thirsty future, governments should be reducing water use and wastage. Analysis finds Hong Kong to be extremely wasteful – it has a leakage rate of 25% compared to 11% for GBA mainland cities and 9% for Macao.

Hong Kong’s water use has also increased by almost 10% since 2011. Meanwhile, despite GDP growth, Guangdong has managed to reduce water use by 4.3bn m³ – this is 4x Hong Kong’s freshwater use. Significant water diversions projects have also been launched to alleviate stress in the Pearl River Delta.

HK’s water use has increased by ~10% since 2011…


…Meanwhile Guangdong water use down by m³ – 4x of HK’s freshwater use

Hong Kong also lags in concrete plans for coastal flooding from storm tides and sea level rise. A 6.5m sea wall to protect the runways at the airport is being built but is this enough? CWR’s 2100 extreme storm tide projection is 7.81m and recently Singapore announced that its airport will be built 5m above sea level to be climate resilient. Singapore is not even in the path of typhoons. More on this in “No-sense Climate Strategies: From DSD to HSBC”.

Macao’s sea walls will leave large swathes of its territory & Vegas brands unprotected from typhoons

The report also shows that Macao’s sea walls to protect against typhoons may not be enough, leaving large swathes of its territory and Vegas brands unprotected. The mainland on the other hand, is building sea walls of various heights to heavily protect coastlines along high GDP regions such as Shenzehn and Guangzhou. Targets set to reinforce walls are also in the 13th Five Year Plan, but it is not clear if this will be enough without more detailed analysis.

Given Hong Kong’s laissez-faire attitude to a “thirsty & underwater” future, the report examines the exposure of four companies that have significant operations in Hong Kong – Hongkong Land, Hong Kong Exchanges & Clearing, Cathay Pacific Airways and Hutchison Port Holdings. The analysis shows that they can be materially impacted by storm tides as early as 2030. “Given the unmistakeable risks, it was shocking to see that the companies had no real disclosure on the risks faced nor adaptation plans to mitigate such water and climate threats” said Dharisha Mirando of CWR, a co-author of the report.

“Clearly such omissions on material risks disclosure may trigger systemic shocks to the financial system”

Mirando worries that these material risks are being overlooked. “These companies are clearly omitting to disclose imminent and material financial risks, but the SGX and HKEX consider them “to be in compliance” with reporting rules. Does this mean that companies listed on these exchanges and indices linked to them are at risk?” Clearly such omissions may trigger systemic shocks to the financial system.

Heading for 3°C-4°C, but planning for 1.5°C-2°C = sure to fail

Aside from companies and banks, governments also may not have a grip on the magnitude of the risks faced. The report cites Hong Kong as an example: Hong Kong’s own decarbonisation actions puts the world on a path of 3°C-4°C, yet it is building resilience to protect against a 1.5°C-2°C future. This is clearly not sensible.

“If you are not aggressively decarbonising, adaptation must be seriously stepped up; otherwise you are planning to fail”

“It doesn’t matter whether you are a government, a company or an investor, you must have climate strategies that make sense. If you are not aggressively decarbonising, adaptation must be seriously stepped up; otherwise you are planning to fail” cautions Tan. She adds that “if neither happens, then going concern issues surface and prudence dictates a write down of assets and investments with no adaptation plans.”

The risk landscape is changing and challenges ahead are plenty. Although by no means a comprehensive guide to water risks, the report was written to serve as a quick threat assessment to catalyse urgent action.

To succeed in a changing climate, the GBA watershed must be managed & planned cohesively together

To succeed in a changing climate, the GBA watershed must be managed and planned cohesively together. Companies, governments and banks are still not doing this. We need to stop making climate strategies that make no sense. If you want to learn more about water risks on the GBA and what we are working on, please contact us.

Further Reading

  • Too Big To Fail! Protect At All Costs – Multiple policy innovations have been unleashed to protect the Yangtze River as it is too big to fail – corporates and investors need to get on top of the YREB to avoid regulatory shocks
  • Yangtze River: Actions Toward Ecological Compensation – With RMB5bn already allocated to supporting ecological compensation along the Yangtze River, what’s next? Chinese Academy for Environmental Planning’s Dr Zhanfeng Dong highlights what needs improving
  • Capital Two Zones: Protecting Beijing’s Upper Watershed – The Capital Two Zones plan is set to protect Zhangjiakou, upstream of water stressed Beijing & host of the 2022 Winter Olympics – how will this impact industry and development? China Water Risk’s Yuanchao Xu explores
  • Blue City Water Quality Index – Building on their successful Blue Map mobile app, IPE takes it up another notch with the new Blue City Water Quality Map. Hear from their Shen Sunan on which cities are leading and which are lagging
  • No-Sense Climate Strategies: From DSD To HSBC – Hong Kong’s shortsighted & unrealistic climate plans will leave key assets & infrastructure exposed that mean the government, companies, investors and the public are even more exposed. China Water Risk’s Dharisha Mirando & Debra Tan expand
  • Are Asia’s Savings Exposed To Water & Climate Risks? – Asian asset owners have portfolios skewed towards domestic markets that will bear the brunt of climate change. Find out about these risks and what to do as our Dharisha Mirando shares key takeaways from the new report China Water Risk co-authored with Manulife Asset Management & the Asia Investor Group on Climate Change
  • 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.
  • 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
  • Pearl River Delta: 5 Water Must-Knows – China’s Pearl River Delta generates 9% of GDP but water challenges lurk behind the dazzling economic success. Don’t know what these are? China Water Risk’s Feng Hu shares 5 water must-knows for the region
  • China Water-nomics – Will China’s economic development be hampered by limited water resources?  The very existence of the Three Red Lines signals that China can’t keep developing the way it has. Read on for why GDP will be capped at 5.7% given China’s water-nomics
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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Debra Tan
Author: Debra Tan
Debra heads the CWR team and has steered the CWR brand from idea to a leader in the water risk conversation globally. Reports she has written for and with financial institutions analyzing the impact of water risks on the Power, Mining, Agricultural and Textiles industries have been considered groundbreaking and instrumental in understanding not just China’s but future global water challenges. One of these led the fashion industry to nominate CWR as a finalist for the Global Leadership Awards in Sustainable Apparel; another is helping to build consensus toward water risk valuation. Debra is a prolific speaker on water risk delivering keynotes, participating in panel discussions at water prize seminars, numerous investor & industry conferences as well as G2G and academic forums. Before venturing into “water”, she worked in finance, spending over a decade as a chartered accountant and investment banker specializing in M&A and strategic advisory. Debra left banking to pursue her interest in photography and also ran and organized philanthropic and luxury holidays for a small but global private members travel network She has lived and worked in Beijing, HK, KL, London, New York and Singapore and spends her spare time exploring glaciers in Asia.
Read more from Debra Tan →