‘Investors voice concerns about overvaluing assets, but undervaluing assets is of even greater concern’: LAPFF’s Doug McMurdo on water risk

Ceres’ Kirsten James talks to investors about valuing water

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To 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 Dutch to launch 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 Councillor Doug McMurdo, Chair of the Local Authority Pension Fund Forum (LAPFF), which represents 82 UK government pension funds and seven pools with over £300bn of assets under management. 

What aspect of the water crisis is most concerning to you as an institutional investor?

We are concerned by companies undervaluing water resources. There is a gap between normative values companies use to price water and its actual intrinsic value, which is much higher. Water is a necessity in every business and must be considered as such. It is particularly concerning when companies that are dependent on water at an operational level are not reflecting the true value of water or taking water management seriously. 

Investors often voice concerns about companies overvaluing assets, but undervaluing natural and environmental assets, including water, is of even greater concern and poses material financial risks across all asset classes if not addressed. For companies that are not adapting their business to the risks and opportunities associated with water scarcity, there is a high risk of the end result being business failure.

Do you feel sufficient progress is being made to address water risk by investors? 

The investor response to carbon risk is certainly more developed when compared to water risk. This is in part due to the way in which investors have been able to mobilize and collaborate on the issue. Our ambition should be to elevate water risk up the agenda and work towards a more coordinated investor response to the issue – and this is exactly why we’re a member of Ceres’ Valuing Water Task Force.

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

The Forum participates in investor collaborations to help amplify our voice and to accelerate change. Joining the Task Force will help to further our work in this area, as well as inform a coordinated investor response, building on the work of existing water-related initiatives. 

The Task Force has identified a need for a science-based framework that investors can make use of to help progress their work in mitigating water risk. We are hoping the Task Force will contribute to what can be understood as best practice in this area and contribute more broadly to pushing water risk up the agenda within the investor, business and political spheres.

The Valuing Water Finance Task Force isn’t the only water initiative that LAPFF is involved in. You also joined the Ceres/FAIRR global investor engagement on meat sourcing, which seeks to address water risk in fast-food supply chains. Why was it important for LAPFF to participate in this engagement? 

We recognize the increasingly clear importance of the role the agribusiness sector plays in driving climate change and degrading fresh water aquifers. Collaborating with Ceres, FAIRR and other investors enables the Forum to amplify the investor voice and accelerate change, including corporate stewardship of our critical water resources. 

All companies should have effective initiatives to address water efficiency, reduction of water consumption and waste, as well as the elimination of contamination. This is in alignment with Sustainable Development Goal 6 on Water and Sanitation.

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

Do not undervalue wider stakeholder involvement. All too often the conversation on issues of this nature are investor-company centric. Discussions generally overlook or neglect the involvement of wider stakeholder groups such as those representing impacted communities. 

This is a lesson that we learned through our involvement in the investor response to the Samarco dam failure and, more recently, the Brumadinho dam disaster in Brazil. Issues regarding water pollution and sanitation have been raised by the local community consistently and LAPFF has worked hard to provide the affected community members a platform from which their voices can be heard. Issues relating to water security already, and will continue to, disproportionately affect some of the most disadvantaged communities around the world. Any investors looking to develop a cohesive response to the problem should consider the issue at the point of impact and include affected stakeholders within any engagement strategy. 

Has the COVID-19 pandemic taught you any lessons about investing that can be applied to your work around water?

In part, the pandemic was, and continues to be, the result of an imbalance in how we as investors and consumers interact with the natural environment. This is a balance that, as investors in global companies, we must look to help restore. If this pandemic has taught me anything, it is that our understanding of tipping points caused by human behaviour are too often ill judged. I think the lesson is to recognise the urgency with which we must act. 

Failure to take action in mitigating water risk could prove to have even more costly impacts than our current crisis. This is apparent in the increasing occurrences of droughts, and it’s undeniably a contributing factor to the devastating wildfires we witnessed in Australia at the start of 2020 and to the flooding that has caused significant disruption to many areas of the UK within just the last few weeks.