Water Is a Key Feature of the Climate Crisis, Posing Risks for Investors

The scarcity of water will be a key feature of the climate crisis, and it poses growing risks for investors. And though it should be considered with the same level of scrutiny as the risks of carbon are, it has registered far less with investors.

That’s why water and climate adaptation will be one of the key subjects for the COP27 climate summit, which runs through Nov. 18 in Sharm el-Sheikh, Egypt.

“Water plays a key role in meeting the goals of the Paris Agreement and in supporting science-based global climate action,” says Kata Molnar, a water expert with Sustainalytics, a Morningstar company that provides sustainability research. To forestall the worst effects of climate change, the world is aiming to slash the carbon emissions that cause global warming to net zero by 2050. Yet the world isn’t anywhere close to net zero, and even a 2-degree global temperature increase could result in physical water scarcity for 3 billion people, according to the Intergovernmental Panel on Climate Change.

“We’ve all come to a realization of how inextricably linked water and climate are,” said Betty Yee, California’s State Controller, at a Ceres webinar this year. “Water risk manifests in water scarcity, affecting livelihoods and the entire economy.”

As the world’s population grows, water supply will be ever more crucial, threatened as it is by drought, floods, and other climate disasters. “Increased demand for water is baked into the story of more people and higher standards of living,” says Ian Simm, CEO of Impax Asset Management.

For institutional investors, says Lindsey Stewart, director of investment stewardship research at Morningstar, COP27 sets “an important context for asset managers’ active ownership activities related to water in 2023 and beyond, in the same way that COP26 did for climate. It will also set an important foundation for the UN 2023 Water Conference due to be held in New York next March.”

To help you understand the interplay between climate and water, look out for commentaries by Molnar and Stewart that further detail the challenges investors face regarding water. You can also read insights from Jon Hale, director of sustainability research for Morningstar, about stocks and water funds to consider.

At Morningstar, you can count on us to help you understand the risks and opportunities of climate change. In the coming week, watch out for our new articles and videos around COP27, all of which can be found in our special report.

You can find more insights on other key climate-related topics in our previous special reports on investing in energy and investing in food. And check out our Investable World site, as well as the site of our sister company, Morningstar Sustainalytics.