Water, the lifeblood of nature

Few people will be unaware of the significance of water to life on Earth. Indeed, you can hardly miss it: 71% of the Earth’s surface is covered by water (96% in our oceans).¹ It is vital to ecosystems, human health, energy production, and is increasingly instrumental to societal and political stability.

While water garners most attention when its absence poses a threat to human life, it is also central to a well-functioning global economy. There are several organisations that have taken up the unenviable task of estimating the annual economic value of water. For example, WWF’s research indicates the value derived from water’s direct and indirect benefits are in the region of $58 trillion, equivalent to 60% of global GDP.²

So, if the research suggests that we are deriving a gigantic amount of value from water, are we treating it with the utmost care? The answer is no. For decades it has been mistreated, degraded and undervalued. If you look around, this is not difficult to see. For example, a weak and disjointed policy environment combined with decades of underinvestment has made it necessary to consult a pollution-monitoring website before taking a dip in open water in the UK (or being unable to drink the tap water).

An impact as wide as the ocean

All too often we don’t think about the breadth of issues a weak water system creates. Alongside causing public health issues, the degradation of our water ecosystems disrupts economic activities, resulting in declines in asset values, or lower profits from companies dependent on water directly or through their supply chain. In some regions, water-related impacts on agriculture, heath and incomes could knock off as much as 6% of GDP by 2050.³ The NGFS found that water is the dominant nature-related risk, constituting 7-9% of global GDP.⁴

There are increasing pressures on the demand and supply side. By 2030, demand for fresh water is expected to outstrip supply by 40%.⁵ It is also estimated that by 2050 about 46% of global GDP could come from areas facing high water risk, up from 10% today.⁶

These aren’t distant issues. We are already exposed to significant water-related risks – physical and transition – along value chains, varying across geographies and sectors. These risks are financially material and have significant implications for our clients’ assets, markets and our societies if left unaddressed.

In essence, the global water system presents us with a systemic market risk and will require Herculean efforts from us all as we strive to protect, manage and restore it.

How are we approaching water

LGIM supports the vision of the Kunming-Montreal Global Biodiversity Agreement of halting and reversing nature loss by 2030 and living in harmony with nature by 2050. As outlined in our Nature Framework, we believe there are abundant opportunities to transform how society and capital markets work together to protect and restore nature.

The water system is a key aspect of how we approach that. This is not a simple topic. It covers two of the four realms in the natural world, cuts across the five direct drivers, and is interlinked with our other strategic themes such as climate and health. We are focusing our attention on addressing the risks facing marine and freshwater ecosystems, from both a quality and quantity perspective. This is not rhetoric; we are already acting.

Taking action

Water is a global issue that requires a systems- and market-wide approach. Therefore, we approach it with a corporate, policy and regulatory lens. We are focused on sectors that have the greatest impact and dependency, risks and opportunities in water. We approach our work through multiple avenues, including with likeminded partners such as the Investor Forum, Ceres and CDP (who recently came out with a helpful briefing for director of financial institutions). As they say, ‘if you want to go far, go together’.  

Our recently released Water Policy outlines our expectations of companies and policymakers. These include our clear expectation that all investee companies assess their risks, start to set science-based targets, and act collaboratively to accelerate action.

Sources:

1. https://www.usgs.gov/special-topics/water-science-school/science/how-much-water-there-earth#:~:text=About%2071%20percent%20of%20the,in%20you%20and%20your%20dog.

2. https://www.worldwildlife.org/press-releases/water-crisis-threatens-58-trillion-in-economic-value-food-security-and-sustainability

3. The World Bank. ‘High and Dry: Climate Change, Water, and the Economy’. 2016. https://www.worldbank.org/en/topic/water/publication/high-and-dry-climate-change-water-and-the-economy

4. https://www.ngfs.net/sites/default/files/medias/documents/ngfs_occasional_paper_green-scorpion_macrocriticality_nature_for_finance.pdf

5. https://turningthetide.watercommission.org/

6. ibid.