World Economic Forum report says water security among six "global systemic risks" for investors
- June 8, 2020
- Category: Water issues, Investment and Finance, Corporate, Global
The World Economic Forum (WEF) has identified water security among six “global systemic risks” in a white paper which outlines a governance framework to enable the investment community to address the annual investment gap of $6.26 Trillion USD required to mitigate the risks.
The other systemic risks are climate change (identified by WEF as the most obvious risk), population growth, geopolitical uncertainty, negative interest rates and technology disruption.
Transformational Investment: Converting Global Systemic Risks into Sustainable Returns, released in May, provides new insights to ensure that the long-term impact of non-traditional risks and opportunities can be better understood.
WEF defines “transformational investment” as:
“ an investment that is intended to derive an attractive risk-adjusted expected return within the context of a given asset owner’s overall portfolio, and at the same time is expected to help mitigate or address one or more long-term risks.”
According to WEF, individual universal shareholders acting collaboratively can produce greater impact, faster. The whitepaper, which is focussed on transformational investment from the viewpoint of the institutional asset owner community, says this dynamic is driving a growing recognition of the importance of collective action by institutional asset owners.
The most sophisticated transformational investors have “blazed a clear trail”, the paper says, which other investors can follow to potentially garner sustainable returns while mitigating systemic risks.
However, WEF believes at least $6.2 trillion per annum is needed for the combination of climate, water and demographics transition strategies alone.
The whitepaper sets out the following governance framework:
- Understand the overall impact on the funding entity, objectives and beneficiaries.
- Collaborate with similarly situated organizations that are concerned about the same risks and opportunities.
- Design governance, policies, delegation and accountabilities for material systemic risks.
- Invest to manage the portfolio’s exposure to the global systemic risk.
- Transform through driving an investment strategy that aims to deliver change.
- Monitor and revisit. Apply learnings to improve policies and processes.
British Columbia Investments (BCI), one of the expert contributors to the whitepaper, has identified water risk as a top engagement issue and recognized that it needs to be selective in how it uses its internal research resources.
BCI provides investment management services for British Columbia’s public sector. With CA$153 billion in assets under management as at 31 July 2019. and one of the largest asset managers in Canada, BCI seeks global investment opportunities across a range of asset classes.
Water risks are one of three core focus areas for the investment group because:
- they are prevalent and material across most industry sectors;
- data is available to assess the risks
- BCI believes it has the ability to influence change
The white paper says BCI’s thematic investing team has undertaken significant research on water scarcity and the investment implications driven by this theme.
BCI uses water security as a lens to view sector-based impacts and opportunities and is also developing comprehensive environmental, social and corporate governance (ESG) risk measurements and monitoring tools in which water risk will be one of several key focus areas. BCI’s focus is on identifying, tracking and potentially investing in companies that could perform well given the long-term increase in water scarcity and the opportunities that water crises may provide.
In particular, BCI is looking for solutions in regions and sectors where water supply is anticipated to decrease, while increased demand is required to sustain established and growing economic activity, which could include:
- technological solutions
- value chain investments (distribution, treatment, purification, reuse)
- water utilities
- engineering and consulting services
According to the report, climate change risks often manifest as water risks – as a result, water security is sometimes not viewed independently from climate change.
However, the risk impacts and transformational solutions for water risks are often different from those of climate risk.
The white paper says collaboration groups to address water security include:
- Ceres Investor Water Hub;
- working groups of the United Nations-supported Principles for Responsible Investment (PRI);
- Interfaith Center on Corporate Responsibility (ICCR).
Commenting on the current state of play, the white paper says:
“Cross-sector dependency on water by households, agriculture, industry, energy and transport make water scarcity and threats to water quality a significant investment risk.”
According to WEF, some investors are already actively monitoring water risk and investing for sustainable return outcomes. However, it says the additional investment required to achieve Sustainable Development Goal 6 (SDG6) of ensuring availability and sustainable management of water and sanitation for all until 2030 is approximately $1.7 trillion– about three times the current investment levels.
In addition, the scale of transformational water investment demands collective effort. Globally, there are 286 transboundary river and lake basins and 592 transboundary aquifers shared by 153 countries.
Key transformational opportunities include more efficient food and energy production
The white paper says there are many opportunities and solutions related to water security, a large number of which relate to ways of making food production and energy generation more efficient and mitigating water pollution. Food production takes up 70% of human water use globally, while energy production has “traditionally required vast amounts of water”. It also flags up the oil and gas, semiconductor and chemicals sectors. WEF says the sector all consistently rank high in terms of water-intensive operations and weight in the major global indices – and are likely to affect the quality and quantity of local water resources.
WEF goes on to warn that the amount of capital required to effect change across the global trends is daunting. The organization believes that unlocking the potential of transformational investments and addressing global systemic trends will require further securitization, structuring and product development.
The whitepaper says that while demographics and water security have drawn some focus, “adoption of sophisticated investment practices globally as relates to these trends remains in its early stages.”
Click here to download Transformational Investment: Converting Global Systemic Risks into Sustainable Returns