ESG – Feature
“ESG risks are not only about climate change and the E is not only about carbon,” says Tim Currell, Aon’s head of invest- ment for insurers.
A local issue Water is a more complex problem than carbon, which is a global concern. There is no escape, whereas water stress is a local issue. You have to draw it from local sources and it cannot be dispersed around the country in the way that electricity is. It is also difficult to measure the impact of a water footprint. For instance, a business which uses a large amount of water in an area where it is abundant and with little competition, is not the same as a company drawing modest amounts from stressed sources. Identifying areas of water stress is one thing, dealing with it is another. “It is not like other infrastructures which are simple to build, such as rail, roads, electricity and telecommunication networks,” Fruschki says. “Water is heavy, it takes a lot of energy to pump up and down hills, through filters and then bring it back to treat it. Water infrastructure takes time and needs massive investment.” He points to the emerging world to support his argument. There are huge problems with water quality and access as well as proper sanitation, yet mobile phone use is high. “It is no surprise that emerging markets advanced quickly in terms of access to mobile phones and the internet,” Fruschki says. “But it takes a decade or two longer to get everyone connected to a water supply.” But does the size of this task strengthen the investment case? “The problem of accessing quality drinking water is that it takes time,” Fruschki says. “That is the beauty for those who want to invest in something that has a high certainty of playing out. We know 2 billion people still need access to clean drink- ing water and there is no competing product or viable alterna- tive for it. “The attractiveness of investing in water is the element of cer- tainty and predictability,” he adds. “You can invest in water today and not have to look at it for the next 10 to 20 years because you know those investments are going to come through.” Another benefit is that water is not a traded commodity. There is no market for it. It is not traded in the way oil, gold and coal is. “It makes sense to drill for oil on one side of the planet and ship it to the other and make it work financially,” Fruschki says. “Water has to be available locally because you cannot ship it long distance at commercial rates. You could build a pipeline, but that is expensive because it needs a lot of electricity as water is heavy and perishes quickly.” As an example, he questions the credibility of Quantum of Sol- ace, the James Bond film where the villain’s aim is to take con-
32 | portfolio institutional | March 2021 | issue 101
ESG risks are not only about climate change and the E is not only about carbon. Tim Currell, Aon
trol of a local water supply. “This notion that anyone could buy water physically, store it and sell it at double the price later is not realistic. You cannot transfer it or auction it on an open market as it is not transferrable,” he says. “Water is free, it’s the service of delivery that is costly.”
Efficiency, supply and quality
This is as big an issue for long-term investors as climate change, so reducing water stress in portfolios is as crucial as cutting harmful emissions. Investors need to raise the issue during engagement meetings or make it a condition when lending money.
“The focus is on incumbent companies that are looking to bet- ter manage their reliance on water,” says Ian Burger, head of responsible investment at Newton Investment Management. “I can think of a beverage company which has multiple beer- brewing operations across the world. In one part of Europe, it uses two litres of water to make one litre of beer. “In South Africa, where water is more scarce, they are using 14 litres to produce one litre of beer,” he adds. “They have been focusing on how they can be more efficient.” Another option is to invest in companies which have technolo- gies that improve the quality or management of the mineral. But this might be more accessible for schemes with private equity portfolios, says Robert-Alexandre Poujade, an ESG ana- lyst at BNP Paribas Asset Management. “We should be modest on the impact that we could have today when it comes to water consumption, as we mostly have aggre- gate data at company level, as opposed to a private equity inves- tor that can have access to project-level data,” he adds. For those who do not have private equity managers or who are approaching water stress reduction as an investment theme should look for companies that help to solve one or more of the following three problems:
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