Water Risk: Single Largest Risk Threatening People, Planet and Profit

by Thomas Schumann, Thomas Schumaan Capital

Let me begin by asserting that SRI and ESG Investing will escalate to the forefront of global thinking, speaking, doing and capital. Both represent the sole solution to save people, planet and profit. And if you do not know Richard L. Sandor yet, I encourage you to look him up: “Sandor is known for asserting that the next financial revolution will be in the convergence of the financial markets and the environment.” He is often credited for founding the field of environmental Finance. His first book, Good Derivatives: A Story of Financial and Environmental Innovation, was published by John Wiley & Sons in April 2012. My own particular dedication is to water security, a sector that I am immersed in. Once I discovered the gravity of water risk it became a calling that burgeoned into a passion.

Water Risk

Physical and financial water risks are the greatest threats to people, planet and profit. By 2025, $145 Trillion in assets under management are either directly or indirectly exposed to financial water risk. Financial water risks are increasingly material. Climate change and other drivers are turning water into a scarce commodity, increasing competition for available resources and making protection of water quality more vital than ever. These risks have to become an integral part of investor research and risk management processes and daily financial decisions. Otherwise, investors will be blind to a risk that is only continuing to grow. Asset managers require transparency to make decisions. Typically, water risk transparency is based on share pricing, curated corporate financial accounting and voluntary disclosures of environmental risk attributes. Indexing water risk allows the asset manager to extract a probabilistic financial indicator of corporate and portfolio risk to facilitate allocation decisions. Corporate water risk assessments influence or modify financial projections or their weighted average cost of capital assumptions. Scenario analysis modeling determines how much the market cap of companies would be impacted if they had to absorb more of the costs of treating their wastewater discharges, especially as drought intensifies and communities and regulators become less tolerant of water use and pollution. Hence a deeper understanding of the probability of large financial losses due to strategic risks related to water, such as not being able to grow revenue, access new markets, or develop new facilities is imperative. 

Water Security

Water security is the single largest investment opportunity. It is the foundation for healthy people, planet and profit. Water security investments ensure social and environmental returns, and financial outperformance. In a water-secure world: Investors, companies and cities understand that water is an essential and fundamental factor in practically all economic activities. They recognize its crucial role in mitigating and adapting to climate change and take transformative steps to increase its security. There is equitable access to safe and affordable drinking water, hygiene and sanitation for all, in line with the objectives of Sustainable Development Goal (SDG) number 6. This requires significant and sustained investment in water infrastructure to secure future water supply.

Water Risk Index

LIMEYARD TSC Water Risk Index is a new benchmark index designed to inform asset owners and investment managers of the water risk to equities in their financial portfolios. Rather than forcing asset managers to make their own interpretations of operational reports and resource management scenarios, the index translates the key metrics of water risk into financial measures that can be accurately and effectively incorporated into financial models.

Read the rest of Thomas Schumann blog post here including about a new Water Security Fund - https://greenmoneyjournal.com/water-risk-single-largest-risk-threatening-people-planet-and-profit

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