Jan 20, 2021 ESG

Water risk: what COVID-19 has taught us about ignoring systemic risks and what to do about it

Alexis Morgan

Alexis Morgan

WWF Global Water Stewardship Lead
Francesco Curto

Francesco Curto

Global Head of Research, DWS
to read

water crises as a major component of 'natural resource crises' were again ranked in the top 5 global risks by impact

Over the past year, COVID-19 has fundamentally re-shaped our global economy, social ties and the environment. Most of the world was totally unprepared even though pandemics had been consistently highlighted in the annual World Economic Forum (WEF) Global Risk Reports, including last year's which ranked infectious diseases as the 9th greatest risk by impact. This underlines how identifying a risk is not enough, what matters is preparation and management.

With the exception of a few countries, we can safely argue that the 'risk' has been poorly managed. Along with the huge human loss of life, the Economist estimates that COVID-19 will result in US$10 trillion in forgone GDP over 2020-21. Proper preparation would have cost a fraction of that price. But infectious diseases are not alone among the list of high impact risks that companies, investors and countries remain unprepared for: there is also water.

For the past decade, WWF has been asking, "why are water crises continually ignored despite featuring on the WEF risk list year after year?" We know water crises are happening, we know the impact is substantial, and we know the risks are worsening, yet nobody is listening? Thankfully, the message is starting to be heard. It is no coincidence then, that this year – when water crises as a major component of 'natural resource crises' were again ranked in the top 5 global risks by impact – WWF and DWS are co-authoring this article.

WWF is the world's largest independent conservation organisation and a driving force behind corporate water stewardship, water risk tools and sustainable finance. DWS is one of Europe’s largest asset managers with more than €759 billion of assets under management. DWS has been involved in responsible investment initiatives and has offered ESG funds for many years, and has recently turned its attention to water risks and opportunities.

While the individual risks featured in the WEF's Global Risks Report changes over time, 'water risk' appeared in the top 5 risks by impact every year between 2012 and 2020 and features in many of the top risks in 2021 by both likelihood (extreme weather, climate action failure and human environmental damage) and impact (climate action failure and natural resource crises). However, a separate WEF evaluation found that comparing progress for global risk management, water crises have seen much less action than the climate crisis. 

And yet, the water risks faced by societies and economies are potentially catastrophic. Today, 785 million people lack a basic water-drinking source and two billion people do not have access to basic sanitation. Poor sanitation and hygiene led to almost 1.6 million deaths in 2017. In addition, if the world’s rivers, lakes and wetlands continue to be degraded and unsustainable pressures put on global water resources then, it is estimated that by 2050, 51% of the world’s population and 46% of global GDP (WWF Water Risk Filter scenarios) and 40% of global grain production (World Water Development Report) will be in areas facing high water risk. More broadly, failure to act on the climate and nature crises also exacerbates water crises, which will hasten habitat destruction and reduce resilience, thus increasing future pandemic risk.

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WWF and DWS both agree that water risk affects all of society and all types of investments, and hence a holistic approach is best.

While the world tackled COVID in 2020, many people and institutions continued to dig into the linked systemic risks of water, climate and biodiversity. In October 2020, through the WWF Water Risk Filter, a trusted, practical, online tool used by numerous leading Global 500 corporations and investors, WWF released their Task Force on Climate-related Financial Disclosure-compliant scenarios. These scenarios enable users to anticipate future water risks exposure and make better informed investment decisions. WWF also released new guidance on how to harness nature-based solutions to enhance water resilience through water stewardship. WWF continues to believe that these challenges are not simply risks: they represent the future for investment opportunities. Solving these challenges will create financial returns, which WWF is showcasing by leveraging its own data to link need, solution, actors and funds. From Vietnam to Zambia, WWF is helping to leverage hundreds of millions of Euros via the 'Dutch Fund for Climate and Development'(DFCD). But more is required to mobilize the billions needed to to tackle these challenges.

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From the investor perspective, DWS is taking a multi-faceted approach. In its November 2020 report, 'A Transformational Framework for Water Risk' DWS argues for the creation of a transformational framework to address the systemic risks around water, calling on governments to legislate, accountants to measure and investors to invest. In their response to the recent International Financial Reporting Standards consultation, DWS advocates for improved levels of disclosure. In its investment process, DWS is now incorporating water risks with the help of its proprietary ESG Engine, which brings together multiple data providers. The asset manager is also launching investment funds linked to water as well as working with various stakeholders and experts to help define a transformational framework for water investments.

Both WWF and DWS believe that there is a need to underpin investments with a clearer approach to water risk and opportunities. This requires strong and ambitious policies from governments, supervisors and regulators to create economic incentives for funding investments that have a transformational impact. If we are to scale up funding and harness the rising tide of ESG interest, we need a strong foundation. Indeed, we would both argue that this extends to many of the most complex, systemic issues of our time: climate, biodiversity and water..

So let's avoid getting caught off-guard again in 2021. Let’s put funds to work and start converting systemic risks into investment opportunities by collectively mobilizing the capital markets to create a better, more prosperous world.

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