The danger of flashing wrong signals

Have you heard the stories of people who have driven through fields, into lakes or off cliffs while following their GPS units? Any outsider would have told them to use their common sense before making a right turn over a cliff, but are WE so wise when it comes to our indicators?

Although the water sector really needs more and better information (that's why I founded the water data hub*), I worry about people putting the wrong weight on the wrong information -- a worry that puts these recent stories into a different context:

• The World Resources Institute released the Aqueduct 2.0 tool for water risk.
• IBM and Waterfund (a global water risk management firm) created a benchmark with which to assess risk when it comes to investing in the water sector.
• Ceres has put out another report on the importance of water risk to companies.

Now, I'm not worried about the discussion of water risk. I think that it's a topic of growing importance, as the end of abundance exposes business models, bureaucratic assumptions and personal habits formed in an era of too much, too cheap water to a new reality of scarce water that cannot be taken for granted.

What I worry about is the arrival of over-simplified models of risk and tools for "managing" risk, and the damage that may result from the naive application or use of these models.

I worry, for example, of what might happen if:

• Some 25 year-old bets your pension based on "data" from his Bloomberg terminal (Bloomberg partners with WRI).
• Banks or governments allocate investments based on the IBM-model of risk.
• Investors move their money based on Ceres' risk warnings.

All of these actions may be valid in their consideration of the information at hand, but what if they are paying too much attention to what's in the index while missing what's NOT in it?

I'd put a lot more weight on:

• Local institutions for managing water. They determine the difference between drought and shortage.
• Political and regulatory interventions (i.e., "regulatory risk") that outweigh natural risk by an order of magnitude.
• The importance of funding local water projects with local money -- especially when it comes to knowing the people who are spending your money.

Each of these factors, IMO, are significant, and each can overwhelm any number that you get from a risk model.

Bottom Line: Caveat emptor! Risk in the water world is not so much about nature or market forces, but the arbitrary, illogical, unaccountable and uncertain ideas and actions of politicians and bureaucrats who drive water management (and cause 90 percent of the mismanagement).

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* The WDH does not worry me because it's merely a way of finding data (is yours linked?). People can then interpret the data any way they want.

H/Ts to BB