Deep-dive analysis of water security information submitted to CDP (formerly Carbon Disclosure Project) in 2020 and 2021 suggests that global financial institutions are at risk of investment losses estimated around $225 Billion USD. Over one-third of the entities who have responded to CDP’s surveys are doing very little to assess the direct and consequential impacts of water insecurity.
CDP’s data is used to inform investment decisions throughout the financial sector who collectively manage more than $130 Trillion USD in assets. Water-security risks begin with investment in companies whose production assets are exposed to availability risk (quantity and quality of water used in production) and range through to the physical risks associated with the impacts of climate change (both too much and too little where it is needed).
The risk at the corporate level can be broadly quantified as a loss in production (through pollution, flood or drought), resulting increased costs and lower revenues. Both corporations and the entities that finance them are also at risk for continuing investment decisions in assets that are now or will become “water stressed” and therefore uneconomic. Water-security risks could also include shareholder actions that block further investment or even sue for malfeasance for mismanagement of investment at the corporate level.
CDP and the non-profit entity Planet Tracker have analysed CDP’s own water-risk information submitted by 1,112 companies in response to CDP’s survey. Of these, 69 per cent admitted water (in)security imposed a “substantive” impact of their overall business.
Of the listed financial institutions, 33 per cent were not assessing exposure of financial activities to water risks, suggesting that many financial institutions may be underestimating their exposure, including risk of fines, shareholders lawsuits and corporate inability to obtain adequate insurance.
By underestimating all associated risk, banks, investors and insurers could be allocating too much capital to companies and projects that may ultimately prove uneconomic. Lack of economic viability can lead to asset “disinvestment”, abandonment or “stranding” and ultimately to write off.
"Financial institutions need to understand how exposed they are to these risks and take immediate steps," said Cate Lamb, CDP's global director of water security.
The report analyses CDP’s own information but can be used by a large range of stakeholders, including financial institutions and policymakers.