Water risks are often ignored by mainstream investors despite being one of the five biggest threats to global economic stability, a report by investment research firm Edison Group claims.

“Typically, they are perceived as long-term issues. Their complexity and location-specific nature makes them difficult to assess and integrate into the investment process. This perception overlooks the evidence of their potentially acute impact on financial performance,” the report says.

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Water risks mainly affect sectors such as agriculture, food and beverages, energy, oil and gas, chemicals and mining. Investors need to systematically include them in their investment process to assess potential returns accurately, suggests the report.

But the importance of water within the investment process does not only lie on the risk spectrum but also provides opportunities for investors. 

In order to achieve the UN’s Sustainable Development Goal (SDG) of delivering clean water and sanitation for all people – Goal 6 – by 2030, an additional annual $100bn investment is required, estimates the World Bank. 

“There is little evidence that these factors are driving an acceleration in spending so far. With the notable exception of China, global water capex has sustained a sedate 0.6% annual growth over the last decade. Neither consumers nor the public sector appears willing to bear the substantial funding costs of large, multi-year infrastructure projects,” the report reads.

Also, in terms of private greenfield foreign investment projects into water infrastructure, their number has been decreasing gradually since 2008, according to foreign investment monitor fDi Markets.

“The water sector presents big opportunities for investors. Huge spending increases are needed over the next decade to both address underserved communities and upgrade existing infrastructure,” said Dan Gardiner, director at Edison Group.

However, the regions with the highest needs of water infrastructure are often amongst the least developed, and have little ability to guarantee private investors stable return, the report also highlights, which fuels the search for alternative, more innovative solutions to water issues, such as, among others, drip irrigation and smaller, more efficient wastewater treatment facilities.

The Social Progress Index (SPI) highlighted that water is the most underperforming of the SDGs, alongside global personal rights. 

The shifting patterns of demand and supply consequently contribute to acute and chronic water issues. It is estimated that by 2030 population growth will mean the global demand for clear water exceeding supply by 40%, with half of this expected to be in Africa. 

Ceres, a non-profit organisation focused on encouraging investors to address sustainability, has created tools to help access water risks. They highlight physical risk of water shortages, regulatory risk and social/reputational risk.

These water risks need to be considered when making investment decisions, including assessing corporate risk in form of water’s dependency risks, due diligence in the form of screening, and full portfolio integration through a standardised assessment approach, Ceres suggests.