Water risk - a growing concern for investors

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Circular pattern on water surface
25-03-19 13:56 | Environment | Responsible investment | Our work

On April 12 2018, Cape Town experienced an immediate risk of facing the dreaded ‘Day Zero’ – the day when the taps would run almost completely dry in the country’s legislative capital. The situation in South Africa was a global wake-up call that brought attention to water risk in a completely new way, with several large, global cities possibly facing a similar situation in the future. In December 2018, Nordea traveled to South Africa to speak to the companies affected.

As investors, water risk is something we need to be aware of and take into consideration. When cities with millions of people and thousands of companies, such as Cape Town, São Paulo, Mexico City, Bangalore, and Beijing, face a real risk of water scarcity, it becomes a topic we must look into and understand the consequences of. Water shortage directly affects the companies we invest in and thereby the assets we manage.

With a changing climate, environmental risks are becoming more and more tangible for both people and businesses. To better understand the situation, Nordea went to South Africa to find out how the companies we invest in are tackling the water issues, as water risk is one of Nordea’s focus areas within stewardship and engagement. 

In 2016, the World Economic Forum identified the water crisis as one of the top five global risks of highest concern over the next 10 years. The water issue is not only a pressing challenge for countries but poses severe business risks to the companies we invest in. In a vicious cycle, businesses impact the environment, but the environment also affects the ability of businesses to operate.

“It would be a mistake to look at the situation in Cape Town as a unique, one-time incident. With the changing climate, similar scenarios are quite likely to occur in other cities in the future – unless we change our ways,” says Anders Langworth, Head of Sustainable Finance at Nordea.

Climate change bringing extreme weather combined with inadequate public water management practices, pose threats to industrial, agricultural, and domestic water provision. These pertain to the allocation of water to ensure national water, energy, food, and economic security, not only to keep the ecosystem intact but also to avoid already emerging competitions and conflicts among multiple stakeholders. Water is a fundamental necessity for lives and livelihoods, yet it is known that already a billion people around the world live in water-scarce regions. It is also known that unsustainable consumption habits and lifestyles are spreading, and the world faces a paradox of inequalities with poverty and hunger in the era of immense food waste generated. 

While the biggest existing water resource management challenges have more to do with economics and politics than physical availability, changes in climate, such as extreme droughts and floods, have the potential to seriously affect water and all systems depending on it. 

In this context, our report aims to uncover the level of awareness of selected South African companies and assess their exposure to any potential water risks, and the impacts and responses to them. It also concludes the future and explores how the risks can be transformed into opportunities

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