BlackRock believes that water stress is an “underappreciated risk” and that companies resilient to it will fetch a premium in the transition to a low-carbon economy.
Water stress – which occurs when demand for water exceeds supply – is a risk that cuts across “region, asset classes, and sectors”, but investors aren’t pricing it in according to research from BlackRock Investment Institute.
“(Water stress) is a component of growing climate-related risks such as hurricanes, wildfires and flooding, and threatens public health, production facilities and global supply chains,” BII said in a note. “Large cities will need to strengthen their water infrastructure. Within a decade, much of the world will lie in regions of high water stress, projections by the World Resources Institute show.”
Population growth and urbanisation are driving demand for water and straining resources, while climate change is disrupting precipitation patterns, hitting water-intensive industries hard.
Companies in water-stressed locations may need to spend more to source water, raise water efficiency and meet more stringent environmental regulations. The European Central Bank has already identified water stress among the physical climate risks it may require financial institutions to manage and disclose, while APRA has also called on Australian companies to keep a closer eye on the risks posed by climate change.
“We believe increased asset flows into sustainable investing strategies in 2020 are part of a tectonic shift that could last decades,” BII said. “A societal shift toward sustainability and growing awareness of related risks are behind these flows. Climate-related events such as extreme weather are already causing real financial damage.”