S&P Global Ratings is warning that as climate change increases the volatility of water volumes – exacerbating drought-flood cycle issues in recent years – water conflicts are coming to the fore, and heightening geopolitical and social tensions.

Commenting in its latest report, the ratings agency says that water crises stand to worsen as the climate changes, leading to more disputes and possible conflicts particularly when two sovereign entities compete for water from the same geological basin.

The report says that “water conflicts seem to be headlining more than ever in 2020”, highlighting two key areas in particular:

Egypt, Sudan and Ethiopia seek UN involvement to resolve concerns over dam construction 

The Grand Renaissance Ethiopian dam will store 74 cubic kilometers of water from the Blue Nile and have a hydroelectric capacity of 6,000 MW, roughly doubling Ethiopia's electricity supply and allowing the nation to export energy to other countries.

Water scarce Egypt gets 80% of its water from the Nile and is concerned that the dam puts Ethiopia in control of this resource. Sudan is also located downstream of the dam and relies on the Nile for water.

China and India dispute over Diamer-Bhasha dam in Pakistan

The planned construction of the Diamer-Bhasha dam on the Indus River in Pakistan-administered Kashmir (over which India claims territorial sovereignty) is the cause of the recent India-China clash.

The Indus flows primarily through Pakistan, which has been suffering a water crisis in recent years.

The dam will store 10 cubic kilometers of water, about 50 m3 per capita – which unlikely to solve Pakistan's water crisis. It will however serve as a hydropower generator with 4,500 MW capacity bringing low-carbon energy to a nation primarily dependent on coal and natural gas. The dam is being funded by Power China and built by Pakistan Water and Power Development Authority.

According to the OECD, $1.7 trillion of investment is needed to meet the UN's 2030 Sustainable Development Goal of achieving safe drinking water for all--about three times the current level of investment. The ratings agency said that debate about whether large-scale dams will help meet demands for water in scarce regions is continuing.

Water crises are important consideration in assessing a company's preparedness to face emerging and strategic risks

As part of S&P’s ESG (Environmental, Social, And Governance) Evaluation, the ratings agency assesses a company's preparedness to face emerging and strategic risks--and water crises are an important consideration.

The ESG evaluation analysis shines a light on not only whether companies are exposed to such risks, but whether companies and their boards are integrating a full range of emerging and strategic risks into their preparedness strategies.

The evaluations, assess an entity's board and management teams' preparedness to face emerging and strategic ESG risks such as water conflicts.

The ratings agency also looks at a company's ability to understand and manage its water risks throughout its network of suppliers, customers, and other key stakeholders, known as value chain analysis.

The S&P Global Ratings report also flags up the fact that the Taskforce for Climate-Related Financial Disclosures (TCFD) asks that business leaders disclose to investors how climate change might affect their businesses. Yet physical risks can indirectly affect businesses via the impact of water scarcity on communities and geopolitics, which can lead to under-reporting of climate risks in financial disclosures, it concludes.

On the issue of whether climate scenarios could include water conflicts in the future, the report says S & P had been unable to find any TCFD disclosures on the potential financial impact of geopolitical and social risks stemming from water crises. However, the ratings agency is expecting to see more of these kinds of disclosures as the market starts to integrate water crises into investment analysis.

The report concludes:

“Our evaluations seek to understand how the most exposed companies and countries are not just looking at water scarcity today, but how boards will continue to evolve their thinking as the risk becomes more severe. It requires much thoughtful discussion because it exists at the intersection of finance, geopolitics, and science.”

“It is our view that ESG analysis requires forward-looking assessments of uncertain and evolving risks including water scarcity and its impact on all stakeholders.”