Water risks are a larger threat to portfolio performance than exposure to carbon dioxide. “The risks are already here.”
‘Wars in the next century will be over water,’ Vice-Chairman Ismail Seragel of the World Bank warned as far back as 1995. Due to climate change, shipping pollution and industrial usage, the freshwater supply is shrinking, while demand is rising as the global population continues to grow. According to the United Nations, water shortages, or water stress, will affect two thirds of the world population by 2025.
The Paris climate agreement has awakened investors to the need to reduce their carbon footprint. But water may well be a larger operational and strategic risk for portfolios than greenhouse gas, says Lisa Beauvilain of Impax Asset Management. She is responsible for environmental, social and governance (ESG) research and analysis at this sustainable investing specialist that is part-owned by BNP Paribas Asset Management. She is also a member of International Institute of Environment and Development, an international think tank.
Reducing the ecological footprint is important for long-term investors, while a water shortage or surplus constitutes both an imminent and future risk that can immediately destroy portfolio value, says Beauvilain. “Nearly every company needs water, while some parts of the world are now contending with unprecedented drought such as the cities of Cape Town and São Paulo and the state of California. We need to learn fast what these water risks entail for portfolios.”
Water strategy since 2008
Having started to research listed water companies in 1999, Impax launched a specific water strategy in 2008 aimed at innovative companies specialising in waste water reuse, water quality measurement, desalination and other water-related activities. There is plenty of data on the impact of carbon dioxide, but water data is less widely available. Beauvilain and her investment team often do pioneering work.
“Through analysis and discussions with companies, we try to find out which business operations are water-intensive, whether their factories or facilities are located in parts of the world suffering from water stress and what percentage of the revenue is exposed to water risks. We encourage companies to share this information with investors. But that doesn’t happen much yet, if at all.”
These days there are many good online tools for determining which parts of the world are at risk of water stress and in which season. “From our discussions with companies, we know they use these tools and that is encouraging,” says Beauvilain. “But there are still big differences in how companies approach water risks. Only 15% of utility companies have taken water-saving measures , for instance, even though they are among the largest users of cooling water. The percentage among food and beverage companies is much higher.”
Corporate disregard for water risks is partly the result of water being cheap. If companies were to bear the true economic cost of blue gold, as water is sometimes called, they would soon change their tune. In fact, this seems to be gradually happening. “Water prices around the world are on the rise, with the cost of waste water outpacing inflation. Even so, water is still too cheap and taken too much for granted. But this might well change in the future.”
For more on sustainable and responsible investing with BNP Paribas Asset Management, click here. For more blog posts on water, click here. This article first appeared in Dutch on Fondsnieuws.