South Africa Min
South Africa Min

Water risk – a growing concern for investors

On April 12, 2018, Cape Town experienced an immediate risk of facing the dreaded ‘Day Zero’ – the day when the taps would run almost completely dry in the country’s legislative capital. The situation in South Africa was a global wake-up call that brought attention to water risk in a completely new way, with several large, international cities possibly facing a similar situation in the future. In December 2018, Nordea traveled to South Africa to speak to the companies affected.

As investors, water risk is a severe consequence of climate change. When densely populated cities such as Cape Town, São Paulo, Mexico City, Bangalore, and Beijing, face a real risk of water scarcity, it becomes an issue we must look into and understand its consequences. Water shortage directly affects the companies we invest in and thereby the assets we manage.
With a changing climate, environmental risks are becoming more and more tangible for both people and businesses. To better understand the situation, Nordea went to South Africa to determine how the companies we invest in are tackling the water issues. Water risk is one of Nordea’s focus areas within stewardship and engagement.

It would be a mistake to look at the situation in Cape Town as a unique, one-time incident

In 2016, the World Economic Forum identified the water crisis as one of the top five global risks of greatest concern over the next ten years. The water issue is a pressing challenge for countries and poses severe business risks to our investee companies. In a vicious cycle, businesses impact the environment, but the environment also affects the ability of companies to operate. 

“It would be a mistake to look at the situation in Cape Town as a unique, one-time incident. With the changing climate, similar scenarios are quite likely to occur in other cities in the future – unless we change our ways,” says Katarina Hammar, Head of Responsible Investments at Nordea.

Climate change bringing extreme weather combined with inadequate public water management practices pose threats to industrial, agricultural, and domestic water provision. These pertain to the allocation of water to ensure national water, energy, food, and economic security to keep the ecosystem intact and avoid already emerging competitions and conflicts among multiple stakeholders. Water is a fundamental necessity for lives and livelihoods, yet we know that already a billion people worldwide live in water-scarce regions. We know that unsustainable consumption habits and lifestyles are spreading, and the world faces a paradox of inequalities with poverty and hunger in the era of immense food waste generated. 

While the biggest existing water resource management challenges have more to do with economics and politics than physical availability, changes in climate, such as extreme droughts and floods, can affect water and all systems depending on it seriously. 

In this context, our report aims to uncover the level of awareness of selected South African companies and assess their exposure to any potential water risks and the impacts and responses to them. It also concludes the future and explores how the risks transform into opportunities.

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