Water Risk Could Make Portfolios Run Dry
By Thomas Kostigen
We humans cannot healthily survive for more than about three days without water. Besides air, water is our most critical resource.
Businesses, too, rely on water. And Ceres, the Boston-based nonprofit organization that works with investors and companies to drive sustainable solutions throughout the economy has developed the first-ever comprehensive resource to evaluate and act on water risks in investment portfolios.
“Competition for water, weak regulation, growing population, aging infrastructure, water contamination and climate change are driving water risks. The most significant risks are physical, regulatory and social, referring primarily to the social license to operate. These risks are increasingly manifesting as financially material and impacting a wide range of asset classes,” Ceres says.
Indeed, the United Nations projects that global water demand will increase by as much as 30% over the next 30 years. Most impacted will be the food and agricultural sector, which relies on 70% of the world’s fresh water. Energy companies, too, will be affected (50% of the surface freshwater in the United States, for example, is used to generate electricity). Tech companies need water to cool data centers. And manufacturers need water for machinery if not for products themselves. Virtually every sector of the global economy is impacted by water supply — and supplies are shrinking.
As the UN notes, one-third of the world’s biggest groundwater systems are in distress, and nearly half the global population are already living in potential water-scarce areas. This scenario is expected to stretch to approximately two-thirds of the world by 2050.
Ceres Investor Water Toolkit provides sector-specific and geographic approaches to assessing risk that can improve investment analysis. “Investors need to look beyond water risks at the individual security level and also study portfolio water risks, beginning with portfolio exposure to geographic water-risk hotspots and industries,” Ceres advises.
Financial advisers often have professional tools, or water experts at their disposal to assess risks, such as water scarcity, as well as other factors. Filters, measurements and software analytics are typically available as the firm level of a financial services company and can be part of due diligence procedures. But individual investors may not have access to such sophisticated tools.
Even at the corporate level of investment firms’ awareness needs to be raised. This was part of Ceres point in creating the water risk toolkit. Indeed, the organization, which counts as its members some of the world’s largest pension funds and corporations, makes clear that "all investors should consider engaging their portfolio companies and developing clear guidelines and engagement policies concerning ESG issues.” Here’s why: Investors may find that their holdings are overweighed to industries with high water risks or to regions where water resources are vulnerable. (Ceres found that both US and global indices have a very high proportion of companies in medium or higher water risks industries.)
The toolkit is divided into several sections to help investors: understand water risks; establish priorities; create a buy/sell analysis; develop a portfolio and asset class analysis; and foster engagement. It also provides case studies that show how to integrate water risk into various investment analyses. Ceres has done investors a big favor by developing the Investor Water Toolkit. Investors should return that favor by using it.
Thomas Kostigen is a contributing writer to www.myperfectfinancialadv
isor.com, the premier matchmaker between investors and advisors. Thomas is a best-selling author and longtime journalist who writes about environmental, social, and governance issues.