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Sandra Odendahl, RBC - Reflections on Water Risk: Assessing Water Risk in Financing
1. Sandra Odendahl Director, Corporate Environmental Affairs Royal Bank of Canada Reflections on Water Risk: Assessing Water Risk in Financing
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6. 1. Regional Water Issues Water scarcity in different countries National averages do not indicate sub-regional water stresses Reference: The Pacific Institute “Total Renewable Freshwater Supply, by Country (2006 Update)” http://www.worldwater.org/data.html 2830 410 2 8233 139 3300 3069 457 832 14 Renew. Water km3/year 549.76 82.75 2.05 59.3 3.15 44.72 477 78.22 0.36 6.07 Water Use km3/yr 0.04 43.40 Congo Algeria Africa 0.72 2.27 Brazil Uruguay South America 1.36 15.54 17.12 Canada USA Mexico North America 19.43 20.18 120.60 China Thailand Israel Asia Use as a % of renewable supply Country Region
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8. Example: Sector and Region Assessment Water Scarcity Risks For Business, RBC Report, October 2008 etc Primarily coal. No significant concerns Natural gas, hydroelectric, coal Water shortages in Ca (utilities in general) Coal, natural gas, nuclear. No significant concerns Hydroelectric, nuclear, coal, natural gas, wind Potential fresh water shortages in AB, SK and PEI Power Generation Depletion of Ogallala Aquifer threatens agriculture production Irrigation may be curtailed in California - demands on the Colorado R. Irrigation for citrus crops in FL could be impacted by aquifer depletion Potential water shortages in AB and SK Agriculture Central Plains US Southwest US Southeast US Canada Sector
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11. What Is the Risk to a Bank? Credit Risk Physical Regulatory Political Reputation Client’s Risks Bank’s Risk
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Editor's Notes
So, you may ask, what does banking have to do with water. Well, there are 3 reasons why a bank is interested in water: Risk management – water issues can impact our clients, which in turn cam impact us Corporate responsibility – water is an important issue social and environmental issue for some of the regions where we do business and so we are interested in it too Business opportunities - markets for water-related products and services are growing, and present business opportunities in lending, project finance, and investing
When the bank evaluates risks, we do so on a sector, a company/borrower, and a transaction basis. When looking at water related risks, we need to include in our analysis some undertanding of the regional water issues and risks affecting the company or transaction we are looking at. We need to understand water risks.
We know that there is a constant quantity of water on earth, and it is constantly being recycled via the hydrologic cycle. It is always being moved from one state to another or one location to another. The problem is it’s not equally distributed. Some regions have lots, some not enough, and some regions have both extremes, depending on the year or the time of year.
This chart shows national data on water use, renewable water supply, and the ration of how much of that water supply is used each year. You can see how even national averages vary enormously. Water use tends to be a function of population, amount of water intensive agriculture and other industry. China tops the list with almost 550 cubic km/year. But, since China also has relatively generous amounts of renewable water, it uses only about 19% of its renewable supply each year. On the other hand, Israel is a water miser using only 2 cubic km/year. Unfortunately, Israel has even less renewable water, so they use more that 100% of their renewable water supply. These data are typically comprised of both renewable surface water and groundwater supplies, including surface inflows from neighboring countries. The UN FAO refers to this as total natural renewable water resources. Flows to other countries are not subtracted from these numbers.
In addition to understanding water issues, we must of course look at which sectors are vulnerable to water-related risks. However, just because a sector uses a lot of water, doesn’t mean that it’s facing water realted risks. It’s very location specific. So we move to a company and facility level analysis.
When we conduct a company or transaction risk assessment, we are looking to identify, quantify, and mitigate where possible risks that impact the financial position of the borrower. In other words, we are interested in risks that could result in (1) business interruption, (2) increase costs, or (3) limits to growth Drivers of water related risks are physical issues like scarcity, poor water quality, flooding concerns and access problems. These physical risks give rise to risks in 3 categories:
Examples of water-related risks to companies are shown here: (one example in each category)
Credit risk is the risk that the counterparty will be unable to meet its obligations i.e. repay its debt on time
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