US-based sustainability non-profit group Ceres has found 50% of four major global indices are exposed to medium to high water risks, as it launches an online water risk toolkit for investors.
Using ‘water footprinting’, Ceres has assessed water risk exposure of the S&P 500, MSCI World, MSCI Emerging Markets and Russell 3000. Water footprinting has many methods including assessing volumetric use of water by companies or assessing water risk by geography.
In this instance, Ceres has used SASB’s materiality maps to identify sectors and industries for which water and wastewater management is assessed as likely or not likely to be material. Each constituent in the indices is assigned a water risk exposure score of low, medium or high.
The analysis found that more that 50% of the components of the four indices are exposed to medium to high water risks. The MSCI Emerging Markets has the highest exposure to water risk.
Ceres also studied water volume data per industry but found there was too low disclosure of companies on water use, for example only 5% of constituents in the Russell 3000.
The new research comes as Ceres launches what it says is the first online toolkit for investors to evaluate and understand water risk. It has been developed with 90 institutional investors collectively managing $6trn in assets, including Caisse de dépôt et placement du Québec, State Street Global Advisors and PGGM Investments.
Speaking to RI, Piet Klop, senior adviser of responsible investment at PGGM Investments, said investors needed help to understand their exposure to water-related risks, and indeed water-related opportunities:
“The problem with water is that it is very location-specific so it doesn’t easily translate into a global thing like climate does.“The other thing with water is it is under-priced, which is also true for carbon pollution, you could say,” he said.
“With water also being an input that is particularly problematic, because if the input price for water doesn’t signal scarcity or trouble down the road it will be ignored by mainstream investors.”
He said the Ceres Investor Water Toolkit was trying to address water as a business risk, “it is an externality. It is not priced in just yet but it may be down the line and we’d like to understand what part of as business is at risk due to water scarcity, water pollution or perhaps indeed due to much higher water prices.”
For the past several years, the World Economic Forum has ranked water as a top global risk, due to competition for dwindling resources, climate change and weak governance. It is also a UN Sustainable Development Goal: goal six – Clean Water and Sanitation.
Ontario Teachers Pension Plan senior vice president of strategy and risk Barbara Zvan said the toolkit “contains valuable resources to help us look beyond individual company risk and discover the material water risks that are embedded in every asset class, from fixed income to private equity”.
The Toolkit includes guidance on understanding and evaluating material water risks and how to embed this into investment analysis. It also has guidance on establishing water-related investment priorities including establishing leadership on trustee boards on water, creating an investment policy and engaging with companies.
It includes case studies on the issue from investors such as the State Board of Administration of Florida and ACTIAM. Link