Water + Indigenous Peoples Rights = Risk

Investors are facing four Hard Truths in today’s financial markets:

• Massive global demographic shifts.
• Unprecedented demands on natural resources.
• Significantly larger trillion-dollar capital shifts taking place worldwide.
• Accelerated spread of increased market volatility.

These are all about RISK – risk identification, risk management, downside risk, risk pricing and risk mitigation are becoming important drivers in this market.

Investors are still looking at their portfolios as an aggregate of individual businesses or even sectors without acknowledging the collective risks to their underlying asset base driven by the actions of their individual holdings. For example, last year Montana did an assessment of the State’s financial system – Access to Finance in Montana. Although 62% of Montana land is used for agriculture, and water demands are increasing due to uncertain precipitation patterns, higher temperatures, and longer growing seasons not a single prediction of higher business risk or unanticipated market changes was mentioned. Yet these weather changes will increase the risk individual ranchers and the agriculture industry face.

The erratic weather patterns and uncertainty of our water supply coupled with an unprecedented growing demand for water raises the potential for new kinds of risk and higher volatility. There is frequent debate as to whether ESG ratings tell us anything meaningful but while there is significant qualitative data there is very little if any quantitative evidence. More empirical evidence and quantitative data should become part of the debate. Better risk-based analytics such as the database on climate patterns and risk matrices maintained by the insurance industry (especially in Europe) include empirical evidence on risks regarding water, the environment and now conflict and famine. The four hard truths in today’s financial landscape suggest correlated risk and expanded quantification of costs should be part of the risk framework.

ENOUGHNESS The Prequel: Indigenous Economies have “values added”. Today’s economy values hoarding, greed and consumption. Using Indigenous values of sharing, cooperation and fairness with the millennial old design principles of indigenous economies see how we can transform today’s finance system to meet the most needs of the most people and provide a sustainable path for our future.

Indigenous People rights and water have been historically under addressed by investors. Due diligence for Water investments is classified as an environmental risk. However, Water and community is just as much of a social risk especially when the rights of Indigenous People are considered.

For example, for years Montana’s water future was tied to over 10,000 outstanding tribal water rights claims. The intensity of mounting demands for water led to the largest tribal water settlement in history. Last year. $1.9 billion was awarded to the Confederated Salish and Kootenai Tribe. Throughout the Southwest and much of the Western region water use and access is subject to Tribal rights. Globally 50% of all inland waters are located on Indigenous Peoples’ territory which like US tribal rights, Indigenous waters are protected by legal frameworks that range from national to international such ILO Treaty 169, the Bio-Diversity Convention and UNDRIP. Indigenous People have the right to Free Prior Informed Consent for any operations taking place on their lands and territories.

In addition to 50% of the world’s inland waters Indigenous Peoples territories encompass at least 30% of the earth’s land surface and if Indigenous Customary Rights are recognized it totals 50% of the land. Currently conservationists have designated 15% of the remaining wilderness as Protected Areas of which over half are located within Indigenous lands. In fact, 80 % of the planet’s remaining biodiversity is within Indigenous territories along with 40% of the terrestrial areas, 33% of the Intact Forest Landscapes and 70% of Tropical Forests. Climate financing, which is 61% debt and 33% equity for a total $632 bn. faces potential high risk in ecoservice investing when you consider 56% of Above Ground Carbon Stock and 50% inland waters are represented. Indigenous Rights can materially impact investor risk, credit events and company operations.

A recent study by Wharton ESG Material Credit Events & Credit Risk, found that projects operating on Indigenous lands or within a 10km distance had as high as 500% higher material events than those operating farther away. Additionally, it was found that the individual projects of companies with poor or low capacity to manage Indigenous risk incurred 3 to 66 times higher risk. Yet research found no evidence for the 1,444 projects in the study factored this potentially 500% higher credit risk into credit ratings, risk mitigation, or the cost of capital.

