A transformational framework for Water Risk

An institutional framework on addressing water risk across asset classes

Overview

An estimated US$670 billion of annual spending is required until 2030 to meet the sustainable goals associated with water. Yet, water is the risk where the least progress has been made. DWS is part of a working group, organised by the World Economic Forum (WEF), on ‘Transformational Investment’. The initiative targets new approaches to convert global systemic risks into a sustainable return. Water is one of the six systemic risks identified by the WEF.

How water has become an important risk

Water is a finite resource with only 2.5% potentially being usable for life on earth. In the past 100 years, water per capita has decreased significantly as a result of population growth while water quality has deteriorated. Today, 785 million people lack a basic water-drinking source and two billion people use a contaminated drinking water source.

Two of the seventeen SDGs are directly related to water, with water linked to many of the other SDGs, yet the 2030 water targets outlined by the UN will most likely not be met without stronger new actions. While the European Environment Agency 2020 report paints an upbeat picture regarding greenhouse gas emission targets stating these are largely on track, the EEA cites that for 2020 most water-related targets will be ‘largely missed’ with many displaying a deteriorating trend. That 60% of European surface water is polluted 50 years after the first European Water Charter was declared in 1968, is a sign of how public policy to date has largely failed.

Water risk is understood at the macro level

Over the past two decades, a significant body of research has taken place to understand water risks. The polyhedric nature of water, its importance to humanity and the risks we face are clear, but, progress on addressing such risks is slow. Our failure to properly address water risks is likely due to factors, including (i) the fragmented nature of water regulation, (ii) the characteristics of water investments, and (iii) our misplaced belief that water is plentiful and cheap. Further, population growth, climate change and our inability to redress the damage created by past action have the potential to make a bad situation even worse.

How to address water risk

The investment community could have an important role to play in addressing water risk. In the end, our fiduciary role is about looking after the capital, deploying that capital and ensuring sustainable returns. In this report, we propose an ambitious, but, pragmatic approach to addressing water risk. However, many challenges exist.

A ‘transformational investment’ requires a solid foundation, requiring investors to move from an ‘outsidein’ focussing on how sustainability issues affect financial risk management, to an ‘inside out’ approach of using investor influence for a positive, transformational change.

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