Investors have a thirst for better corporate water management
Water is essential to life. It accounts for two thirds of the earth’s surface and two thirds of human body weight – indeed our brains are 95% water[1]. Unfortunately more than 97% of earth’s water is salty seawater[2] and the bulk of earth’s freshwater is locked in polar ice caps, meaning there is relatively little left for humans.
So important is water to people and the planet, that the UN Sustainable Development Goals (SDGs) make ‘access to clean water and sanitation’ and ‘oceans conservation’ a key priority. So it is apt that much of the information around World Water Day this week has been focused on ensuring that business manages water use in a responsible and smart way.
Businesses can’t afford to go with the flow…
Industries from agriculture to apparel, extractives to energy require large and secure access to water. For example, a meat processing company will use an estimated 2,400 litres of water to produce a hamburger,[3] and a whopping 4,650 liters of water to produce a 300 gram steak.[4] Yet by 2035 some 40 per cent of the world population is expected to live in areas facing water scarcity,[5] putting companies in competition with people and farming.
It is vital therefore that companies use water responsibly, both for the health of society and for their own financial health. Companies that fail to manage water efficiently while protecting access for local communities endanger their ability to operate and ultimately damage value. Recent data from CDP, for example, indicates that in 2015 water related impacts cost companies US$14bn,[6] which is about the same as the GDP of Jamaica.[7]
Something in the water
Alongside the limited freshwater availability in many parts of the world, sits the issue of industrial water pollution. A significant proportion of the world’s freshwater resources are contaminated with pollutants from farming, energy generation and other industries. It is estimated that 70% of industrial waste in developing countries are dumped untreated into waterways[8], limiting usable water supply. In the US, 40% of our lakes are considered too polluted for fishing, aquatic life or swimming.[9]
Therefore managing water pollution is also a critical part of ensuring safe and secure freshwater supplies for the future.
What can investors like Boston Common do?
There are three key areas where investors can use their influence as shareholders to help ensure sustainable water use by companies. They are i) encouraging water disclosure, ii) improving behavior, and iii) allocating capital to those providing solutions.
Investors are increasingly asking companies to disclose how water is used and water risks managed as an important first step, because if something is not monitored it cannot be managed.
At my firm Boston Common Asset Management, water is a long term and on-going engagement theme. For example since 2013 we have engaged with a number of companies including J. Front Retailing, Kao, Panasonic, Orix, Shiseido, and VF Corporation to encourage them to report on their water use via the CDP Water Survey. As a result, VF Corp completed its first CDP Water Report in 2016. They are now working with WWF to develop a global water strategy that addresses water use and impacts throughout its facilities and supply chain.
In terms of improving corporate water management, we have been proactive with companies in our portfolio to encourage responsible use of water. For example as part of our eco-efficiency drive we have asked Air Liquide, an industrial gas company to improve the efficiency with which they use water, especially where their facilities are located in areas of high water stress. EOG Resources, another company engaged under this initiative, has recently implemented a pre-drilling water testing program for all its US operations.
Similarly, a multi-year engagement has led Apache Corporation to develop innovative water approaches such as the use of brackish water, and water recycling, ,and cutting freshwater use for hydraulic fracturing new wells in the dry conditions of west Texas. Not only do these initiatives reduce stress on local freshwater sources, they have also helped to reduce costs. We have also worked with French firm Veolia Environnement for a number of years regarding the protection of water access and clean sanitation as a human rights issue.
As well as ensuring our companies manage water risk, Boston Common also seeks out those companies providing solutions to water challenges. For example,
increasing water scarcity means many industries will have to rely on wastewater recycling or desalination to a growing extent in coming years. That trend is good news for a company such as Japanese firm Kubota who are involved in wastewater management solutions around the world. While British company Spirax-Sarco, who manufacture water efficient steam systems and pumps projected a 30% increase in earnings per share in 2016.
New tools available to help investors and companies
With water risk rapidly rising up the private sector agenda, a number of tools and resources have been developed to help link water risk to valuation. For example tools such the WWF Water Risk Filter and World Resource Institutes Aqueduct tool. These help companies assess their exposure to water risk at the country and water basin level, and are being updated to highlight how water risk can impact financial value.
The NGO CERES has created the Investor Water Hub to provide a forum for knowledge exchange and share leading water integration practices. While for companies, the UN has launched the UN CEO Water Mandate Action Hub – an online platform that allows users to identify opportunities for collective action.
The growing scale of water scarcity poses an enormous challenge to the world, but it can also be viewed as a sustainable investment opportunity. If we can empower investors and companies to invest in solutions and manage water risk then we have a better chance of protecting precious freshwater supplies for the generations to come.
The information in this document should not be considered a recommendation to buy or sell any security.
[1] http://www.freedrinkingwater.com/water-education/water-health.htm
[2] https://en.wikipedia.org/wiki/Water_distribution_on_Earth
[3] http://www.huffingtonpost.com/2012/06/25/hamburger-water-footprint_n_1624394.html
[4] http://www.purenano.co.uk/water-footprint-of-products/
[5] https://www.ft.com/content/fa9f125c-0b0d-11e7-ac5a-903b21361b43
[6] https://www.cdp.net/en/water
[7] http://statisticstimes.com/economy/countries-by-projected-gdp.php
[8] http://www.nationalgeographic.com/environment/freshwater/pollution/
[9] https://www.dosomething.org/facts/11-facts-about-pollution
