Over the past decade, CDP has driven action on water amongst the world’s largest, most impactful companies through the corporate water questionnaire. This evidence flows to a range of stakeholders including financial institutions (FIs) so that they are able to see how companies are addressing water risks and identifying water opportunities within their growth strategies.

For the first time ever, we bring the financial sector water disclosure results. They represent a performance baseline for increasing ambition amongst FIs to value water appropriately. Read the Executive Summary.

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Financial institutions were invited to disclose to CDP on water for the first time in 2022.

These FIs are early adopters in water disclosure. We are shining a light on the actions they are taking, encouraging them to continue and compelling others to join in.

• For the first time, financial institutions (FIs) were asked to disclose on water in CDP’s annual global questionnaire. 1,226 financial institutions were invited; 556 responded to questions about climate (45%) and 275 (22%) on water. Respondents represent a combined market cap of US$3.7 trillion.
  
  
• Water impacts and risk exposure of portfolios appears to be an under-prioritized issue for FIs with only 93 of the 275 respondents undertaking water-related risk assessments, only 40 assessing portfolio impacts on water security, and just 48 reporting exposure to risks. The maximum potential impact due to water risks from 22 FIs was US$6.4 billion.
  
  
• Despite the low perceptions of risk exposure, 118 respondents indicated they have board level oversight of water issues, and 72 respondents report that they set water-related requirements that their clients/investees must meet. A further 79 respondents are aiming to implement such criteria in the next two years.
  
  
• This level of action may be driven by a range of other factors, in particular, the opportunities to be seized from tackling water insecurity. Indeed, while 56 respondents report such opportunities, just 23 report that they anticipate generating up to $203 billion in potential value.

Our economy depends on water, so water risks are material to business and to financial institutions. 17 countries withdraw more than 80% of their available supply every year. Climate and environmental risks are the core focus of global risks perceptions over the next decade – and are the risks for which we are seen to be the least prepared.

The Network for Greening the Financial System (NGFS), the group of 108 central banks focused on climate and environmental risk management, has released reports on the materiality of nature to FIs. They are of the view that nature-related risks could have significant macroeconomic implications, and that failure to account for, mitigate, and adapt to these implications is a source of risks for individual financial institutions as well as for financial stability. Storms, floods, and droughts could cause economic losses of US$5.6 trillion by 2050. CISL studies using scenario analysis show that the credit rating of some East Asian heavy industry companies in areas of high water stress declined from investment to speculative grade if water is temporary curtailed. They also mapped nature-related risk exposure across a portfolio and found that of all the services provided by nature, water is the most important across the MSCI Inc. World Index (a proxy representation for the global economy) for companies in resource intensive industries such as agriculture, beverages, utilities, energy, and mining. There are already US$15 billion of assets stranded or at risks in the energy and mining sectors due to water risks. The global financing needs estimated for achieving SDG6 are US$1 trillion, equivalent to 1.21% of global gross product.

Nearly two-thirds of the world’s people are expected to live under water-stressed conditions by 2025, impacting levels of disease, food production, and other basic quality measures. Safe water infrastructure is a fundamental component of economic health. Research on water in the west of the USA revealed the requirement for a strategy that makes water infrastructure a higher priority in the USA and for international investment, with lessons learned shared across borders. There is an imperative globally for public and non-public sources of capital to be as coordinated as possible.

Double materiality

It is important that FIs address both materiality lenses by assessing not only the risks that water insecurity poses to their business, but also the impact FIs have on water security through their portfolio activities. “The TNFD framework will require organisations to implement a double materiality reporting perspective, where they disclose how nature is impacting the organisation, positively or negatively, and how the organisation impacts the natural world”. Disclosing wider risks and impacts can kickstart standardization and data transparency and reduce the risk of being exposed to greenwashing. In turn, finance can more credibly deploy capital towards nature positive activities.

The largest financial institutions are universal owners, and with exposure to every sector of the economy have a critical impact on water in various ways. On one hand, FIs exposed to water risks will need to call for stronger regulation from governments and policymakers and seek action from the companies in their portfolio to become water secure. On the other hand, FIs are polluting and destroying water systems through the business activities they finance and enable. The impact that financial institutions have on water, both environmentally and ecologically, has an economic cost for society at large, which leads to social inequality and a financial burden for taxpayers. Therefore, financial institutions have a shared responsibility for avoiding and/or mitigating adverse impacts, with disclosure and action increasingly expected from them. Tools such as CDP’s Water Watch Index and CERES’s global assessment of private sector impacts on water can support their assessments.

