By 2025 over 40 percent of the world’s population could be living in water-scarce regions. Water scarcity, either due to physical scarcity or to technical and managerial constraints, is a risk to both development projects and private sector investments. Financial institutions need to understand how water scarcity will affect their core businesses and that of their business partners.

A report from the United Nations Environment Programme and the Stockholm International Water Institute urges financial institutions and investors to understand the need to involve the private sector in promoting water sustainability. Improved water supply and resources management could be the first step in improving operational performance and efficiency and are essential for a country’s macroeconomic development. Corporate leaders should become more aware of the challenges of reduced water availability and work with business partners, national governments and local communities to develop risk management strategies.

Review of investments in Africa and Latin America highlighted three major types of water scarcity related financial risks faced by bankers and investors: financial losses due to disruption of operations; increased financial investments due to additional water treatment; and loss of an anticipated revenue base. Such risks may not become apparent through standard financial analysis.

Some financial institutions surveyed suffered losses due to unexpected water related problems affecting their customers or investments. Most respondents noted that the issue of whether water would be available does not play a prominent role in institutional risk assessments or evaluations. Neither is it prominent in loan management processes. Few banks have explicit policies for water-related risks, although development and multi-lateral banks are beginning to develop them.

The authors note that water matters to all businesses – and not just those who build, operate and finance water infrastructure or are dependent on water for production. Equally essential to the long-term success of all enterprises is the role that water plays in economic development, social and political stability, health, employment and markets in the communities where they operate.

Businesses are reminded that:

• Water use for human purposes has multiplied six-fold in the past 100 years.
• Water consumption doubles every twenty years, over twice the rate of human population growth. It is driven by increased food production, as the agricultural sector uses 70 percent of all water withdrawn.
• Pressure on fresh water supply is not only limited to increased water withdrawals: human activities also have negative effects on water quality.
• Pollution is not cost-free: 70 percent of all industrial waste and over 90 percent of sewage in developing countries is discharged into surface waters without any treatment, causing enormous health problems, lost development opportunities downstream and ecosystem degradation.
• Food and beverage industries are major polluters, producing 54 percent of total organic water pollutants in developing countries
• The major destination states receiving over half the world’s foreign direct investment flowing to non-rich states – China, India, Russia, Poland, Mexico and Brazil – all face significant challenges with freshwater supply.

Businesses need to engage with the emerging international consensus that water is both an economic and a social good that should be treated as a valuable and finite resource, equitably and sustainably allocated. Management or ownership of water assets carries the obligation to conduct business in a socially, environmentally and ethically acceptable manner.

Financial institutions can promote risk mitigation by encouraging clients, project developers and business partners to:

• include water assessment and risk management in project planning decisions and business projections
• develop appropriate performance indicators focused on water risks as part as part of annual reporting
• include integrated water resource management as an intrinsic part of their operations, and open dialogues with their stakeholders for its effective implementation
• support local community strategies.

Contributor(s): Alberto Pacheco Capella and Johan Kuylenstierna

Source(s):
‘Challenges of water scarcity: a business case for financial institutions’, The United Nations Environment Programme Finance Initiative (UNEP FI) and the Stockholm International Water Institute (SIWI), by Tareq Emtairah, Marta Echavarria and Ralph Hamann, 2005 More information.

Funded by: Swedish Water House (SWH)

id21 Research Highlight: 24 June 2005

Further Information:
Alberto Pacheco Capella
Finance Initiative
United Nations Environment Programme
International Environment House
Office D-512
15 chemin des Anémones
CH-1219 Châtelaine
Geneva
Switzerland

Tel:    +41 (0) 22 917 8178
Fax:    +41 (0) 22 796 9240
Email: alberto.pacheco@unep.ch

United Nations Environment Programme (UNEP) Finance Initiative

Johan Kuylenstierna
Stockholm International Water Institute
Hantverkargatan 5
112 21 Stockholm
Sweden

Tel:   +46 8 522 139 60
Fax:  +46 8 522 139 61
Email: johan.kuylenstierna@siwi.org

Stokholm International Water Institute, Sweden

Other related links:
'Driving development by investing in water and sanitation'

'Making water a part of economic development'