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‘CalPERS is overlaying physical climate risk with water scarcity insights’: California’s Betty Yee on water risk

Ceres’ Kirsten James talks to investors about valuing water

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Betty YeeTo highlight the escalating global water crisis, this year’s UN World Water Day on March 22 will focus on 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 to Betty Yee, who was first elected as California State Controller in November 2014 - a position that serves as the state’s chief fiscal officer. She also chairs the California Franchise Tax Board and serves as a member of the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) Boards, representing a combined portfolio of nearly $500bn. She speaks about how her experience managing the world’s fifth-largest economy has shaped her thoughts on climate and water risk. 

Why did you join the Valuing Water Finance Task Force? What do you hope the new Task Force will accomplish?

Investors have made a great deal of progress measuring both physical and financial transition risks in their portfolios related to carbon emissions. I believe water risk – including water scarcity, quality, and threats of floods – must also be measured, disclosed and mitigated by the companies in which we invest. I am hopeful the Task Force can help call attention to the importance of water risk and articulate a set of shared expectations for companies to value water. Concise and scientifically-backed expectations will also go a long way toward uniform disclosure and help investors adequately measure and manage water risk in our portfolios. Clear expectations that align with high-level water risks and metrics akin to the Paris Agreement targets would help make corporate engagements around water more effective.

What aspect of the water crisis is most concerning to you as Controller and board member of the two of the largest US pension funds? 

I view the water crisis as an economic and humanitarian crisis with potentially staggering costs to our society. Recent studies present a bleak picture if we fail to take strong action now. By 2035, water supply from snowpack may decline by as much as two-thirds. California agricultural production - which supplies 13% of produce in the US - could face climate-related water shortages of up to 16% in some regions by 2050, which could cost up to $50bn per year. Water quality also is a major concern. According to the recent California Climate Assessment, some of our California Central Valley towns already lack safe drinking water. Sea-level rise may inundate California buildings and infrastructure in 30 years, causing losses of nearly $18bn. The San Francisco airport already faces a risk of storm surge flooding; the Oakland and San Diego airports could be added to the threat list by 2040. Meanwhile, nationwide, labour-related losses from extreme heat alone may hit $155bn a year by 2090. Potential losses due to unmitigated water risk from the companies and real estate in which CalPERS and CalSTRS invest add another layer of risk to our state budget and the millions of employees and retirees who depend on them for retirement security. 

You are signatory to the largest investor engagement initiative on climate change: Climate Action 100+. What lessons have you learned from that engagement work that can be applied to your water engagements? 

Climate Action 100+ has amplified investors’ voices to demand that the companies most responsible for carbon emissions adopt transition plans and disclose metrics on an annual basis. Since most institutional investors invest in passive equity indexes, the group found that a relatively small group of companies were responsible for the majority of carbon emissions in investment portfolios. This made it easy for the group of 540 investors with $52trn AUM to come together to share the engagement work. It also made it much more difficult for these companies to ignore investors’ concerns and demands. I am hopeful - as the tools and metrics to measure portfolio water risk advance, and alignment on specific expectations for companies around valuing water coalesces - that we can leverage the global reach of Task Force members and a big tent of other investors to influence companies with excessive water risk. 

How are you currently addressing water risk in your decision-making? What is your approach when it comes to engaging with companies on water risk? 

A CalPERS investment team recently conducted its first total fund water-risk analysis, aided by Ceres Investor Water Hub and ESG research providers. The analysis raised awareness of which industries are most water-intensive and the performance of companies within these industries. It also focused on how best to effectively manage exposure to water risk going forward. CalPERS staff now are overlaying the physical risk of climate change with water scarcity insights to achieve a deeper view of accumulated risk. CalSTRS has joined the Valuing Water Finance Task Force and is committed to using the insights in its engagement with companies in high water-risk industries. They have already made some positive inroads through engagements with food companies on improving water stewardship, particularly those that are not disclosing or managing water risks in their agricultural supply chains. 

What advice would you give to your investor peers who may be in the early stages of thinking about water risk? 

I would urge investors to begin with a review of the available tools and metrics, such as those discussed through the Ceres Water Hub and the Ceres Investor Water Toolkit. Connecting with other like-minded investors also is helpful. Water risk is a critical and monumental issue, and the more investors speaking with one voice, such as through the Valuing Water Finance Task Force, the faster necessary change will take root.

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