The message is clear. Achieving a water secure future will require a complete transformation of our global economy. The financial sector has a critical role in catalyzing this change. It can offer unique, systemic incentives for change by ensuring their investment, insurance, lending, and underwriting practices drive industrial water users to use water wisely.

Financial institutions must now move to identify, assess, and manage risks and opportunities across their portfolios. They need to act via engaging with their investees/ clients, develop ambitious targets, build governance structures, and align their investment with water crisis solutions. Disclosure is an important step in achieving this.

Pathway to a water-secure world

In its first year, of the 1,226 FIs invited to disclose, 556 responded for climate (45%) and 275 responded comprehensive water data, corresponding to a 22% water-related disclosure rate amongst the most impactful disclosers.

CDP divides the FIs into three primary activities. Additionally, disclosures cover the four portfolio activities making up core segments in the finance sector. Many financial institutions undertake more than one portfolio activity.

Water disclosures cover all six continents with 45 countries represented and a total market cap of US$3.7 trillion.

Portfolio impact

As noted above, it is increasingly clear that the impact companies are having on freshwater resources is a cost to society and something that they, and in turn their financiers, should have an interest in and a responsibility to address. Companies and their financiers should therefore assess their own water-related impacts as well as the financial materiality of water-related risks. Disclosing from both these angles and taking into account any interactions between them is necessary for comprehensive sustainability reporting, which provides a foundation for addressing freshwater risk at large.

40 FIs responded that they currently measure their portfolio impact on water security.

Primary reasons for currently not measuring portfolio impact on water security were:

• ‘Important but not an immediate priority’ at 56%, and
• ‘Lack of tools or methodologies available’ at 19%

Assessing risks and opportunities

Financial institutions are establishing processes for water-related risk assessments. 93 FIs assessed their portfolio's exposure to water-related risks and opportunities. Of these, banks appeared to be the largest users of both qualitative and quantitative information (ie water policy, water volumes, WASH access), followed by investors (asset managers). The top processes in which water-related information was obtained were directly from the client/ investees and public data sources.

Of those not responding, reasons for not doing so yet or planning to do it soon included:

• Current taxonomies focused on climate change, so they are focusing on those;
• Waiting for TNFD guidelines;
• Lack of knowledge and need for capacity building; and
• Lack of tools and methods.

Scenario analysis

TNFD is looking into at scenario analysis, and water risks - being one of the nature realms - will be included. Countries such as UK FCA are driving TCFD reporting for FIs with scenario analysis a key part of this. 38 FIs are carrying out scenario analysis. The majority of those who conduct such analysis (29) report to have identified outcomes. FIs used more than one type of scenario analysis, with climate-related scenario analysis being the most widely used as expected (64% of 57 mentions). The analysis shows that if more FIs are to carry out scenario analysis and use methods tailored to water (ie water-focused scenario analysis), the financial sector would have a better understanding of the future risks and opportunities and will be able to make better informed decisions.

Risks

48 responding FIs (18%) identified water-related risks in their portfolio with the potential to have a substantive financial or strategic impact on their business with banks leading in responses likely due to the comprehensiveness of their assessments and being requested to disclose the most.

The top water risk drivers were physical and regulatory, while the top reported financial service industry risks that had the potential to be realized were credit risk, market risk and reputational risk. The majority of FIs (70%) considered the time of realization of water risks to be short or medium term, while over half of FIs (55%) indicated that water risks had a potential high likelihood of occurring.

The maximum potential impact due to water risks from 22 FIs was US$6.4 billion while the cost of response from 20 FIs was US$85 million.

On the other hand, CDP 2020 data shows that companies assessed the maximum potential impact due to water risks at US$301 billion. These baseline financial impact assessments of water risks by FIs compared with those from companies demonstrate that more FIs should undertake these assessments to limit blind spots and mitigate their risks.

