YtDl2r

A key interest of financial service providers should be to understand their
client’s exposure to water-related risks and interdependencies. If these risks
materialise, the effects will most likely have direct consequences for portfolios,
financing and investment activities, and the business performance of financial
service companies. Due to intensified public and shareholder awareness, a
financial institution’s reputational risk will increase if a client demonstrates
insufficient water risk management. In the past few years, the number of environmental
and social policy resolutions filed by investors has strongly increased,
especially in the USA 176 .
Sector water risk
Seasonal droughts and floods, bad water quality, and changes in water-related
regulations are standard risks faced by financial services. Insurance companies
should be aware of their client’s resilience to water-related risks and management
strategies because they can be simultaneously affected as insurers and
investors.
Impacts of a changing climate are expected to lead to increased insurance risks
related to water. The most expensive natural disasters Germany experienced
in the last 10 years were flooding (Elbe flood in 2002) with material damages
estimated at €1,800 million (US$2,290 million), a hail storm (2011) at €300
million (US$381 million), and torrential rain (2008) at €100 million (US$127
million) 177 . In other locations, climate change is likely to lead to reduced rainfall
and could bring more frequent claims related to drought and water shortage,
which in itself might lead to the un-insurability of either a region or products.
It has been calculated that the average annual economic consequences of
droughts in Europe over the last two decades has drastically increased, costing
€6.2 billion/year in the most recent years 178 .
As financial institutions
are a key enabler
of economic development,
they can also
be key for sustainable
development.
Strategies to understand, capture, and measure potential and actual water-related
risks for financial institutions can vary greatly, from actively hedging
against weather-related effects to properly understanding, engaging, and cooperating
with companies to become resilient or adjusting their business models
to the causes and effects. Some development banks have made good strides in
reducing the water risk in their portfolios, for example, by providing technical
assistance to their clients (see Side Note 5). Development and implementation
of mitigation strategies and new technologies to address future challenges and
increasing water demand and climate change impacts are entering the agenda
of public and private decision-makers. As financial institutions are a key
enabler of economic development, they can also be key for sustainable development.
Important aspects are sustainable water management, efficient water
use, alternate approaches to water supply, water pollution minimisation, and
water resource recycling – all to be put into the perspective of the given river
basin’s specific circumstances.
While the origin of water risks will stay the same, each branch in the financial
services sector (see Table 13) for a selection of some of the most important)
has to develop its own understanding of where water risks are emerging and
materially relevant for their portfolio and/or investment’s performance and
how these should be integrated in their processes.
54