As illustrated above, in contrast to the conventional idea that Indigenous conflict is primarily with the extractive sector, it now includes natural resources ecoservices, new transition minerals, and clean energy. In January 2024, the San Carlos Apache Tribe and the Tohono O’odham Nation filed a complaint against the Department of the Interior for failing to consult them about the Energy Pattern SunZia Southwest Transmission Project. Billed as our largest clean energy infrastructure project, construction began last September — only for the BLM to order an “immediate temporary suspension” after the tribes objected. Energy Pattern claims, “The delay would likely put SunZia’s commercial viability at risk.”

Vast amounts of the new transition minerals are being found on Indigenous lands: 50% of the Lithium Reserves which do not include the McDermitt Caldera deposits on Paiute and Shoshone lands in Nevada and up to 70% of the nickel, copper, and other transition minerals.

The first evidence based global research on foreign direct investments (FDI), the correlation to Indigenous Peoples (IP) conflict and material concerns for investors found that FDI increases armed conflict across all sectors [Source: Henisz, W.J, Jamison A.S., & Tadmor D (2023) Indigenous Land Claims and Foreign Direct Investment: Evidence of Conflict Impacts from Geo-Spatial Media Event Data]. Tracking over 3000 Indigenous conflicts the study found that where both IP lands and investments exist, there will be an additional 6-7 armed conflict events in the following year. The potential is for conflict to increase given in the current decoupling or de-risking of the US-China supply chain as low to middle income countries are brought into the supply chain.

From 2012 through 2016, I consulted on Social Performance with one of the largest corporations in the world achieving reputation accolades, mitigation of protests, resumption of project operations, and de-risking a potential joint venture’s exposure to human rights violations. Because the Company lacked an internal audit system to track and quantify its Social costs and benefits all the data remained qualitative. This same Company tracked the exact tire pressure for any vehicle in its fleet because Safety was a priority.

As far as life goes, priorities can’t get much bigger than Water. As far as the market, Water is such a huge fundamental risk that it could cause another recession or financial crisis when we reach a tipping point. Several Wharton studies found that companies with poor IP risk management also had low ESG social performance ratings and higher risk. Applying the ESG framework to capture the correlated risk and expanded quantification of Water can position investors to absorb the new risks and volatility of today’s finance landscape.

Article by Rebecca Adamson, Indigenous Economist, Cherokee and Founder of First Nations Development and First Peoples Worldwide. A leader, activist and ground-breaking indigenous woman, Rebecca holds a distinct perspective about how indigenous people’s systems thinking and the value system behind indigenous economies can be used to catalyze change. Rebecca’s career spans her time spent in and out of jail working for the Coalition of Indian Controlled Schools to serving as Advisor to the Wharton Business School Initiative on ESG Investing (Environment, Social and Governance). A featured TEDMED speaker in 2014 and early Schwab Social Entrepreneur 2004-2009 with the World Economic Forum, Rebecca uses finance- and market-based strategies to take on global giants and win. Read more about her here in a 2018 interview.  

Rebecca has worked directly with grassroots indigenous communities, and internationally as an advocate of Indigenous self-determination since 1970. Her first five years at the Coalition of Indian Controlled Schools were spent in and out of jail until the Indian Self Determination and Education Act was passed in 1975 making Indian self-determination legal. At First Nations Development Institute, in 1983 Ms. Adamson, with the Ogalala Sioux on Pine Ridge South Dakota, created the first microenterprise loan fund, the Lakota Fund. She became one of the key leaders of the Community Development Financial Institutions (CDFI) movement. In 1994 as Trustee of Calvert Social Investment Mutual Funds Ms. Adamson created Community Notes the first market mechanism for individual investors to invest directly into low-income community development financial institutions (CDFI). Today over $4.2 bn is being invested in CDFIs. In 2000 at First Peoples Worldwide she launched the Indigenous Peoples Rights Investment Criteria used by all the premiere social investment research firms.

Ms. Adamson has won many awards: PBS Change Makers, National Women’s History Recipient, Council on Foundations Scrivner Award for Most Innovative Grant-Maker, John Gardner Civic Leadership Award. She is widely known for her asset-based development strategies and co-author the award-winning book “The Color of Wealth: the Story Behind the US Racial Wealth Divide”. Currently she serves as Advisor to the Wharton Business School ESG Initiative, Trustee Women’s Media Center and Trustee Bay Paul Foundations.