Think you know the biggest risks with climate change? Think again

The spectre of rising sea levels tends to dominate perceptions around the risk of climate change, but the more imminent threat may actually be a lack of water, rather than inundation.

According to the OECD¹ climate change is, to a large extent, water change, and the primary way through which the effects of climate change will manifest. How society deals with our dwindling supplies of fresh water is likely to dominate the geopolitical landscape in decades to come.

The UN Food & Agriculter Organisation² cites the disappearance of the Himalayan glaciers, source of the rivers that supply water to billions of people across Asia, and the potential loss of seventy-five million hectares of arable rainfed land in sub-Saharan Africa as just two of the many ways in which a changing climate will affect our water.

Lack of water now affects four out of every 10 people across the globe, and diarrhoea kills around 2.2 million people every year.³

As the driest inhabited continent, Australia in particular is no stranger to water shortages. Many citizens, particularly in rural Australia, have taken steps in their own lives to conserve this often-scant resource.

For those who keep a bucket in the shower to water the house plants, or turn off the tap whilst brushing their teeth, such efforts can seem a little insignificant in the face of such a momentous challenge. But for those who are prepared to take the same attitude to their investment decisions, there may be scope for a much more significant impact on the planet and your portfolio.

Action points

Investors may seek full transparency about water risks in a company’s operations but also across its supply chain, which often represents the largest proportion of water use⁴. This information may be voluntarily disclosed by the company as part of its sustainability reporting regime; alternatively, organisations such as the CDP compile reports on the exposure of companies to water risk.

A number of indices have also been developed that encompass companies whose business lies to a large extent in water. These include broad indices that track a variety of water-related stocks, such as the S&P Global Water Index⁵, as well as those with more focussed sustainability criteria, such as the NASDAQ OMX US Water Index.⁶ 

Despite the opportunities on offer, recent evidence suggests that investors aren’t yet taking the initiative when it comes to water sustainability⁷. This is a concern, as while the effects of climate change on sea level rise might not be realised for decades or even centuries, the deadly consequences of a world with dwindling resources of clean, fresh water are being felt now.

Markets, after all, are chiefly concerned with the allocation of scarce resources, and for many of us water scarcity is about to become a fact of life. Our investment decisions have the potential to reflect that.
 

¹ Water and climate change adaptation, OECD (2013) 
² Climate change, water and food security, Food and Agriculture Organization of the UN 
³ World Health Organization, 10 facts on climate change and health 
⁴ Larson W., Freedman P., Passinsky, V., Grubb E. and Adriaens P. (2012). Mitigating corporate water risk: Financial market tools and supply management strategies. Water Alternatives 5(3): 582-602
⁵ S&P Global Water Index (Nov 2019), S&P Dow Jones Indices <hyperlink>
⁶ NASDAQ OMX US Water Index (Nov 2019), NASDAQ Global Indexes <hyperlink>
⁷ Hogeboom R., Kamphuis I. & Hoekstra A. (2018). Water sustainability of investors: Development and application of an assessment framework. Journal of Cleaner Production. 202 (2018) 642-648