Water – Feature ESG
The first is water efficiency. Invest in companies that fix leakages, provide smart metering or invest in drip irrigation rather than flood irrigation equipment. Essentially, anything that helps companies meet their needs by using less water. Second, companies that increase supply. These include desali- nation plants, which turn sea water in drinking water, or com- panies that own the pumps and pipes that access groundwater and move it around.
Third, invest in businesses that preserve quality, by treating wastewater to stop it infecting drinking water. “This is all we can do because the water that we have today is static,” Fruschki says. “It is the same amount of freshwater that we have always had. It does not rain more today than it did 100 years ago.”
A thirst for knowledge Measuring the water footprint of your assets under manage- ment is a tough task as the information is difficult to come by. Indeed, Poujade admits that his team are having to assess water stress from “data sources we find here and there”. This includes CDP, an environmental impact specialist, which has helped the asset manager collect water stress and intensity data. Highlighting the lack of disclosure in this area, CDP’s research only applies to a quarter of BNP Paribas AM’s corpo- rate assets under management. “25% is not ideal,” Poujade says. “We would like it higher, but it is something.” The data that BNP Paribas AM has found shows that the aver- age corporate in its portfolios draws 6% of its water from stressed areas. But there are disparities. For where BNP Paribas AM has data, on average, companies withdraw 6% of their water from water-stressed areas but this figure masks large dis- parities at the individual company level. In particular, 26 com- panies with extremely high-water intensity (over 100,000 cubic meters for every €1m of revenue) withdraw more than 10% of their water from water stressed areas. This provides the insight that quality data offers at a granular level in a particular region, in a particular river basin. “The aim is to go deeper into the analysis with our portfolio managers and understand how we can engage companies with high exposure,” Poujade says. For Tim Manuel, Aon’s head of sustainable investment in the UK, a lot of work is needed to achieve this. “Data is an obstacle for investors to get a better handle on where they might be exposed in terms of their water stress risk.
“There is a weak understanding of the financial materiality of that exposure and what it means for an investor,” he adds. But the level of water usage disclosures is not the only issue. The type of information released is a concern. More data is needed on how much of the water bought by corporates is con- sumed. Usage in supply chains is another factor that must be examined.
It appears that data standards on water usage need to mature, and it needs to fast. Currell says that water conservation is not top of the ESG agenda among his clients, but it is coming into conversations more and more and he is seeing corporates set- ting water reduction targets.
Investors are becoming more sophisticated when it comes to sustainable issues, adds Manuel. “They understand how envi- ronmental risks connect with each other,” he says. “Water stress as an environmental risk is gaining more prominence.” This is not an area Newton routinely takes questions from its clients, but, according to Burger, if it does come up in conver- sation, it is as part of the general realm of climate change, but this could change. “There is an obvious link between water stress and climate change. “Water stress is a key theme under biodiversity, so we are expecting more queries concerning our thought processes on water scarcity from our clients going forward,” he adds.
A bigger issue To solve water stress, it is perhaps best not to look at the prob- lem in isolation. There are several layers to environmental risk and they are connected, including climate change and defor- estation, so a holistic approach is needed.
“It is not helpful to isolate environmental risks to single top- ics,” Manuel says. “It is better to broaden out the consideration of all the components that make up that mosaic of environ- mental risks that pension plans should be concerned about.” The issue is that there is the lack of an established universal framework to help approach this. “It is a failing that we do not have an impetus by way of a framework to understand risk bet- ter,” Burger says. There are, however, some initiatives designed to increase the levels of non-financial reporting, including the TFCD, which will shed light on water as a risk and potentially increase reporting on consumption. Then there is SBTN (Science-Based Target Network), a consortium working to set scientific water usage standards. “That is going to be a game changer but takes time,” Poujade says.
It is clear that the issue needs more awareness of the need for more efficient usage of water and improving access of its qual- ity. This could come via a pressure group, investor partner- ships with non-government organisations or regulation. “Reg- ulation is a key driver to ensure the consistency and quality of reporting,” Burger says. “We can get to a better place more quickly with the right regulations.” However, regulation may help when it comes to climate change but on water conservation businesses in some countries have not been fully compliant. “Regulation can be interesting but is not a silver bullet,” Poujade says. “We need to build a new approach with investors, municipalities…everybody.”
Issue 101 | March 2021 | portfolio institutional | 33
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