Current issues related to economics, (responsible) investment, pensions and income: every week an APG expert gives a clear answer to the question of the week. This time: Climate Data Specialist Lucas Wouters talks about the impact of prolonged drought on investments.
Extreme drought in Italy’s Po Valley, forest fires throughout the Mediterranean and historically low water levels in the Rhine. All of Europe is suffering from a precipitation deficit this summer. And the drought is not incidental. “It’s not a question of if the drought will get worse than it is now, in the long- term; it’s a given that it will,” says Wouters. “About 20% of the carbon we are emitting now will still be in the air in a thousand years. So our current emissions will still have a long-lasting effect on future temperature increases, with all the consequences that will entail. Droughts will last longer and be more severe.”
Climate change will lead to increasing droughts in certain parts of the world, which will affect water supplies, among other things, Wouters argues. “And that in turn has consequences for agricultural production, as well as for industries that depend on a stable water supply to produce consumer goods and materials, for example, and for the energy sector, which uses a lot of water to cool power plants or to generate energy with steam turbines or hydropower. Such impacts will in turn affect the entire economy, making the increasing drought a potential risk for investors.” According to a study done by the World Bank, drought could lead to a loss of 6 percent of gross domestic product in certain countries by 2050. That would involve water shortages and the consequences of that, such as crop failures. A long-term investor like APG therefore looks at the potential impact of climate factors, including drought, in all its investments, and analyzes the potential risks and returns.
A tangible example is investments in agriculture and forestry, grouped together at APG under the heading Private Natural Capital. “In agriculture, the presence of reliable water sources is a key indicator of a good harvest,” Wouters says. “That’s why, for potential investments, we assess whether there is enough capacity in the surrounding area to secure sufficient water for the intended operations. In addition, innovation with respect to irrigation is an important aspect in protecting the harvest. In Romania, we are investing in a project that involves working with local parties to repair, improve and expand irrigation networks, which often also save water and energy.
APG also urges managers of land that is invested in to cover any climate risks. “In agriculture, for example, this involves leaving land fallow as little as possible, thus preventing evaporation. This improves the quality of the soil, so that it can absorb more water. The crops to be grown are also determined by the water that is available in the longer term. In forestry we expect the managers to have fire extinguishing facilities in place, in case persistent drought leads to forest fires. We also want fire prevention to be taken into account in the management and layout of forests. We use climate scenarios to assess potential investments. We won’t take on investments in which the impact of climate change is too great.