Regulators Have A Role To Play In Tackling The Global Water Crisis

July 17, 2020
Robin Miller
Water

Ceres’ Robin Miller shares ways that recommendations from a recent report on the risks posed by climate change can apply to tackling water pollution and scarcity.

Major institutional investors are among the avant garde in recognizing the systemic nature of climate and water-related risks
Action steps include affirmation and research, prudential supervision, disclosure and coordination
Water scarcity and pollution present risks to both the future and today -- unless regulators act boldly, now.

Climate change is intricately interlinked with the global water crisis. In fact, our warming planet is exacerbating water scarcity and pollution in our already crowded, water-hungry world. Water-related risks and the uncertainty they cause are key components of the systemic nature of climate risk.

Many of the actions that regulators need to take right now or are already taking to address climate risk are focused squarely on water risk.

Ceres has long focused its efforts on building the case for greater regulatory action on climate risk as a systemic financial risk. And in a new report, Addressing Climate as a Systemic Risk, we lay out 50 sweeping actions regulators can take to protect the stability of the US financial system. Although the report focuses on climate risk, regulators can and should apply these same steps to tackle water risk.

Climate change, a driver of water risk, is creating systemic risk

For decades, climate change has altered our planet and regional ecosystems – creating physical risks that have led to significant financial impacts for investment returns, companies, communities and households. These extreme weather events, including storms, droughts, floods, wildfires and rising sea levels, are increasing in frequency and intensity, combining in devastating ways to to create systemic risks to financial systems that impact asset valuations, health and productivity, the predictability of supply chains, and even where people can live and companies can do business.

Many institutional investors and world leaders are already taking action

Major investors, including one the largest US pension funds, CalPERS, and the world’s largest asset manager, BlackRock, are among the avant-garde in recognizing the systemic financial nature of climate risks. Research underscores that climate change poses significant impacts to investor portfolios across all asset classes. These risks are what prompted some of the largest financial firms, investors and companies to work together on the climate risk disclosure guidelines released by the Financial Stability Board’s Taskforce on Climate-Related Financial Disclosures (TCFD) in 2017.

At Ceres, we formed the Investor Water Hub, a working group of the Ceres Investor Network, made up of 130 investors with more than $20 trillion (USD) in assets under management to raise more awareness around water risk and launched the Ceres’ Investor Water Toolkit to enable investors to evaluate water risks across all asset classes, design strategies for mitigating water risks in their investment portfolios and complements the ongoing work of China Water Risk. We provide investors with information on engagement priorities, portfolio analysis, and a variety of scenarios to help them integrate water in portfolio management.

Most recently, Ceres launched the Valuing Water Finance Task Force, composed of influential global pension funds and commercial banks, which aims to drive corporate action on water risk. Founding Task Force members include Cathay Financial Holdings and Cathay Life Insurance. The Task Force is keen to embed the physical climate risk dimensions reflected in the TCFD recommendations into the recommendations it is putting together for companies on responsible water use, which will be released in 2021.

Financial regulators must take action

The regulatory authority in the U.S. can address climate risk under existing mandates to protect the stability and competitiveness of U.S. markets to tackle systemic risks, including water risk. Although the report centers recommendations on U.S. regulators, the action steps draw from existing global leadership and can be applied to a variety of geographic contexts:

Several banks and financial authorities in Asia, including the Bank Negara Malaysia (Central Bank of Malaysia), the Bank of Japan, the Bank of Korea, the Bank of Thailand, Japan FSA, the Hong Kong Monetary Authority, the Monetary Authority of Singapore, Bank Indonesia, and the People’s Bank of China, are already members of the Network for the Greening of the Financial System (NGFS). NGFS is a group of central banks and supervisors who share best practices and contribute to the development of environmental and climate risk management in the financial sector.
The Ministry of Trade, Economy and Industry in Japan published guidance on how companies should implement the TCFD recommendations in January 2018 and held a summit to advance the implementation of the recommendations in October 2019.
Canada is linking its pandemic recovery aid to a requirement that recipient companies publish annual climate-related disclosure reports consistent with the TCFD.

“Water is the primary medium through which we will feel the effects of climate change.” - United Nations Water

The insurance sector is a prime example of an industry where climate change and water risk intersect. A global survey of 232 insurance actuaries identified climate change as the top “current and emerging risk” in 2019, ranking it higher than both cyber-security and terrorism. The impacts of climate change on the insurance sector are clearer than ever. According to Swiss Re, the world’s largest reinsurer, total losses from natural disasters and “man-made disasters” totaled more than $316 billion in 2018 and 2019. As a result, financial regulators are growing more aware of the physical climate risks that often manifest in water-related events. Ceres recommends the ecosystem of insurance regulators acknowledge the significant risks climate change poses to the insurance sector and pledge coordinated action to address them. Additionally, we call on regulators to mandate that insurance companies in their jurisdictions disclose climate risk using the TCFD recommendations. Our global economy, now weakened by the impacts of COVID-19, is even more vulnerable to additional shocks from the compounding climate and water crises. Financial regulators must play an essential role in ensuring the economic recovery is resilient to climate and water risks if they take bold steps, now.

To learn more, read the full Ceres report, Addressing Climate as a Systemic Risk, and watch to a webinar recording on the report here.

This blog originally appeared on CWR.