Shining a Light on Material Water Risks
“If climate change is a shark, then water is its teeth”. This quote from James P. Bruce, a Canadian hydrogeologist, has never seemed more relevant to the South African context than today in light of recent extreme flooding and drought events.
A warmer atmosphere holds more water vapour and when that water is released it can have devastating effects, as parts of Kwa-Zulu Natal experienced in 2022. A warmer atmosphere can also result in lower rainfall in other regions, such as the crippling droughts experienced in Gqeberha in 2022 and in Cape Town in 2018.
There is increasing awareness of the environmental, economic, geopolitical and social risks that water insecurity poses globally. The Global Risks Report, published by the World Economic Forum in 2023, for example, states that “[c]limate and environmental risks are the core focus of global risks perceptions over the next decade – and are the risks for which we are seen to be the least prepared”. The top three global risks are ranked by the World Economic Forum as:
- failure to mitigate climate change;
- failure of climate-change adaptation; and
- natural disasters and extreme weather events.
The report also highlights that “present and future risks can also interact with each other to form a ‘poly-crisis’ – a cluster of related global risks with compounding effects, such that the overall impact exceeds the sum of each part”.
Communities around the globe are experiencing these physical risks as we increasingly approach and exceed the “planetary boundary” relating to water. The planetary boundaries framework demarcates nine planetary boundaries “within which humanity can continue to develop and thrive for generations to come”. Our collective freshwater use is currently within the planetary-scale boundary, based solely on estimated current global water withdrawals of blue water from rivers, lakes, reservoirs and renewable groundwater stores. However, when considering green water usage, which includes rainfall rates, evapotranspiration rates and soil saturation/moisture levels, evidence suggests that this boundary has been extensively disrupted by human pressures at global scales and that the green water planetary boundary is already transgressed.
As a result of concerns around global water management, in March 2023, heads of state met to discuss water security at the UN Water Conference for the first time in almost 50 years. It is possible that this meeting is the first step towards an international agreement on water, as we have seen for climate with the Paris Agreement and the Kunming-Montreal Global Biodiversity Framework for biodiversity.
Not only is water vital for our very survival, but like electricity, it is also a critical economic enabler. In the same way that a lack of electricity can cripple economic production, a lack of water, through drought, or too much water, through floods, can be similarly debilitating.
South Africa has witnessed the convergence of multiple crises in regions where, notwithstanding sufficient water supply, governance failures have resulted in disruptions to or unavailability of water supply, which is further compounded by intermittent water pump operation as a result of interruptions in energy supply.
The State has the primary responsibility for water resource management in South Africa, as the custodian of water resources. The Department of Water and Sanitation have noted in their Master Plan of 2019 that South Africa will have a water deficit by 2030. Capital investment in new and existing water infrastructure will be key to ensuring that South Africa has a water secure future. This is particularly so given the Department of Water and Sanitation’s estimate that there is a capital funding gap of approximately R33 billion per annum. In this regard, the Department of Water and Sanitation intends to create a National Water Resource Infrastructure Agency to drive investment in the water sector, which provides significant potential opportunity. The publication of the National Water Resource Infrastructure Bill in 2022 is a notable development which has the potential to alleviate some of the pressures faced in the water sector over the medium and long term and is likely to present funding opportunities for the private sector.
However, water security will not be achieved through infrastructure alone as corporate action will also be critical to the effective management of our water resources through the adoption of water use efficiency and waste-water re-use measures. The adoption of such measures will reduce costs over the long-term and reduce water supply risk.
Evidence from the last decade suggests that private sector disclosure of water information is a critical part of transformative action to stem both water and climate crises. Disclosures on water risks helps investors, banks, buyers, policymakers, civil society, and consumers make smarter decisions and increase their expectations of companies concerning their performance. In South Africa specifically, the JSE Sustainability Disclosure Guidance of 2022 already includes a disclosure metric for water consumption, withdrawal and intensity per material unit. It can, therefore, be expected that corporate water disclosures will increasingly be expected and will become more commonplace.
Without adequate due diligence on water as a risk item, or in circumstances where there are inadequate water-related disclosures, investors may be exposed to water risks in their portfolios. This may force or require investors to exit an investment prematurely where there is increased and persistent water risk. Where refinancing options are not available or are unattractive, these water-risk-exposed assets have the potential to become stranded.
Already, approximately USD15.5-billion of assets globally have been stranded or are at risk as a consequence of water risk. If we do not transform our approach to water use management, research suggests that current water management practices will put at risk US$63 trillion, or approximately 45%, of the projected 2050 global GDP, equivalent to 1.5 times the size of today’s entire global economy.
From an investor point of view, having greater visibility on material water risk will allow for more informed capital-allocation decisions. From an investee point of view, grappling with physical, regulatory and governance-related risks and adapting and planning accordingly will reduce exposure to water risk and make the investee more attractive to sustainable finance.