In January 2019, De Nederlandsche Bank (DNB) published a report on the ever bigger risks for financial institutions due to water scarcity (notwithstanding risks from floods). Dutch financial institutions have invested at least 97 billion euros in companies in areas of extremely high water scarcity, ranging from soft drink makers to mining groups. Water scarcity can therefore cost the financial sector a lot of money in the coming decades. DNB therefore believes that banks, insurers and pension funds should include these types of risks in their sustainability policy. The majority from the 25 parties investigated by DNB in the financial sector (together accounting for 80% of the invested assets worth at least 1,600 billion euro) do not yet have a well-developed policy for managing water scarcity risks.
In 2018, the first Water Benchmark for financial institutions was developed and carried out by the Water Footprint Network (WFN) in the Netherlands, which is a leading international knowledge partner. On the basis of the water footprint concept, three dimensions were distilled and used in the Water Benchmark, to describe the water sustainability of investment decisions. These dimensions are: efficient allocation, sustainable scale and fair distribution. Efficient allocation revolves around the efficient use of water in the production process, and investigates whether an investment does not unnecessarily waste or contaminate water; sustainable scale compares the total of all water users in the region with ecological ceiling values and analyzes the share of the investment in the total local water use and the possible scarcity that this creates; and the fair distribution criterion provides insight into how the investment usage relates to other users, and asks if the investment does not claim a disproportionate part of the limited available water. More than 50 criteria / questions describe these three sustainability dimensions in both direct operations and the supply chains of investments. Scores are awarded based on the study of publicly available sources and reports released by the financial institutions themselves. The scores describe the degree of sustainable use of water by the companies that are invested in by the rated investor.
The results showed that water sustainability is a blind spot to investors, resulting in disclosed policies being neither well-demarcated nor clearly formulated, especially regarding the supply chain of the activities invested in.
In 2021, WFN together with Water Footprint Implementation have reapplied the assessment framework to the same 20 Dutch large investors with the intent of uncovering trends in the financial sector’s consideration of physical, regulatory, or reputational risk posed by water.
In the figure below are the resulting rankings as well as an indication of increasing or decreasing rankings (left hand side) and scoring (right hand side. Green arrows signify an increase, red arrows signify a decrease.
Main take aways:
- · ASN Bank tops the list, taking over from NIBC.
- · Even the top ranking FIs score just above 50%, meaning there is plenty room for improvement.
- · A slight positive trend suggests that FIs pay more attention to water now compared to 2018.
- · The gap between frontrunners and laggards is growing.