How is drought affecting critical national infrastructure and global economies

Across the northern hemisphere this year, national media outlets in multiple countries have reported profound impact of climate change on water supply and demand. What are the knock-on effects of weather changes on the supply chain, and how are these, in turn, impacting countries’ economies so heavily? Here Rupert Kruger, Ricardo’s Director - Water discusses some of the key impacts on critical national infrastructure and global economies, and what mitigation or adaptation actions need to be taken in the future.

The breadth and extent of the impact of our warmer climate on water resources keeps making headlines around the world. The interface with the energy market and supply of electricity provides an additional layer of complexity and challenge with three examples hitting the news recently.

France has put in place a temporary waiver so that hot water can be discharged into rivers and five nuclear plants can continue to run. Under the rules, Electricité de France SA must reduce or even halt output when river temperatures reach certain thresholds to ensure that the water used to cool the plants won’t harm the environment when put back into the waterways.

In Germany the low water levels on the Rhine due to the dry spell now mean that barges can’t be fully loaded,restricting supplies for factories which could erode growth in the country this year.

The drought and lack of water in Sichuan, a province in China that relies mostly on hydropower for its 80 million residents, has forced the authorities to ask companies to shut factories temporarily and has led to an increase in the use of coal-fired power plants. After the disruption to the supply chain caused by COVID, we now face a second wave of disruption in China’s manufacturing capabilities that are drought-related with US electric carmaker Tesla saying that power shortages in Sichuan had led to supply chain problems.

The importance of Task Force on Climate-Related Financial Disclosures (TCFD) reporting or similar climate related risk assessments

What can private industry do to plan for, mitigate and adapt to these ever increasing climate related events? A key first question has to be: have the examples from France, Germany and China been captured by Task Force on Climate-Related Financial Disclosures (TCFD) reporting or similar climate related risk assessments?

As mandatory climate disclosures take over from voluntary disclosures, big corporates will be challenged. TCFD is now mandatory for premium listed FTSE 100 companies in the UK, for example, and more detailed robust sustainability reporting is set to be introduced in the EU in 2023 through the corporate sustainability reporting directive (CSRD) and subsequently in the UK, through the UK Government’s own Sustainability Disclosure Requirements (SRD). The rest of the world will undoubtedly follow suit.

The trend we are seeing is that there is going to be more sustainability regulation and mandatory reporting for corporates, and the big shift that we see is coming is that there is going to be a requirement to approach sustainability reporting with exactly the same detail and rigour as the financial reporting required by companies. This will mean the introduction of strict guidelines, audited information and a much more robust approach to reporting on sustainability.

So, one of the big challenges will be data to support the reporting requirements. This is certainly causing problems with TCFD disclosures where corporates are not familiar with conducting scenario analysis and struggle to access the data they need to assess and understand their climate risk. Without that data, financial actors often feel unable to make climate-related decisions.

Disclosing on your climate risk may seem daunting to many organisations. Although the number of companies engaging with the area has increased, the quality of the reporting is still weak. Ricardo has outlined four action points that organisations can take to start, or strengthen, their TCFD disclosure:

• Map your current environmental and sustainability activity
• Understand your climate litigation and liability risks
• Start scenario planning
• Identify climate risks

Take action

• Find out more about TCFD and the steps that you can take to get started on your climate risk disclosure journey
• Contact Jamie Pitcairn, Technical Director, Circular Economy & Sustainability, Ricardo