Commentary: In a changing world, investors must cut exposure to water risk

​Climate change didn't cause the recent monstrous hurricanes, but a warming earth certainly fueled their fury. The food sector, which consumes 70% of our planet's fresh water, is especially vulnerable to extreme weather patterns that are the most visible and devastating hallmarks of climate change. Already, erratic precipitation and hotter temperatures are affecting crop yields and productivity. Climate models predict worse to come.

Diminishing snowpack in many regions will dry up seasonal water supplies that sustain major growing areas such as the western U.S., India and Peru. Crops will suffer more stress as evaporation reduces the amount of water they can soak up through the soil. And farmers will contend with increased weed growth, disease outbreaks and pest infestations — all of which reduce yield and drive up food prices.

Population growth adds to the pressure. According to the United Nations, by 2050, to meet the needs of a projected population of 9.1 billion, water demands are expected to increase by 55% and food demands by 60%.

Investors must act to cut their exposure to water risk, but it time is dwindling rapidly.

The financial fallout of growing water risk is evident.

In headlines and on earnings calls, major industry players — including Nestle SA, The Coca-Cola Co. and Diageo PLC — are disclosing material financial impacts linked to water challenges, including scarcity-driven tariff hikes, agricultural supply chain disruptions and lost growth opportunities in water-stressed markets.

Pioneer Foods Group, for example, a South African packaged goods company, reported a 47% drop in 2017 midyear earnings resulting largely from a regional drought — especially shortfalls in raisin crops and high grain prices.

More than 90 food-sector companies flagged water risk in their earnings calls so far this year, as well they should. Financial risks associated with water withdrawals and wastewater are highly material to the food sector, according to an analysis by the Sustainability Accounting Standards Board.

The implications for businesses that rely on agricultural inputs are profound.

A recent analysis by MSCI Inc. found $459.2 billion in revenue is at risk for food companies from increasingly widespread water shortages for irrigation or animal consumption, and $198.2 billion is at risk from changing precipitation patterns.

But many food companies are unprepared for climate change's profound impact on the water resources that sustain their operations and agricultural supply chains.

Feeding Ourselves Thirsty, a new benchmarking analysis by Ceres that scores the world's largest food companies on their response to water risk, found that while some corporate leaders are making progress — especially Coca-Cola, General Mills Inc., Nestle, PepsiCo Inc. and Unilever — the majority must do more to water-proof their businesses and protect and sustain water supplies. Even with these strong performers, the average score for the 42 companies evaluated is only 31 out of 100 points, based on their water management through governance and strategy, and in their direct operations, manufacturing and agricultural supply chains. The meat and agricultural product industries in particular continue to lag, demonstrating little investment in mitigating water-related risks, even though they have the highest exposure to them.

What can investors do to minimize their exposure to water risks in the food sector?

First, money managers should review their institution's proxy-voting guidelines and policies to ensure support for relevant shareholder resolutions on water risk, while asset owners should ensure their fund managers act on those guidelines.

Second, investors can support efforts to increase and standardize disclosure on food-sector water risk, whether by engaging directly with portfolio companies, joining investor collaborations such as Ceres Investor Water Hub or supporting market-level disclosure platforms such as SASB, the Global Reporting Initiative and the water questionnaire of CDP (formerly the Carbon Disclosure Project) among others.

Third, investors can directly engage with poorly performing companies on performance improvement.

Let this season's hurricanes serve as a wake-up call.

The food sector must put into place water-smart plans to prepare for the inevitable. Starting today, companies need to assess their supply chains and determine how they can prepare for water risks in the age of climate change, set time-bound measurable goals for improvement, equip farmers and invest in water conservation technology. To protect their bottom lines and shareholder value, food companies must make water management a business imperative like never before.

Mindy Lubber is CEO and president of Ceres, Boston, This article represents the views of the author. It was submitted and edited under Pensions & Investments guidelines, but is not a product of P&I's editorial team.