Environmental group WWF and German investment bank DEG are developing the first-ever tool to help investors assess the financial risks posed by water scarcity and pollution.
DEG, part of KfW Bankengruppe, finances corporate investments in developing countries. Using the tool, it found that it has invested in 48 firms with sites in water-stressed areas. The firms’ future profitability is at risk, unless sustainable water management practices are established.
For many businesses, water has emerged as a crucial risk alongside carbon in recent years. There are physical risks from a lack of water resources due to climate change, regulatory risks from governments imposing tougher restrictions on use, and reputational risks for companies becoming embroiled in confrontations with local communities over dwindling supplies.
There has been a surge of activity by firms trying to measure their water footprints (ENDS Report 415, p 25). Those in water-intensive sectors such as food and beverages, metals and mining are most exposed to water risks in the developing countries where they operate. Big UK retailers are also exposed through their supply chains.
Awareness of water risks among investors has increased, with the Carbon Disclosure Project also asking companies to reveal their plans on managing water risks (ENDS Report 430, pp 11-12).
What is lacking is a practical tool to help investment managers with little or no environmental background take account of water risks in their portfolios.
WWF and DEG designed the ‘water risk filter’ tool to fill this gap. It provides for an initial high-level screening of firms followed by an in-depth assessment of those at risk. The filter uses 48 indicators comprising location-related and company-related indicators.
An example of a location-related indicator is: “What are the total annual renewable freshwater resources per capita in the river basin?” An instance of a company-related indicator is: ‘Is the company likely to be exposed to significant regulatory changes in the next five years?’ Multiple choice answers are available for most questions.
WWF and DEG also incorporated the World Business Council for Sustainable Development’s global water tool into its assessment. The tool is used by companies to assess sites in water-stressed regions. It generates a map of sensitive areas overlayed with site locations.
Of 319 firms in DEG’s portfolio (excluding financial firms), initial screening identified 191 as potentially at risk from water-related impacts due to their sector and geographical location. Of these, 124 were asked to complete an online water-risk survey. Forty-eight responded, representing 65 sites.
The survey found 84% of sites relied heavily on water for their operations. A quarter of them had experienced difficulty accessing the required amount of water.
Some 60% of sites said water regulation was already strict. A further 10% expected it to become tighter still. But only half of respondents measured the quantity and quality of water supplies.
Most claimed to have a water management policy, but only 18% had one with water quality and quantity targets.
The water risk filter concluded that 46% of the 65 sites were operating in areas at high risk from water scarcity and pollution, while 57% were at high risk due to inadequate management.
This information will help DEG begin a dialogue with the companies over how to mitigate the risks. Some firms will have to implement better water management policies. Others will have to go further by working with local authorities, communities and other water users to protect regional water resources.
WWF intends to work with other financial institutions to develop the tool further. Supply chain risks are an element of the assessment that needs to be improved. This is because companies in DEG’s portfolio were unable or unwilling to share the information needed to consider these risks.
Bruno Wenn, chairman of DEG’s management board, said: “We realise that population growth and climate change exacerbate the water risks for many of our clients… DEG sees the need to support our clients in first identifying, but more relevantly in mitigating, water-related risks in their business operations.”