Water is not just a basic human necessity but a key issue for businesses, albeit one that still does not garner the attention it deserves. Because of its central role in all aspects of life, it is one of the world’s most heavily regulated sectors. Yet the availability and quality of water present systemic and unpriced challenges to companies around the world, and carry economic and societal risks that are routinely overlooked or downplayed.
Water is a primary medium through which the effects of climate change will be felt globally through drought, flooding or rising sea levels, as explicitly highlighted by the Intergovernmental Panel on Climate Change (IPCC) in their February 2022 report. At its publication, the secretary-general of the World Metrological Organisation highlighted water and water scarcity as major threats to both food security and human health. According to the UN, by 2025, 1.8 billion people are expected to be living in countries or regions with absolute water scarcity and two-thirds of the world population could be under water stress conditions.
It is also a key factor in another ongoing environmental crisis: biodiversity loss. According to the IPCC estimates, rising temperatures and the increased frequency, severity and duration of extreme events place many fresh water, coastal and marine ecosystems at high or very high risks of biodiversity loss.
Yet, as a report by Impax Asset Management and Swedish pension fund AP7 revealed last year, corporate water disclosures have long lagged those of carbon and climate in terms of both the quantity and quality of data reported. CDP reported in 2020 that fewer than 5 percent of companies it polled could demonstrate any progress against water pollution targets.
Transparency on water usage and risks is important. In Europe alone, the costs to society arising from a group of substances known as “forever chemicals” – officially per-and polyfluoroalkyl substances (PFAS) – that are increasingly found in drinking water, are estimated to be as much as €84 billion every year.
At the same time, water and watersheds provide critical eco-systems services. Wetlands, which store more carbon than most terrestrial ecosystems, are disappearing three times faster than natural forests, with up to 87 percent of global wetlands lost since 1700.
Our 2021 study found that there are few standards or globally agreed frameworks to measure water impact, and none capture all the elements required to produce a full and holistic view of it. In addition, most of their focus is on water quantity, whilst there is not enough information on water quality and pollution.
An opportunity for clarity on water
Despite the severe problems with water management globally, there is some prospect of improvement. In 2021, the creation of an International Sustainability Standards Board (ISSB) was announced as a global baseline of sustainability-related disclosure standards. At the COP26 climate conference in Glasgow in late 2021, the ISSB published prototypes of climate-related and sustainability disclosure standards. While the ISSB’s initial focus will be on climate change and sustainability-related financial information more broadly, it may in time consider a wider set of issues, including water.
The ISSB’s aim is to provide the information about the risks and opportunities related to sustainability that will enable investors and capital markets to make better-informed investment decisions. Importantly, it will bring together several leading standard-setters in sustainability, such as the Value Reporting Foundation and the Climate Disclosure Standards Board (which has particular expertise in water), while integrating the recommendations of the Taskforce on Climate-Related Financial Disclosures (TCFD). It is hoped that this will reduce the fragmentation of the standards landscape and lead to the emergence of one global standard for sustainability disclosure.
This is particularly needed for water, where there are key gaps in reporting standards. Current water impact reporting practices fall short of what is required. Improving the measurement and reporting of these impacts would give investors decision-useful information on the risks and opportunities pertaining to water and companies’ resilience to water-related climate risks.
The importance of local context, materiality and solutions
The development of the ISSB standards is an important and positive step, but at present the Board’s approach fails to address the three main issues that lead to weak and insufficient water reporting.
The local context of water risks must always be considered
One of the key challenges when examining water risks is that they are highly local in nature, meaning that a company can have a low overall score for water materiality while being extremely exposed at particular facilities. This is an issue the ISSB touches on in its prototype sustainability guidance, where it asks companies to report not only on total amounts of water withdrawn and consumed, but also the percentage of each of these facilities in areas with high baseline water stress.
That is a good start when it comes to getting a sense of general exposure to water stress. However, it does not tell the full story of the financial exposure or value-at-risk of physical assets based in water-stressed areas that may be especially important to a company’s operations but cannot be easily moved, for instance. Disclosure of the location of key company assets would enable investors to better understand and so price risks relating to water stress.
Importantly, there is nothing in the ISSB standards about the often-overlooked issue of local water quality, which can be even more important than water availability in certain areas, especially urban areas. CDP addresses water quality in its water-related disclosure requests.
2. Clear definitions of materiality are needed
One of the most important gaps in reporting standards relates to materiality, where the focus has been mainly on operational use of water: ie. how dependent a company’s operations are on water. However, companies’ own impact on water (negative and positive) as well as their water resilience today and in the future, is critical.
Many companies say that water is not a material risk for them because it is cheap, but in many parts of the world water is heavily subsidised and so prices do not accurately reflect the dynamics of water supply and demand. Indeed, because of water’s importance to all aspects of life, the lowest prices are often found in some of the most water-stressed areas.
To create a realistic and decision-useful picture of their material risk exposures, and capture the full economic value of water to their operations, companies should use shadow water pricing. This involves placing an estimated total economic value on water used at a specific location, factoring in local water stress and population, as well as alternative uses for water including agriculture and supply to households. Veolia’s “True Cost of Water” tool is one illustration of how these principles can be applied.
In addition to disclosing water risks in their direct business operations, companies also need to consider and report on indirect water risks and exposures in their supply chains. They must take a long-term strategic view as well as looking at more immediate issues.
3. Greater focus on opportunities and solutions is needed
Much reporting currently focuses on risk mitigation and water stewardship, which are important, but neglects opportunities to tackle water shortages and pollution. Metrics and disclosures relating to water solutions are often overlooked.
The investment opportunities in products that can reduce water consumption and waste, improve water quality and eliminate pollution are critical and very significant, however. There are three key areas of opportunity here – water infrastructure, water treatment and water provision – as outlined in our 2021 report.
These should be approached alongside solutions to the pressing challenges of climate change and biodiversity loss. The standards should identify how climate change, water and biodiversity are intrinsically interconnected and must be considered and addressed together.
Engaging to plug the gaps in reporting
Measuring water impacts is in many respects more challenging and complex than for climate change, and must always consider the local context. It is also a relatively new discipline and there is a lack of comparability in the data that does exist. Being able to measure water impacts on companies, and their impact on water, is vital to help drive investment towards the most promising technologies and the places where they are needed most.
We believe this makes it more important than ever for investors to engage with standard-setters to address these gaps in reporting principles and metrics, and to help address the systemic underestimation of water risks and impacts.
Lisa Beauvilain is head of sustainability & ESG at
Impax Asset Management
Johan Florén is head of communications and ESG at AP7