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November 8, 2021

Building resilience in the age of water stress

On November 4th Moody’s held a virtual event featuring our climate specialists, credit rating analysts and leading external experts for a discussion on opportunities for building resilience and managing water stress risk globally. The cost of inaction presents significant risks. The CDP’s 2020 Global Water Report on water security found that the cost to business of water risk without action is an estimated US$310 billion, but the preventative cost is an estimated US$55 billion. Yet the event also highlighted the opportunity for financial markets and governments to build resilience through the use of data analytics, technology and governance. Below, we share key takeaways.

Global exposure to water stress is growing. By 2040 nearly 40% of the global population will be highly exposed to water stress.

Figure 1. Global states colored based on their population-weighted exposure to water stress, with darker red states more exposed. Source: Moody’s ESG Solutions

Water stress will have multifaceted global impacts on food security, sanitation, and business costs, but this risk will not manifest evenly. Moody’s ESG Solutions’ physical risk data finds Morocco, Algeria, Libya, Tunisia, and the Middle East are all projected to have over 90% of their population, agriculture, and GDP exposed to high water stress by 2040 – although several of these countries do have adaptation measures in place, such as desalination infrastructure. Business risk is also significant with approximately 60-65% of assessed facilities of pharmaceutical companies highly exposed to water stress globally, with higher exposure concentrated in some regions with significant pharmaceutical manufacturing, such as India. Due to pharmaceutical manufacturing’s dependence on large amounts of purified water, this presents rippling impacts on business costs and global healthcare supply chains.

Director of WRI’s Aqueduct tool, Tianyi Luo, highlighted how global water stress data leverages the latest climate models from the Intergovernmental Panel on Climate Change (IPCC) to project regions expected to have reduced water supply, alongside socioeconomic data to identify regions that have growing water demand from population growth. Leveraging forward-looking climate risk data enables businesses to assess their exposure to water stress, understand the impact of their operations on the surrounding communities and implement changes. However, alongside increased risk, the need to build resilience to water stress presents investment and business opportunities.  

Science-driven water stress data helps identify opportunities for financial markets to address water stress through targeted adaption. Robert Bartrop, Chief Revenue Office of SOURCE Global, explained how off-the-grid, solar powered technology could harness water from air, creating safe drinking water that addresses water scarcity, reduces plastic waste and presents opportunities for resilience. Launching new technologies and implementing local adaptation measures requires an understanding of the local context, including the relevant climate risks as well as the specific community needs.

Climate change brings more frequent, severe, and uncertain physical hazards such as water stress to the forefront for governments and financial markets. As climate change and growing demand deplete traditional water supplies, such as surface water and underground aquifers, municipalities have had to adapt. The City of Cape Town South Africa has tapped into technological advances such as desalinization to provide sustainable sources of water while looking into private public partnerships to subsidize this technology. The Metropolitan Water District of Southern California has looked toward water management and policy changes such as increasing the diversity of its water supply mix, amplifying conservation and local water sources, and stabilizing imported water supplies. The C40 Cities network promotes the implementation of management processes and  technological advances before water stress creates further negative consequences on communities. The City of Freetown Sierra Leone instituted water kiosks that are decentralized water systems, allows for community ownership of the infrastructure and gives water access to communities particularly exposed to water stress.

Water stress policies and institutional governance have financial implications. An issuer’s credit profile is influenced by the quality and impact of governance policies surrounding water stress. Strong governance and liquidity structure are essential for municipalities and sovereigns in the face of uncertain physical hazards such as water stress. Multifaceted approaches that harness forward-looking data, innovative technology, strong governance policies and community buy-in enable communities and financial systems to build resilience in the face of water stress.

You can listen to the on-demand replay of the briefing here.