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 StrategyObjectivesRBC’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?Why Does a Bank Care About Water?

1. Risk Management

2. Corporate Responsibility

3. Business Opportunities

Risk Management Approach in LendingRisk Management Approach in Lending

Sector Assessment•What sectors are sensitive to

Water-related Risks?

Company Assessment

•Risks that could result in increased costs, business interruption or curtailed

growth

Transaction Review

Regional

Water Info

1.Understanding Regional Water Issues

Water isn’t equally distributed

1. Regional Water Issues

Water scarcity in different countries1. Regional Water Issues

Water scarcity in different countries

Region Country WaterUse

km3/yr

Renew.Water

km3/year

Use as a % of renewable

supply

Africa Congo Algeria

0.366.07

832 14

0.0443.40

North America

CanadaUSA Mexico

44.72477

78.22

33003069

457

1.3615.5417.12

South America

BrazilUruguay

59.33.15

8233139

0.722.27

Asia ChinaThailandIsrael

549.7682.75

2.05

2830410

2

19.4320.18

120.60

National averages do not indicate sub-regional water stresses

Reference: The Pacific Institute “Total Renewable Freshwater Supply, by Country (2006 Update)” http://www.worldwater.org/data.html

2. Understanding Water Risks in Sectors2. 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 2008Example: Sector and Region AssessmentWater Scarcity Risks For Business, RBC Report, October 2008

Sector Canada Southeast US

Southwest US

Central Plains US

Power Generation

Hydroelectric, nuclear, coal, natural gas, wind

Potential fresh water shortages in AB, SK and PEI

Coal, natural gas, nuclear.

No significant concerns

Natural gas, hydroelectric, coal

Water shortages in Ca (utilities in general)

Primarily coal.

No significant concerns

Agriculture Potential water shortages in AB and SK

Irrigation for citrus crops in FL could be impacted by aquifer depletion

Irrigation may be curtailed in California - demands on the Colorado R.

Depletion of Ogallala Aquifer threatens agriculture production

etc

3. Understanding Water Risks in Companies3. Understanding Water Risks in Companies

Water Risk

Drivers•Supply scarcity

•Poor water quality

•Flooding

•Access concerns

Water Risks

•Physical

•Political

•Regulatory

•Reputation

$ Impact

s1. Business

Interruption

2. Increased costs

3. Limits to growth

3. Water Risks in Companies

What Are the Risks to our Clients?3. Water Risks in Companies

What 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?What Is the Risk to a Bank?

Client’s Risks

Bank’s Risk

Water Risks in Credit Risk AssessmentWater Risks in Credit Risk Assessment

For Corporate Borrowers in Medium and High Environmental Risk Sectors

1. Overall environmental management framework and abilities

2. Material environmental liabilities

3. Anticipated significant new legislation governing ….water….

4. How relationships are managed with nearby communities, including aboriginal

5. 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?Beyond Credit RiskWhere else can we make a difference?

Business Opportunities

– Public sector finance

– Infrastructure PPPs

– Business retrofits

– Water technology firms

Corporate Responsibility

– Fund academic research

– Fund awareness and outreach

– Fund innovation contests

– Support public policy re water

Operational Footprint

– Gray-water reuse in new buildings

– Low flow toilets

– Waterless urinals

– Automatic taps

www.rbc.com/environment