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