Climate change: Water risks highest in Asia, says Moody's report

Water management risks tied to the existing supply and quality issues, as well as risks amplified by climate change, pose credit challenges across multiple sectors in Asia, particularly in parts of South and Southeast Asia where water scarcity or mismanagement is already prevalent, said a report released on Wednesday.

According to the report by Moody’s Investors Service, risk factors include the availability and cleanliness of water, the adequacy of water transport and treatment infrastructure, the impact of economic activity on supply and pollution, and the effect of regulations.

Water management and environmental impact of economic activity are one of the parameters on which ESG (Environmental, Social and Governance) ratings are done for companies and funding which could be in the form of equity or debt through various instruments.

In a separate development, Fitch Ratings announced a new initiative — Sustainable Fitch — that brings out existing ESG capabilities together in one place.

Fitch said it would add over the coming months the first global ESG Ratings solution for all asset classes at an entity and instrument level. “It is designed and built on fundamentals entirely and exclusively to help the ESG focused financial community make better-informed decisions,” it said.

The Moody’s report said risks are more pronounced for water-intensive sectors like mining, agriculture and power. “Climate change will amplify the challenges and make water management a more pertinent credit risk, as well as heighten geopolitical risks and trade tensions,” it said.

According to Nishad Majmudar, a Moody’s assistant vice-president and analyst, Asia is generally more vulnerable to water risks than other regions. Across sectors, issuers are facing water management issues such as inadequate access to clean or purified water supply, and reputational and regulatory risks related to the downstream effect of water use, including supply, pollution and sanitation.

The mismanagement of water resources has direct implications on Asia’s economic activity, with negative effects across sectors.

Water-intensive sectors such as mining, agriculture, textiles, semiconductors and hydroelectric and thermal power depend on proper water management for their productivity. For sovereigns, water stress and poor sanitation can weaken their growth outlook, as well as add to fiscal costs and social tensions.

Water management risks also affect financial institutions indirectly, since the risks affect the borrowers’ creditworthiness. Over time, these risks may bring more impaired assets, increased insurance claims related to issuers’ water supply constraints, and tighter regulations in water-scarce regions.

The link between non-climate-related water risks and the effects of climate change will become clearer over time as changing rainfall patterns and drought amplify water scarcity and infrastructure deficiencies.