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Edition 4 - article 6

Scarcity or abundance? The risks with climate change you could be missing

Climate change is impacting water in a way that threatens to throw out the delicate balance between flood and fire. Human and social development is not possible without water – with awareness and action, there are ways the investment community can make an impact.

The words of the United Nations are among the most powerful when it comes to describing the nature and magnitude of the water crisis which is on the earth’s doorstep. In particular, the United Nations articulates well the links between water, social functioning and economic productivity. It says:

“Water is at the core of sustainable development and is critical for socio-economic development, energy and food production, healthy ecosystems and for human survival itself. Water is also at the heart of adaptation to climate change, serving as the crucial link between society and the environment.

Water is also a rights issue. As the global population grows, there is an increasing need to balance all of the competing commercial demands on water resources so that communities have enough for their needs.

At the human level, water cannot be seen in isolation from sanitation. Together, they are vital for reducing the global burden of disease and improving the health, education and economic productivity of populations.”1

It’s incumbent on society and investors to understand the role water plays in climate change and the options at our fingertips to get involved for the better.

The state of play

According to the OECD2, 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 & Agriculture Organisation 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 year3.

Facing day zero

A term that we’ll all soon become familiar with is Day Zero – the point at which a city completely depletes its water supply. In 2018 Cape Town came within a couple of months of becoming the first major city to reach Day Zero, only staving off the worst-case scenario with the help of timely winter rains and some extreme water saving initiatives4 on the part of its residents.

India will be amongst the countries worst-affected, with some estimating that more than forty percent of the population – more than 500 million people – will have no access to drinking water by 20305. As climate change increases the incidence of extreme weather, rains across the country will become increasingly monsoonal and harder to capture. The nation’s other major source of water – the immense Himalayan glaciers, the planet’s “third pole” – are in serious decline, and by 2060 the rivers they feed will carry less water as a result6.

India’s plight underscores the fact that 785 million people worldwide already lack basic access to drinking water, and any exacerbation of current crises could be catastrophic for the populations involved. Unfortunately, it is generally the poorest people in the poorest countries who currently have least access to safe drinking water. These same people are also least equipped to deal with the effects of a changing climate.

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 use. 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."

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Wealthy and developed nations are also feeling the impact of water shortages. So far in 2020, states like NSW in Australia are experiencing tough water restrictions – including in metropolitan areas – as the country faces one of its worst droughts and a bushfire crisis.

The effects of climate change on water storages will be further compounded by the addition of another two billion people to the planet by 2050, predominantly in parts of the world which are already short of water7.

What can we do?

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 use8. 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 Index, as well as those with more focussed sustainability criteria, such as the NASDAQ OMX US Water Index.

Despite the opportunities on offer, recent evidence suggests that investors aren’t yet taking the initiative when it comes to water sustainability9. 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.

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 https://www.un.org/en/sections/issues-depth/water/index.html
2  https://www.oecd.org/water/risks-disasters-and-climate-change.htm
3 Water and climate change adaptation, OECD (2013)
4 https://www.citylab.com/environment/2019/04/cape-town-water-conservation-south-africa-drought/587011/
5 Temple J. (2019), India’s water crisis is already here. Climate change will compound it, MIT Technology Review, April 2019
6 Wester P., Mishra A., Mukherji A. & Shrestha A.B. (Eds) (2019), The Hindu Kush Himalaya Assessment: Mountains, Climate Change, Sustainability and People, Springer Nature Switzerland
7 Long S. (2019), Climate change and population growth are making the world’s water woes more urgent, The Economist, February 2018
8 Climate change, water and food security, Food and Agriculture Organization of the UN
9 World Health Organization, 10 facts on climate change and health

Important Notes

While every care has been taken in the preparation of these articles, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in them including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. Performance goals are merely goals. There is no guarantee that the strategy will achieve that level of performance. The information in this document contains statements that are the author’s beliefs and/or opinions. Any beliefs and/or opinions shared are as at the date shown and are subject to change without notice. These articles have been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. They should not be construed as investment advice or investment recommendations. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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