One year ago, a coalition of institutional investors launched a task force to drive corporate action on water-related financial risks, seeking better disclosure and water risk management.
This year, coalition members are no longer waiting patiently. Instead, they are taking their message straight to some of the world's biggest corporate users of water.
On Aug. 16, 64 institutional investors with a collective $9.8 trillion in assets helped to launch the Valuing Water Finance Initiative, coordinated by shareholder advocacy group Ceres and the government of the Netherlands.
Pension fund members include the $444.4 billion California Public Employees' Retirement System, Sacramento; $311.7 billion California State Teachers' Retirement System, West Sacramento; the A$261 billion ($177.6 billion) AustralianSuper, Melbourne; the U.K.'s Environment Agency Pension Fund and Local Authority Pension Fund Forum; and 2.1 trillion rand ($123.4 billion) Government Employees Pension Fund of South Africa, Pretoria. Others, including New York City Comptroller Brad Lander, fiduciary for the five pension funds in the $239.5 billion New York City Retirement Systems, serve on an advisory council guiding the initiative.
With global water demand projected by a United Nations resource panel to exceed supply by 56% by 2030, water scarcity and quality issues will only get tougher for all types of companies, and in turn, their investors. Currently, Ceres estimates that 50% of companies in the four largest indexes have medium to high water risk.
That is a lot to tackle. There is also a lot at stake for investors that cannot meet their fiduciary obligations without factoring in water, coalition members said. "If these risks are not mitigated, the potential financial impact on companies and their shareholders are huge," said John Anzani, an executive committee member of the Local Authority Pension Fund Forum in London, which represents 85 public-sector pension funds and their six pool companies who together have more than £350 billion ($402.6 billion) in combined assets.
Initiative members will begin by engaging with 72 portfolio companies in four sectors — food, beverages, apparel and high technology — using a methodology developed by Ceres that shows companies with the greatest water use and impact. The list includes McDonalds Corp., Coca-Cola Co., ConAgra Brands Inc., Adidas AG, Microsoft Corp, Amazon.com Inc. and Sony Group Corp.
As the investors engage with those companies as shareholders, they will raise six expectations that apply to each company's value chains where:
The initiative will also track how the companies' activities and practices align with the United Nations' 2030 Sustainable Development Goal for water, SDG6, to "ensure availability and sustainable management of water and sanitation for all."
Having investors "strive to drive large-scale practice changes" will be meaningful, said Kirsten James, senior program director for water at Ceres in Boston.
Morningstar Sustainalytics analyzed 122 companies in the tech and telecom sectors that rely on water-intensive data centers to see how prepared they are to mitigate water-related risks. It found that just 16% disclosed elements of a management program to mitigate risks posed by water scarcity. By contrast, 64% of companies had some elements of a physical climate risk management program.
When it comes to minimizing the overall reliance on water in their business activities, nearly 50% of the companies disclosed some elements of a formal water management program, although 61% rated their program as weak.
One of the biggest challenges for investors is inconsistent — and often missing — disclosure of corporate water practices. Sustainalytics offers some useful metrics, including how much companies rely on water for operations, location and water intensity, and how much they need to generate a dollar of revenue.
The good news, investor advocates say, is that there is growing awareness of the interconnectedness of water issues with other environmental issues like climate change and supply chain risk, and new tools for investors.
The World Wildlife Fund's Water Risk Filter online tool helps companies and investors assess, value and respond to water risks in operations, supply chain and investments. It aggregates three water risk types: physical, regulatory and reputational. It allows them to integrate climate and other scenarios of water risks to perform scenario analysis across portfolios or even by asset class.
The Ceres Investor Water Toolkit helps investors evaluate and act on water risks in investment portfolios with concrete engagement advice.
"Investors finally have at our fingertips what we need to hold companies accountable," said Ms. James of Ceres.
Still, the lack of data on corporate water exposure "does hamper engagement," said Kris Nelson, director of investment research for Russell Investments' global equities team in Seattle. "It makes it a much more case-by-case exercise. You have to do some digging," she said.
While there are relatively few water-related strategies to invest in today, "there are thematic strategies that you can invest in with (water) solutions," Ms. Nelson said. "I do think there will be more if the effects of climate change continue to grow, which they will."
Matthew Diserio, co-founder and president of Water Asset Management LLC, a New York water industry-focused firm managing $500 million in public and private equity investments, couldn't agree more. His firm invests exclusively in companies and assets that ensure water quality and supply, and shorts companies that are at water risk from drought, wildfires and supply issues.
"We are seeing more interest from institutional investors. People are mostly still focused on risk. We are focused on investing in the solutions," he said.
It's not altruistic. "The entire water industry has a revenue growth tailwind from more and more spending" and growing recognition of water as an asset class. "We know that all these problems are solvable. These issues get solved by committing capital," Mr. Diserio said.
Recent headlines add a sense of urgency to the investors' mission. A drinking water crisis in Jackson, Miss., caused by poor maintenance and oversight has triggered a federal investigation and will require substantial infrastructure investment.
Record-low water levels in the Colorado River after a 22-year drought are even more ominous. According to the multiagency U.S. Drought Monitor, the Colorado River provides water to almost 40 million people in two countries, seven states, 29 federally recognized Native American tribes, and four million acres of farmland. According to a study by the University of Arizona, the river supports $1.4 trillion in annual economic activity—equivalent to one-twelfth of total U.S. gross domestic product.
Massive challenges like those, along with the energy transition push, could also create new opportunities for institutional investors through private and public partnerships, said Bill Green, managing partner of Climate Adaptive Infrastructure in Mill Valley, Calif. The infrastructure investment firm specializes in low-carbon real assets. Its investment mandate in the water sector includes integrated water and wastewater systems, industrial pretreatment and water recycling and potable reuse.
When it comes to drinking water and industrial uses, "we believe that as the historic supply models break down, you will see increasing demands for water partnerships," Mr. Green said. "The demand is being created by acute shortages resulting from climate-related drought."
The firm did not provide its AUM.
