Reflections on Water Risk:

Transcription

1 Reflections on Water Risk: Assessing Water Risk in Financing Sandra Odendahl Director, Corporate Environmental Affairs Royal Bank of Canada

2 RBC s Environmental Strategy Objectives RBC s environmental strategy is based on our environmental aspects, our stakeholders and our priority issues. Its objectives are to: Manage risks Drive returns Protect and enhance reputation The strategy is led by Corporate Environmental Affairs and activated through the RBC Environmental Blueprint Climate Change Forests/Biodiversity Water

3 Why Does a Bank Care About Water? 1. Risk Management 2. Corporate Responsibility 3. Business Opportunities

4 Risk Management Approach in Lending Sector Assessment What sectors are sensitive to Water-related Risks? Company Assessment Risks that could result in increased costs, business interruption or curtailed growth Regional Water Info Transaction Review

5 1.Understanding Regional Water Issues Water isn t equally distributed

6 1. Regional Water Issues Water scarcity in different countries Region Country Water Use km3/yr Africa North America South America Congo Algeria Canada USA Mexico Brazil Uruguay Renew. Water km3/year Use as a % of renewable supply Asia China Thailand Israel Reference: The Pacific Institute Total Renewable Freshwater Supply, by Country (2006 Update) National averages do not indicate sub-regional water stresses

7 2. Understanding Water Risks in Sectors 1. Water Infrastructure Dams, water utilities 2. Major Users of water Agriculture, food and beverage, hydro power generation, steel, etc 3. Suppliers of equipment, materials and services to Water users 4. Water quality sensitive sectors Sectors requiring specific input water quality (mineral water bottlers, semi-conductors manufacturers), Sectors with large pollution loads in effluent 5. Sectors with water sensitive supply chain or customers Eg: Food and beverage requires irrigated agriculture, aluminum requires hydroelectric power Demand for swimming pools, washing machines, boats may dry up in water scarce situation Combine Regional and Sector analysis

8 Example: Sector and Region Assessment Water Scarcity Risks For Business, RBC Report, October 2008 Sector Canada Southeast US Power Generation Agriculture etc Hydroelectric, nuclear, coal, natural gas, wind Potential fresh water shortages in AB, SK and PEI Potential water shortages in AB and SK Coal, natural gas, nuclear. No significant concerns Irrigation for citrus crops in FL could be impacted by aquifer depletion Southwest US Natural gas, hydroelectric, coal Water shortages in Ca (utilities in general) Irrigation may be curtailed in California - demands on the Colorado R. Central Plains US Primarily coal. No significant concerns Depletion of Ogallala Aquifer threatens agriculture production

9 3. Understanding Water Risks in Companies Water Risk Drivers Supply scarcity Poor water quality Flooding Access concerns Water Risks Physical Political Regulatory Reputation $ Impacts 1. Business Interruption 2. Increased costs 3. Limits to growth

10 3. Water Risks in Companies What Are the Risks to our Clients? Physical Risk Unanticipated water shortages or flooding Unanticipated contamination of intake water Political Risk Expropriation of privately owned utility Revocation of water rights or contracts Changes to taxation Regulatory Risk Water withdrawal caps Changes to water permit availability and cost Changes to effluent standards Effluent discharge permit availability Changes to water tariffs Reputational Risk Community opposition to industrial water taking

11 What Is the Risk to a Bank? Client s Risks Bank s Risk

12 Water Risks in Credit Risk Assessment For Corporate Borrowers in Medium and High Environmental Risk Sectors 1. Overall environmental management framework and abilities 2. Material environmental liabilities 3. Anticipated significant new legislation governing.water. 4. How relationships are managed with nearby communities, including aboriginal 5. Do borrower s processes rely heavily on water or operate in water scarce regions Results combined with other assessments including broader environmental risk, quality of management, financial analysis, legal review, etc

13 Beyond Credit Risk Where else can we make a difference? Business Opportunities Corporate Responsibility Operational Footprint Public sector finance Infrastructure PPPs Business retrofits Water technology firms Fund academic research Fund awareness and outreach Fund innovation contests Support public policy re water Gray-water reuse in new buildings Low flow toilets Waterless urinals Automatic taps

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