Finance must tackle the growing water crisis. Here's how

The financial community increasingly understands and accepts that the global climate and biodiversity crises are a systemic and financial risk. This has spurred action. Similar efforts to address the global water crisis have been slower to gain traction.

Warning bells have increased in just the last few months, with the world’s leading scientists from the Intergovernmental Panel on Climate Change laying out how dramatically the climate crisis is compounding and accelerating the water crisis. A new global assessment identifies the critical sectors and industries – as well as the business activities – most significantly affecting freshwater availability and quality, while another recent analysis underscores the persistent gap in financing to achieve a water secure future. These messages make it clear that key financial players such as institutional investors, banks and development finance institutions urgently need to step up to address the water crisis.

Water risk is a systemic, material risk that is causing significant economic and social costs right now, from supply chain disruptions unleashed by climate-fueled flooding and droughts, to water and food insecurity caused by dwindling water supply. By failing to account for water security in financial decision-making, financial markets are contributing significant financial flows that are increasing exposure and vulnerability to water-related risks across the global economy. This ranges from urban development that does not take new weather risks, changing weather patterns and aging infrastructure into account to investments in water-intensive economic activities, such as agriculture and mining.

Even more, these investments have a blind spot when they don’t factor in how water crisis can impact them, contributing to the risk of future stranded assets. This threatens asset prices, economic activity and undermines progress towards the United Nation’s Sustainable Development Goal 6 on water and sanitation, and broader environmental and economic priorities.

The longer it takes finance to elevate water security in decision-making, the more we put society and the economy at risk. At least half of the industries in the U.S. economy face significant water risks. This is illustrated by the finding that 50% of the stocks listed in each of the four major US stock indices are in industries with medium to high water-related risks. Some 69% of equities listed globally face around $300 billion dollars of corporate value at risk, and billions more in stranded assets. The cost of water risks to business could be more than five times greater than the cost of acting now to address those risks, a gap that dramatically increases financial exposure.

Prominent voices in the finance sector are calling for action on the water crisis to ensure financial and economic stability and security. The Network for Greening the Financial System, the group of 108 central banks focused on climate and environment risk management, explicitly called out the need to focus on water risk in a 2020 report. The United Nations specifically identifies finance as one of the key pillars to achieving water security as called for within the Sustainable Development Goal 6 on water and sanitation and the European Union is seeking to mandate water-related reporting through its Sustainable Finance Reporting Directive.

There are practical steps that financial institutions can take right now to protect themselves from the risks created by the water crisis and to have a positive impact on water security. Here are several ways that capital market players can act:

1. Assess and disclose finance’s water impacts and risks: Disclosure of the steps financial institutions are taking to measure and manage water impacts and risk across their portfolios, loan books, or underwriting moves markets. A study shows that investors subject to climate reporting reduced their financing of fossil fuels by 40%. In April, CDP made the first-ever water-related information request available to 1,200 publicly listed financial institutions to spotlight portfolio water impacts and shift capital allocation away from water negative investments. Right now, more than one-third of financial institutions disclosing are not factoring water-related issues into their investment decisions.

2. Engage with companies: Investors can engage with companies in their portfolios to mitigate water risk. To scale corporate action, investors can sign up for the Ceres Valuing Water Finance Initiative, a global investor-led engagement effort that is developing bold action steps companies should take to improve water stewardship. Investor engagements have prompted companies to address operational and supply chain activities responsible for the most severe and systemic water impacts.

3. Invest in water crisis solutions: Financial institutions have the capital to shore up investments and reduce the risks associated with floods, droughts, aging infrastructure, and water pollution. For instance, they can partner with development finance on blended financing models that offer technical assistance and guarantees to create opportunities to crowd in commercial capital for water-related investments.

4. Advocate for stronger regulation: Financial regulators worldwide are exploring ways to adapt current climate-related reporting policies to include water risks. Financial institutions can advocate for these changes. For instance, financial institutions can comment on the U.S. Securities and Exchange Commission’s new proposed rulemaking on climate disclosure to ensure water risk is part of the subsequent rule. Regulators are key to avoiding further disconnect between the economy, which is increasingly exposed to water risks, and the financial system, which is artificially shielded from them.

Financial institutions can help ensure universal access to a clean water supply and improved sanitation, sustainable management of water resources and prevention of more floods and droughts. But they cannot wait any longer to act. The water crisis will not wait. Now is the time to take advantage of their unique position and begin factoring water security into their decisions. Together, with the right solutions as outlined above, these institutions can be a central driver towards a more water-secure world.