Financing Water Security

Kit Elmes is WRc's Director of Environmental Social and Governance

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During 2023 the topic of water security gained momentum. While water security has always been a concern throughout history, the task of solving the issue as a global society has become no less daunting. The publications, investor toolkits and shared investment commitments that were announced last year bring hope but also provide timely reminders of the challenges that lie ahead.1 More interest from governments and change-makers in pursuing projects that support water security should not be under-celebrated, but it is clear that sustaining such momentum and seeing projects through to completion will require a strategic and considered approach.

Water security can be defined as ‘the reliable availability of an acceptable quantity and quality of water for health, livelihoods, ecosystems, and production, coupled with an acceptable level of water-related risks.’ The lack of water security has fueled war for centuries due to unequal access to, or control over, the resource, which some would describe as ‘greed and grievance’ led conflict.

For example, disputes erupted again recently between Iran and Afghanistan who have fought over water since the 1870s. While taking a global view on water security results in a wide range of geopolitical factors that influence the issue in different localities, understanding some overarching issues that may be detrimental to sustained financing will result in a greater ability to spot opportunities.

I am not alone in disbelieving the threat of international environmental crises will solely be sufficient to catalyse the response required to overcome a challenge like water security. A resilient financing strategy is built on a solid understanding of opportunity, risk and mitigation. Therefore, to motivate dynamic, long-term investment to the scale that would be required, we must understand the factors that have impeded previous investment and learn from the obstacles which may reappear along the way.

Water vs. Water Security

Financing water security is different to financing water. Water can be invested in as a commodity or through water infrastructure, such as treatment facilities or pipe networks. Such investment may require little regard to the risk posed by water scarcity depending on the local regulatory environment. The market for water is well established and can be tracked using tools like the S&P Water Index4 or the MSCI Global Sustainable Water Index. Both of these metrics have security-related lenses, but consideration of scarcity fails to go beyond that. When seen as a commodity, a lack of availability presents opportunities to increase return on investment in accordance with supply-demand economics. This is why it is essential to understand the role water plays in macroeconomic stability. Sustaining long-term supply may go against short-term commercial interests, but it supports the viability of continued economic growth.

Water security carries different complexities. For example, if a water company encounters widespread leakage throughout their network, market norms may make it more economically beneficial to ignore the wasted water than to fix the pipes, that is, market failure exists because the market cost of water is less than its true value. Furthermore, a lack of action in the shorter term increases the rate at which supplies are depleted, increasing the problems that will be faced in the future. Continuing the example of leakage, investors could disregard, knowingly or otherwise, the ‘impact materiality’ of the leakage risk leading to underinvestment in water security. Many investors are becoming more aware of the consequences of resource depletion, therefore while a focus on water security will challenge traditional business performance analysis, progress in this area suggests change is possible.

Valuing Water

Water security is undervalued, as demonstrated in the above example. According to WWF, ‘despite generating seven times more value than direct water use activities, the indirect benefits of freshwater ecosystems are chronically undervalued and overlooked. The economic value delivered by these ecosystem services is estimated at 50 trillion dollars annually.’ Even when considering the direct financial return on water-related investments, CDP questionnaire respondents estimate that $436 billion could be realised, with an average of over $250 million per company.

Investment always carries risk, particularly when you are dealing with the provision of clean and continuous water supply as lives depend on it. Meeting today’s need is a challenge in itself, indeed, according to the WHO, half of the world’s population do not have access to basic water and sanitation . In this context, future planning and considerations of the environment and wider ecosystem impacts is a luxury that often cannot be afforded. It is certainly not what water investments have been centered around previously, as the immediate societal need for water has been prioritised. The problem is, however, that without taking an inclusive view on water risk right now societal needs will also be left unmet in the future. Continued efforts to demonstrate the real value of water are essential for policymakers and investors to adequately quantify project impacts.

