Sandra Odendahl Director, Corporate Environmental Affairs Royal Bank of Canada Reflections on Water Risk: Reflections on Water Risk: Assessing Water Risk in Financing Assessing Water Risk in Financing
Jul 01, 2015
Sandra Odendahl
Director, Corporate Environmental Affairs
Royal Bank of Canada
Reflections on Water Risk:Reflections on Water Risk:
Assessing Water Risk in FinancingAssessing Water Risk in Financing
RBC’s Environmental StrategyObjectives
RBC’s environmental strategy is based on our environmental aspects, our stakeholders and our priority issues. Its objectives are to:
– Manage risksrisks
– Drive returnsreturns
– Protect and enhance reputationreputation
The strategy is led by Corporate Environmental Affairs and activated through the RBC Environmental BlueprintRBC Environmental Blueprint…
Climate Change Forests/Biodiversity Water
Why Does a Bank Care About Water?
1. Risk Management
2. Corporate Responsibility
3. Business Opportunities
Risk Management Approach in Lending
Sector Assessment•What se ctors are s e ns itive to
Wate r-re late d R is ks?
Company Assessment• R isks that could re sult in
incre ase d costs , bus ine s s
inte rruption or curtaile d
growth
Transaction Review
Regional
Water Info
• Understanding Regional Water Issues
Water isn’t equally distributed
1. Regional Water IssuesWater scarcity in different countries
2830410
2
8233139
33003069
457
832 14
Renew.Water
km3/year
549.7682.75
2.05
59.33.15
44.72477
78.22
0.366.07
WaterUse
km3/yr
0.0443.40
Congo Algeria
Africa
0.722.27
BrazilUruguay
South America
1.3615.5417.12
CanadaUSA Mexico
North America
19.4320.18
120.60
ChinaThailandIsrael
Asia
Use as a % of renewable
supply
CountryRegion
National averages do not indicate sub-regional water stresses
Re fe re nce : The Pacific Institute “ Total R e ne wable Fre shwate r S upply, by C ountry (2006 U pd ate )” http ://www.world wate r.org/d ata.htm l
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
Example: Sector and Region AssessmentWater Scarcity Risks For Business, RBC Report, October 2008
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
CanadaSector
etc
3. Understanding Water Risks in Companies
Water Risk Drivers
• Supply scarcity
• Poor water quality
• Flooding
• Access concerns
Water Risks
• Physical
• Political
• Regulatory
• Reputation
$ Impacts2. Business
Interruption
3. Increased costs
4. Limits to growth
3. Water Risks in CompaniesWhat 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
What Is the Risk to a Bank?
Client’s Risks
Bank’s Risk
Water Risks in Credit Risk Assessment
For Corporate Borrowers in Medium and High Environmental Risk Sectors
2. Overall environmental management framework and abilities
3. Material environmental liabilities
4. Anticipated significant new legislation governing ….water….
5. How relationships are managed with nearby communities, including aboriginal
6. 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
Beyond Credit RiskWhere else can we make a difference?
– Gray-water reuse in new buildings
– Low flow toilets
– Waterless urinals
– Automatic taps
Operational Footprint
– Fund academic research
– Fund awareness and outreach
– Fund innovation contests
– Support public policy re water
Corporate Responsibility
– Public sector finance
– Infrastructure PPPs
– Business retrofits
– Water technology firms
Business Opportunities
www.rbc.com/environment