Sweden’s AP7 bemoans painfully slow progress on corporate water risk management

Influential investor: corporate water management has largely stood still over the last two years.

“Painfully slow” is how Swedish buffer fund Sjunde AP-fonden (AP7) has described companies’ progress on managing freshwater risks.

The €46bn pension pot concluded — in its third report on the issue — that the “state of corporate water management has largely stood still over the last two years”.

AP7 launched its three-year focus on corporate water management in 2016, as part of its commitment to supporting the UN Sustainable Development Goal Six (clean water & sanitation).

Its latest report, created in collaboration with ESG data provider Sustainalytics, provides an update on its 2017 benchmark, which assessed the water risk exposure and stewardship of 299 companies across the food and beverage (F&B), garment and mining sectors.

Companies were evaluated across five general indicators: 1) board-level responsibility for water; 2) water policy; 3) water use intensity; 4) water use goals; 5) water pollution goals.

“For AP7, which invests in the global stock market, a global freshwater crisis is a material risk to our portfolios”

Additional sector specific indicators were also applied to companies in the assessment: local community impacts (mining), supply chain water management (F&B), and manufacturing water management (garment).

The report found that the “state of corporate water disclosure remains limited and patchy”.

It was “extremely concerning” that disclosure of water intensity, in particular, has taken a “clear turn for the worse” – 75% of companies in the report scored the lowest possible (3) on water use intensity and 70% scored the same on water pollution goals.

Companies’ water withdrawals have increased by almost 50% between 2015 and 2018, according to a recent report by environmental data body CDP, which is particularly concerning as water stress escalates globally.

The lack of oversight on water, the AP7 report suggests, could be due, in part, to a too narrow focus by corporates when it comes to climate change, who fail to see it as intimately linked to water scarcity.

Another factor cited by the investor is the low – often non-existent – costs associated with water, which give companies little incentive to implement water saving measures or efficiencies.Despite the bleak picture painted in the report, it also offers glimmers of hope.

Engagement does appear to have an effect, it found.

“Out of the nearly 300 companies benchmarked, the ones we had engaged with improved their disclosure on freshwater risks and management more than the rest of the companies during the project,” said Charlotta Dawidowski Sydstrand, AP7’s Sustainability Strategist.

The report sees this as “strong encouragement” for responsible investors to “utilise their leverage and an endorsement of the benefits that constructive engagement can provide for investors and companies alike”.

It expresses hope that this will catalyse “more collaborative efforts” among investors to drive corporate risk management on an issue that could “pose tremendous long-term risk for the investment community”.

Of the 17 companies engaged, 11 (65%) improved their total score when compared with the 2017 benchmark.

Investors involved in that engagement include: ACTIAM, AP7, The Church Pension Fund (Finland), KLP, OP Wealth Management and Strathclyde Pension.

Another positive sign was that engagement revealed that, in some cases, public reporting was lagging behind companies’ actual water-related activities, suggesting more was being done behind closed doors.

Overall the mining sector retains its position as the strongest performing in the latest report, with the garment industry making the most progress over the last two years.

“Among companies, and I believe the same goes for investors, water is seen as an important issue but it is not a top priority. Not even with the water intensive companies we engaged with,” said Dawidowski Sydstrand.

“For AP7, which invests in the global stock market, a global freshwater crisis is a material risk to our portfolios and our ability to generate pensions for our savers.”

She added that the fund has already allocated €140m to investments in water solutions and will publish a report concluding its freshwater theme later this year.

Meanwhile, CDP has also released its latest report on the critical water security issues facing the metals and mining sector.

In Too Deep concludes that while there has been some progress since 2013, the “pace and scale of change is insufficient to deal with the water security challenges that the mining sector is facing both today and in the future”. More than half of the companies approached for the report – including Rio Tinto and BHP – chose not to disclose.