‘A colleague told me water isn't that important because the sector is less than 1% of GDP. The problem is that the other 99% can't do without it’: PGGM’s Piet Klop on water risk
Ceres’ Kirsten James talks to investors about valuing water
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To highlight the escalating global water crisis, the UN has named 2021 the year of valuing water. With water demand expected to exceed supply by 56% within the decade, companies, investors and institutions are being called on to not only recognise the challenges of pricing water appropriately, but consider the social, environmental and cultural value of water.
To address this growing concern, sustainability nonprofit Ceres partnered with the Government of the Netherlands’ Valuing Water Initiative to form the Valuing Water Finance Task Force, a coalition of influential investors who seek to drive corporate action on water-related financial risks. In this series, Valuing Every Drop, members of the Task Force will be explaining how they think about water risk.
Today, Ceres’ Director of Water, Kirsten James is speaking with Piet Klop, Head of Responsible Investment at PGGM Investments, a Dutch non-profit cooperative pension administration organisation that manages over $325bn in assets for over 4.4 million pension recipients.
What aspect of the water crisis is most concerning to you as an institutional investor?
Water scarcity affects people's livelihoods and the entire economy. It’s a systemic risk that’s still underappreciated by investors. For example, a colleague recently told me that water isn't that important because the entire water sector is less than 1% of GDP. The problem is that the other 99% can't do without it. So I’m concerned by ignorance amongst investors on the importance of addressing water risk.
Do you feel sufficient progress is being made to address water risk by investors and companies? What are the biggest challenges to overcome?
My answer is a solid “no”. I think the biggest challenge is the attitude in the private sector that the water crisis is the government's responsibility, and when push comes to shove, some public entity will bail them out. I think that mindset is an obstacle that stops companies and investors from actually acting on water, despite the fact that water risk may affect the continuity of their operations. This is a big challenge to overcome, because this is what leads to companies being “a clean fish in a dirty pond”: they may care about becoming clean themselves, but they can't be bothered about the dirtiness of the pond. This prevents the type of systematic changes needed to address water risk.
How can we best ensure that investors recognise and act on water risk as the systemic risk that it is? How do you think science can help?
Science definitely must come into the picture. One of the challenges of determining which companies are most exposed to water risk is limited data about water security at the company facility level. Understanding water security is still a work in progress - questions about the different dimensions of water security are being answered with more granular data and more detail from science. Science and data can also help investors see the whole picture - including other challenges to company operations, such as water efficiency and water intensity.
Why did you join the Valuing Water Finance Task Force? What do you hope the Task Force will accomplish?
I was a reluctant participant at first. If we were going to elaborate on the importance of water, I wasn’t sure that was going to add a whole lot to the larger conversation. But the key to this task force is the focus on valuing water. For me, to value water is to understand its material importance to every investment. Valuing cuts both ways - both understanding the impact of water on our portfolios, and the impact on water by our portfolios. That focus is what I like about the Valuing Water Finance Task Force. Also, given the increasing awareness by investors of the real world impact of their investments on water scarcity and pollution, there is a need for a standardised language to talk about it. I believe the Task Force can play a role in developing that language.
PGGM is involved in many efforts around water. You are a lead investor in the Ceres/FAIRR global investor engagement on meat sourcing, which seeks to address water risk in fast-food supply chains. Why is it important for investors to join company engagements such as this one?
There are a lot of environmental challenges involved in meat sourcing, including the climate impact, deforestation, water use and pollution. There are also public health risks. Even when water may not be making it to the top of the list of investor concerns by itself, water scarcity and pollution in combination with deforestation, public health and climate certainly grabs investor attention. That is why I joined this investor engagement, because I think it is most effective to engage on a combination of issues that hopefully evolve the company you’re already invested in into a better company. And that is what this engagement does.
The meat sourcing engagement has helped advance climate commitments from the fast food companies, yet the progress on water is far behind. What do you think has to change with how investors approach water risk to see the type of progress we are currently seeing with climate commitments from companies?
I think it’s helpful for water to be presented to investors as a climate-related risk. Water can be more easily understood if characterised as a manifestation of climate change, even though we know that water risk is much broader. This way, water can rise to the top of the list of investor concerns together with climate.