Despite the small sample of FIs reporting potential financial impact of water risks (14 banks at US$4.6 billion, four insurers at US$1.1 billion and four asset managers at US$0.7 billion); the most significant impacts reported arose from physical water risks driving increased insurance costs, increased credit risks and decreased revenues from reduced production capacity.

• ‘Increased insurance claims liabilities’ at US$1.64 billion (including US$1 billion by one insurer)
• ‘Increased credit risk’ at US$1.03 billion by 4 banks (including Sumitomo Mitsui Financial Group) and one Insurer (Cathay Financial Holding); and
• ‘Decreased revenues due to reduced production capacity’ at US$0.8 billion from Bank Grupo Cooperativo Cajamar.

Technology risks drove the ‘devaluation of collateral / potential for stranded assets’ at US$1 billion for one bank.

Insurers, despite being under-represented in carrying out water risks assessments, reported significant potential financial impacts demonstrating their need to disclose these risks.

The cost of response as given by 20 FIs (including 15 banks, three asset managers and two insurers) was US$85 million, with market risk and operational risk covering the majority at US$55 million. For instance, to mitigate the ‘increased in direct costs’ (ie ‘operational risk’), Momentum Metropolitan Holdings Ltd has invested US$27 million in the installation of efficient energy and water technologies in the buildings under its management (eg smart metering, water harvesting, energy efficient chillers and lighting).

Opportunities

Financial institutions are starting to become aware of key opportunities. 56 responding FIs (21%) have identified water-related opportunities in their portfolio with the potential to have a substantive financial or strategic impact on their business. Within these, 27 FIs found these opportunities in the 'Development and/or expansion of financing products and solutions supporting water security’. Responders included 16 banks (including Barclays, BBVA, National Australia Bank and Piraeus Financial Holdings S.A.), seven asset managers (including Schroders and Pictet Group) and four insurers (including CNP Insurances).

The maximum potential value of opportunities from 23 FIs was US$203 billion while the potential cost to realize these opportunities from 21 FIs was US$620 million.

14 banks disclosed the largest maximum value of opportunities at US$202 billion, followed by five asset managers at US$0.8 billion and four insurers at US$0.5 billion.

• The majority of responding FIs (13) related the potential financial impact of opportunities to increases in revenues resulting from increased ‘demands for product and services’ (eight banks disclosing a total of US$200 billion, with largest amount from Barclays at US$137 billion).
• This was followed by opportunities of ‘increased access to capital’ related to resilience (one bank at US$2 billion) and ‘access to new and emerging markets’ (US$0.5 billion).

21 FIs indicated they could put a value to the cost of realizing these opportunities, including 13 banks, six asset managers and two insurers.

Out of the total estimate of US$620 million, ‘Groupe Bruxelles Lambert SA’ solely accounted for the largest (87%) investment due to the ‘development and/or expansion of financing products and solutions supporting water security’. This corresponded to the acquisition in Dec 2021 of a minority stake in GEA, a global technology leader in the processing industries, recognized for the provision of water-related opportunities.

Encouragingly, 42 of responding FIs indicated a high likelihood that these opportunities will take place.

Identifying strategy gaps

96 FIs take risks and opportunities into consideration in their strategy and/or financial planning. Of these, banks comprised the highest proportion of responders (60%), which appears in alignment with their actions on assessing risks and identify opportunities including increases in revenues from products and services, presented earlier. Regionally, European-based FIs lead the way followed by Asian-based FIs, and this may be due to increase pressure from regulators. It is encouraging to see that the knowledge base that these FIs appear to be gaining is being translated into their organization’s long-term strategies.

Building governance

Governance structures that drive finance and resources towards water security by enabling accountability and incentives to achieve them is an overarching first step. The role of the board of directors and their ability to oversee water-related risks is therefore essential.

118 FIs indicated they have board level oversight of water issues. Of these, 33% indicated that they have at least one board member with competence on water-related issues. This is commendable given that they are first time responders on water and as such as are putting in place the foundations for leadership.

Regionally, European-based FIs appear to lead the way in setting governance structures followed by Asian-based FIs.

Nonetheless, most boards should account for more adequate time and attention to water-related issues since currently they are brought to light mostly ‘as important matters arise’.

