‘We want companies and our investment managers to think like universal owners’: HESTA’s Daniela​ Jaramillo on water risk

Ceres’ Kirsten James talks to investors about valuing water

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To highlight the escalating global water crisis, the UN has named 2021 the year of 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.

‘Companies need to start thinking of their ultimate shareholders, people like HESTA members, and how their activities and externalities impact them. Therefore, even when water is not a material input for companies, we want them to recognise and address their negative impact on the communities and environment’

Today, Ceres’ Director of Water, Kirsten James is speaking with Daniela Jaramillo, Senior Responsible Investment Adviser at HESTA. HESTA is an Australian superannuation fund with more than 880,000 members and $45bn in AUM. They are a specialist industry pension fund dedicated to people employed in the health and community services sector.

Why do water issues matter to HESTA?

At HESTA, we are focused on improving the financial futures of our members and that involves not only looking at the final balance they have in their account when they retire, but that they are able to retire with a healthy society and planet. We see water risk as a systemic risk to our portfolio. As a universal owner – a large, diversified, long-term investor that has exposure to a slice of the global economy – we can’t diversify away from systemic risks. We see water as a systemic risk because the impacts of water availability and water pollution are felt across the economy and present in several ways. For all societies, water is fundamental to human life and is a human right, the role of water in human consumption and effective sanitation is a precondition to the health of communities. More directly to economies, water is a material input in many basic sectors such as water services, food and agriculture, mining and some heavy industrial and energy uses.

How does HESTA’s location in Australia, one of the most impacted areas in terms of water stress, affect your perspective on water issues?

The issue of water is particularly relevant for our members. Living in Australia, the issue of water is a very relevant one because we live on the driest inhabited continent and water (in)security is a real and growing issue. The World Resources Institute’s 2019 national water stress rankings has Australia ranked 50th and in the medium-high water stress category. Due to our geography, rainfall is low and erratic over most of the country. Southern parts of Australia are becoming drier with decreasing rainfall leading to reduced streamflow in the Murray-Darling Basin, the country’s main river system. This valuable water system runs through approximately 1 million square kilometers of land and is responsible for 40% of Australia’s agricultural produce and supports more than 2.2 million people alongside animal, plant and landscape ecosystems and natural cultural heritage value. The Murray-Darling Basin is grappling with significant environmental, economic and social issues including water supply and trading, land use and irrigation, water quality issues such as fish deaths, salinity, acidity and toxic algal blooms. The Australian economy relies heavily on water-intensive sectors such as agriculture, energy and mining. Water can pose material risks and impacts to a company’s business and social license to operate, particularly if it operates in water scarce regions.

What is HESTA’s strategy to achieve positive outcomes on water issues?

The HESTA Board approved a statement detailing how we consider water-related issues in our investment decision-making to improve the long-term investment returns for members and positively impact the world in which they live, work and retire into. Our strategy includes mobilising capital for positive outcomes, since the challenges faced by industries that depend on water can represent investment opportunities. We also act as stewards for the companies we are invested in to ensure they are thinking not only on what issues are material to them but also how they are impacting the planet and societies. Beyond our portfolio, HESTA advocates for issues at the public policy level and collaborating with like-minded organisations to amplify our impact. This is why HESTA is proud to be a founding member of the Valuing Water Finance Task Force organized by Ceres – I am excited to be part of the team building the business case for water stewardship.

What are your expectations for companies regarding their management of water issues?

As with any other ESG issue, companies for whom water represents a material risk to their operations or supply chains must have a strategic approach to water use and management. Industries that fail to manage water risks can face financial impacts through increased costs and restricted supply as well as reputational damage from a loss of social license where they do not appropriately manage water supply and waste/pollution into waterways that impact communities and the environment. However, we also want companies and our investment managers to think like universal owners, to whom real world outcomes and systemic risk matters. Therefore, we want them to see that freshwater is much more than an input in industry operations; it has a critical role in supporting natural biological, community, and economic systems and activities, creating risks and opportunities. Companies need to start thinking of their ultimate shareholders, people like HESTA members, and how their activities and externalities impact them. Therefore, even when water is not a material input for companies, we want them to recognise and address their negative impact on the communities and environment. Companies should consider how their operations impact water availability, conservation and quality from the view of multiple stakeholder values. This is particularly important as regulatory standards might not exist or be stringent enough, so companies should seek to understand appropriate standards by considering community, civil society expectations, and future users’ expectations.

How do you approach advocacy on water issues?

Being a finite resource that is rarely priced to reflect its scarcity value, water issues require strong governance and effective multiple-party efforts to ensure it is managed in a way that is equitable and beneficial for broader society. We believe that a collaborative approach between governments and regulators, NGOs and the private sector is required for sustainable water management. At times, this might involve the existence of water markets, however, strong regulatory structures are required, noting that prices rarely reflect scarcity value or the value to communities and ecosystem services provided by water. Policy should aim to create the right incentives for businesses and investors to get involved by considering the needs of other stakeholders and safeguarding the sustainability of water sources.

Why are you a part of the Valuing Water Finance Task Force?

We are big believers in the Principles for Responsible Investment’s proposed framework Active Ownership 2.0, in which investors are encouraged to achieve outcomes at the system level. We believe the only way of achieving ambitious outcomes is through collaborative initiatives like the Valuing Water Finance Task Force. This initiative is operating at the right level by focusing on the issues that matter to universal owners like HESTA, and will help build the necessary resources, tools and leadership to change the way the private sector sees water. We hope that as the work of the Task Force shifts to developing corporate expectations for water use, it will help drive companies to systematically change the way they value water across their business.