A Business Case

Yet, another risk to successful financing is policy. The OECD explains that financing water security is a policy issue inhibited by a lack of knowledge and understanding.8 Wider benefits are not easy to monetise, revenue streams are not clearly defined, and the capital-intensive nature of the sector limits the pool of willing/able investors. We then begin to see why improvements in policy and regulation are essential. Thankfully, even considering the complexities already described, there remains interest in the water scarcity sector and sustainability frequently features in water company performance objectives.

The Investor Water Toolkit9 from Ceres published last year is designed to simplify the evaluation of investments and improve understanding and access. While this is a positive move to addressing barriers, the increase in corporate efforts to proliferate sustainable investment should be met by efforts to create an operating environment with suitable boundaries, incentives and rewards such as those intended with the introduction of nature markets. Without addressing this, enthusiasm in investing may dwindle.

Water Scarcity and Climate Change

Climate change risk assessments, adaptation plans and disclosures are now being used in numerous sectors and contribute to business continuity strategy. Water security is featured, as it also is in nature-related tools. Yet, importantly, water scarcity risks are impacted by multiple factors and not just climate change. Corporate entities need to understand the differences as well as the linkages. Continuity plans that do not consider the increasing need, or decreasing availability, of water will not sufficiently cover material risks. As such, direct benefits of water security investments may not be recognised. The use of corporate continuity planning to highlight opportunities for water security investments should be capitalised rather than forgotten.

Human Behaviour

Altering the way in which we live and the way we do business requires normative change which will be opposed by human instincts if they are not properly considered. For example, according to Maslow’s hierarchy of needs, without achieving the basic needs (physiological and security) our interest in achieving other needs will be limited; we are more concerned with immediate measures and how to achieve them quickly. In conjunction, those who have reached higher levels of the pyramid have less awareness of the urgency of the situation because their basic needs are met, and only once those needs aren’t met may they start to take meaningful action.

Those being physically impacted by water scarcity are acutely aware of the problems, and their grievances are felt less deeply by those not being impacted by it, whether consciously or subconsciously. Given that those with their needs met are likely to be in greater positions of power, comfort in their status quo causes a lack of concern to address the issues with pace. The ‘greed and grievance’ conflict factors may then feature. While feeling secure on a personal level would not be considered ‘greedy’ per say, when resources are overutilised and depleted at a societal level to the detriment of future generations rather than carefully managed with inclusive access, it becomes a cause of greed and grievance dispute. Nature will show its grievances too. By which time, all may be thrown down the levels of the pyramid!

Acting on human instinct therefore dangerous with regard to governing natural resource allocation. Financing strategies should be developed in consideration of this, particularly with the likelihood of increased water scarcity on the rise. Capital allocation planning must consider the geopolitical, societal and behavioural factors that could limit successful implementation.

Lastly, people respond to change differently; there are adaptors and innovators. Innovators are fast to accept change and follow new opportunities, but adaptors take time to assess and will resist until a tipping point is reached. Investors and implementors will fall into both categories. To sustain the level of financing required to secure water resources, appeal must be made to both groups. This will need pace, not only with the elements that push innovation, but with those that help to cement change into business as usual.

Successfully financing water security demands a nuanced and holistic approach that recognises the stark level of change that will be faced. This should not be interpreted pessimistically however, as the recent increase in momentum can be harnessed to tackle these challenges. As businesses and governments are waking up to the severity of future crises, we must act to take this opportunity to avoid water-led conflict, protect our water resources, and equalise access to clean water without necessitating a total paradigm shift.

Created by potrace 1.16, written by Peter Selinger 2001-2019

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Created by potrace 1.16, written by Peter Selinger 2001-2019

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Kit Elmes

Director of ESG

Kit’s background covers both ESG and project management, having led the sustainability department of an £80m turnover company before joining WRc in September 2021. Kit has worked on ESG within many environments, from small, innovative start-ups to large NGOs like the International Federation of the Red Cross. She has worked on a range of technically complex, commercially successful, and logistically challenging projects in the UK and the Middle East.

2024-03-22 11:39:00