Products and services

97 FIs have existing products and services enabling their clients to mitigate water insecurity. The top product types offered were ‘corporate loans’ and ‘listed equity’, while the top activities financed, invested, or insured by responding FIs related to water infrastructure. 46% of responding FIs (38 out 83) currently use their ‘own internally classified methodology’ to classify their products, which appears to emphasize the gaps that exist in supporting them with guidance and standardized methodologies.

Driving action through portfolios and loan books

Currently, although 73% of 264 FIs responding to this metric do not set water-related requirements that their clients/ investees need to meet, a group of 72 firms do.

Regionally, European-based FIs appear to lead the way in formulating their internal policies, as noted in their state of governance earlier with higher levels of board oversight in that region, potentially reflecting the state of development of regulations in that region. This aspect requires further investigation.

Of those responding to this metric, banks (64%) included water-related requirements the most, followed by asset managers (19%).

Over half (59% out of 99) of responding FIs required their clients/investees to comply with their policy criteria as a prerequisite for doing business. These FIs appear to be the first movers, leading the way in valuing water by communicating their expectations to their clients/ investees.

89 FIs include covenants in their financing agreements to enforce their water policies or plan to do so within the next two years.

Bendigo and Adelaide Bank (Australia) have covenants for their agribusiness customers. If these have water rights, the bank includes obligations within their loan agreements for them to not sell the water rights without the bank’s consent.

Engagement

Engagement is one of the most effective strategies to influence clients and investees. As per the Valuing Water Initiative (VWI)’s five principles, financial institutions must first recognize and reconcile the value of water so to protect its sources. They can then educate and empower their stakeholders, and invest in the institutions, infrastructure and information to realize its benefits.

Engagement can be done by interacting directly with clients / investees including through incentivization (changing their behaviour), education/ information sharing and collaboration. Indirect means include exercising voting rights. Either way, the primary aim is to communicate the need for companies to understand, disclose their water risks and opportunities, and work strategically to minimize their impacts to their business and environment.

103 FIs engage with clients/ investees on water related issues. Incentivization was the most predominant form of engagement followed by education/ information sharing. These appear to correlate with the strong emphasis of driving behaviour change through the development of product and services, investments in water infrastructure, and enactment of policies including water-related requirements criteria, as presented earlier.

60 FIs currently exercise their voting rights as a shareholder on water-related issues. Reasons for not doing so varied including important but not an immediate priority, focusing on climate at present, waiting for guidance from TNFD, and not being equity shareholders.

Recommendations

CDP’s findings highlight that action to stem the water crisis, manage associated water risks and seize opportunities within the finance sector is not only necessary but possible and already underway.

Financial institutions

Financial institutions need to map portfolio water impacts, set ambitious, measurable, and time-bound water-related targets to address these and publicly disclose progress.

Like those first-movers profiled in this summary, FIs that begin to engage with water impacts and dependencies stand to benefit across the board. Financial firms which act now will be better placed to manage incoming regulation, get ahead of the competition, and seek out billions of dollars of commercial opportunities, such as creating new products and services.

Policymakers

CDP calls on governments to implement comprehensive water disclosure requirements for companies and FIs.

The policy, regulatory and supervisory structures that dictate how capital is allocated within the financial sector are now starting to consider and embed nature-related risks, opportunities, and impacts6. The regulatory landscape needs to evolve with standards and voluntary initiatives setting the scene for comprehensive disclosure in order to fast-track water action.

Academics, civil society, philanthropists and standard setters

CDP calls for a strengthened enabling environment to guide FIs in meaningfully addressing financed water impacts, risks and opportunities.

While the action on display in this first year is encouraging, we cannot ignore the lack of action from the 951 institutions that chose not to disclose, nor the lack of action in some areas from those 275 institutions that did. CDP’s dataset provides insights into why action is not happening and suggests that a deficit in water-related standards, guides, tools, definitions and data sets is stifling ambition and progress. If we are to accelerate the pace of change, those with the ability to plug these knowledge and resource gaps should do so.

With support from the Dutch Valuing Water Initiative (VWI), CDP and partners Water Footprint Network (WFN), Water Footprint Implementation (WFI) and Mercer worked over the past two years to design and implement a global disclosure mechanism that aims to baseline the current state of knowledge and action of FIs on water. It has been informed by the latest scientific insights, a range of global stakeholders and aligns with and goes beyond the Task Force for Climate Related Financial Disclosure (TCFD).