Thought Leadership

A Transformational Framework for Water Risk

Over the past two decades, a significant body of research has taken place to better understand risks related to water—and an estimated US $670 billion should be spent annualy by 2030 to meet the sustainable goals associated with water. Yet, mitigating water risk is where the least progress has been made. Our failure to properly address water risks is likely due to a combination of factors, including the fragmented nature of water regulation, the characteristics of water investments, and our misplaced belief that water is plentiful and cheap. Further, population growth, climate change, and our inability to redress the damage created by past action have the potential to make a bad situation even worse.
A report by DWS proposes an ambitious, but pragmatic approach to addressing water risk and explores the idea that the investment community could have an important role to play in finding a solution. Noting that the fiduciary role to investors is about looking after the capital, deploying that capital, and ensuring sustainable returns, the authors propose that a "transformational investment" requires a solid foundation and should start with a "transformational framework" that:
  • Ensures that the end consumer, citizen, retail investor, as well as institutional investors, should have a clear view into the impact of water risks on achieving sustainability
  • Reassesses the roles of the different functions along the "investment chain" by bringing back Aristotle and Montesquieu’s concept of the separation of powers:
    • Governments should legislate: Using the EU Water Charter as a starting point to guide policies
    • Accountants should measure: Creating a comprehensive ESG Globally Accepted Accounting Principles (GAAP) with auditing of countries, companies, and investors regarding their entire environmental and social impacts when it comes to water
    • Investors should invest: Implementing investment frameworks across all asset classes with a clear distinction between "do nothing", ESG integration (outside-in), and impact/transformational investment (inside out) approaches
The paper also proposes that investment products that truly address water and/or other ESG risks should have lower fees than non ESG/transformational investment products. Governments should apply a "sustainability fee" to investment products that are not addressing the sustainability challenge. The highest fees should exist for "do nothing" investment products, intermediate fees for ESG integration investment products, and lower/no government sustainability fees for impact investments. An alternative could be a tax credit, like for investors in US municipal investments, to make true ESG investments truly competitive.
The report notes that failing to achieve a transformational framework will likely condemn water—and possibly other ESG—to such a high level risk that investors simply will try to avoid, even though it is expected to become one fo the main challenges for humanity by the end of this decade.

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