AP7: An investors’ journey for water
Companies and investors need to be more aware of water as an ecological and economic systemic risk, explains Johan Floren
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When the Sustainable Development Goals were adopted by world leaders in 2015, we were enthusiastic. The 17 SDGs could function as a proxy for sustainable development in our ambitions to evaluate investors’ contributions to real world impact. Then we were overwhelmed: the complexity made it virtually impossible to operationalise any kind of aggregated approach.
Instead, we decided to work with individual SDGs in our efforts to make an impact. For a universal owner, systemic problems are a natural starting point and, beside climate change, clean water is one of the most urgent challenges there is. There were two obvious paths to take. We took both.
The first, and perhaps most obvious, way forward for many investors is to look at investments. Investors can make a significant contribution to SDG6 by investing in solutions to water problems all around the world.
A good thing about SDG6 is that it is investible, which probably isn’t the case with all the SDGs. There are innovative technical solutions already established on the market for managing many of the specific problems regarding treatment, recycling, desalination etc. Opportunities for investments can be expected in all kinds of assets: listed and unlisted stocks, bonds, real assets, different forms of project financing and more.
At the same time, investors’ opportunities to contribute are limited by factors outside the financial sector, such as national and international policy decisions that in practice are barriers on the road to a more sustainable society. A study of the Swedish water and wastewater system that we conducted, for example, shows that the massive investment needs are not being addressed because of legal, structural and political barriers, and lack of awareness, capacity and pricing. This results in a situation where the demand for ‘blue’ investment opportunities exceeds the supply, even though society is in clear need of both maintenance and development of water infrastructure.
In 2018 we introduced a green equity mandate in our listed equities portfolio to which water investments were a cornerstone. Beside mere investment, we also engaged in a project over several years with the asset managers at Impax Asset Management and KBI Global Investors to further develop means to create and evaluate impact through investments.
Another important path for investors is as active owners in companies and organisations with high water risks. Investors are seen primarily as financers in many water contexts, and the role as governing stakeholder is overlooked. Here, investors as a collective can make a difference. Investors play an important role in promoting and raising the prioritisation of water risks in companies, by calling for measurement, follow-up, governance and collaboration with other actors.
A good thing about SDG6 is that it is investible, which probably isn’t the case with all the SDGs
AP7 started a corporate governance project with Sustainalytics in 2017 that involved reviewing approximately 300 portfolio companies with high water risks and their reporting. After two years of more in-depth dialogue with a selection of the companies, we repeated the review and concluded that the companies with which we held dialogue had improved their reporting more than the others. Even if more knowledge is needed about how investors can exert influence on companies, our study shows that active owners can improve company reporting and thereby risk management.
Water is somewhat overshadowed by the climate issue, which attracts more attention. Companies and investors need to be more aware of water as an ecological and economic systemic risk, a risk that is intimately connected with climate risk. Despite the issue gaining some attention, there are still few investors who have water risks as a top priority. Companies tend to under-report on water, so company dialogues sometimes have a one-way character for investors trying to obtain a better idea of water risks in their portfolios.
A success factor we’ve experienced in many different contexts, that also applies for investors wanting to engage with freshwater challenges, is to utilise collaboration models such as those that have been developed in the climate field. Hopefully a similar approach to Climate Action 100+ can be successfully applied by investors to SDG6. Also, there are many organisations, initiatives and actors in society that investors can contact for collaborations, tools and knowledge partners. For this type of global challenges, collaborations between different types of actors and sectors in society is key.
These activities on our behalf are not solely a consequence of the introduction of the 17 SDGs, but they certainly have catalysed the process and improved conditions for collaboration and innovation. So, if we can retain the momentum, we have 10 more years to go and deal with the most urgent challenges in our time before the task is passed on to the next generation.
No time to rest. Have some water.
Johan Florén is Head of Communication and ESG, AP7.