Water is an essential part of our life. As a species, we are fundamentally dependent on access to clean water. Critical parts of our economy are equally reliant on abundant water supplies, such as agriculture, energy and mining which together are responsible for a majority of human consumption of water.
There is a huge strain on this basic human necessity, driven by climate change-linked water stress, a growing global population, the failure to properly value water as a product and excessive government subsidies. It is predicted that as temperatures increase globally, water scarcity in the southern US, the Mediterranean and the Middle East in particular will worsen. However, at the same time in India, tropical Africa and the high latitudes in the Northern Hemisphere, more water is expected to appear.
The risk to investment as a result of water scarcity is becoming increasingly apparent and must therefore be managed. Some sectors – such as mining, agricultural soft commodities and utilities – already suffer a negative financial impact. And according to a 2013 water report on the metals and mining sector by the CDP, formerly known as the Carbon Disclosure Project, almost two thirds – 64% – of the respondents to its survey had experienced detrimental water-related business impacts in the past five years.
Two notable examples of companies trying to tackle water scarcity have been Rio Tinto and BHP Billiton, with whom we have engaged on the topic. The companies have had to invest over $3 billion in a desalination plant at their Escondida copper mine to ensure a sustainable supply of water for the asset and to reduce the project’s reliance on the region’s aquifers. Other mining companies have also had to permanently write down the value of mines due to lower productivity caused by a lack of access to water supplies.
But when looking to address the risk, unfortunately water stress is unlike carbon emissions – it manifests itself differently from region to region and even from basin to basin. Therefore a globalised solution, such as a cap-and-trade scheme, is not realistic. Instead localised action is required. This however poses another challenge – how to measure the threat of water scarcity.
While CO2 emissions are relatively straightforward to directly measure or at least adequately estimate, water availability and potential future water stress is not. In order to evaluate the exposure of a given company to these risks, highly granular data is required for operational sites across the entire supply chain. While smaller companies in mature markets may be able to compile this data at the local level, large conglomerates with operations in underdeveloped markets tend to struggle to understand the risks across all their operations and at operations upstream in the value chain. In 2014, only 60% of Global 500 companies approached by the CDP replied to its survey on water risk – as opposed to more than 80% to its carbon survey. Yet nearly 70% of those respondents reported exposure to water-related risk that could generate a substantive change to their business. This disparity will need to reduce with improved rates and quality of water stress reporting.
In addition, even when affected companies have been able to determine their water consumption and risks, it is usually only at an aggregate level. This makes it difficult for investors to see which companies are at a greater risk from water stress. Although a wide range of measurement tools is available – many of which can provide comparatively accurate maps of water scarcity at the basin level – few match company facilities with available water basin data. As a result, investors lack the necessary data to determine the most exposed companies in their portfolios.
Given these challenges, Hermes EOS is a founding member of the steering committee of a collaborative engagement project by the Principles for Responsible Investment on water risks in agricultural supply chains. The World Wide Fund for Nature and professional services firm PwC collaborated for the project to identify and create an engagement strategy targeting 54 companies that may be exposed to water stress. To date, 39 global investors have signed up to the project to understand the degree of awareness and risk assessment within companies to water risks in their agricultural supply chains.
The project is designed to enable investors to better assess and manage their portfolio exposure through the improved disclosure of supply chain water risks and management control, for example through the CDP Water questionnaire. To ensure a global approach to the issue, we have also teamed up with the Interfaith Center on Corporate Responsibility and the sustainable agriculture and water team of sustainable leadership organisation Ceres to share our research and findings. Water scarcity will continue to grow as a threat driven by population growth, rising income levels and the outworking of climate change. It is therefore time for investors to act in a coordinated manner.
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