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Industry voices

Commentary: Wall Street and water — getting a grip on a slippery risk

Despite water's central role in all aspects of life, including virtually all economic activity, it has long been an issue neglected by businesses and, until recently, by investors. But momentum is shifting, as the twin risks of rising global water demand and rising climate-driven water stresses are finally hitting home. In just the past few weeks, record hurricanes and typhoons have left millions without water.

The global investment community is beginning to recognize that water is a precious — and not an endless — resource. And investors are seeing that far stronger responses are needed from governments and the corporations they invest in to avoid potentially catastrophic shortages and degradation in the years ahead.

The challenges are already visible today, including record heat waves and droughts in Europe and Asia this summer, dire water shortages in South Africa and, according to at least one study, the fact that the majority of the world's groundwater sources are now potentially depleted beyond recovery. A 2017 MSCI analysis of food companies in its All Country World index noted that $459 billion in revenue may be at risk from lack of water available for irrigation or animal consumption and $198 billion is at risk from changing precipitation patterns affecting current crop production areas. Population growth, deepening climate change impacts and large-scale pollution compound these challenges.

While agriculture accounts for 70% of global human demand, water is a vital input for companies across the economy, including apparel, beverage, electric power, mining and high-tech. All face wide-ranging water risks — physical, regulatory and reputation, among them. In fact, more than half of the more than 600 global companies recently surveyed on this topic expect water risks to materialize within the next six years.

Investors are increasingly mindful of these risks, which also threaten their returns. Dozens are working together to develop resources such as Ceres' Investor Water Toolkit, which outlines steps for evaluating and acting on water risks across investment portfolios.

Investors are also engaging directly with high-impact companies, especially in food and agriculture. Earlier this year, investors filed a shareholder resolution with Tyson Foods, one of the world's largest meat producers, requesting that it adopt a water stewardship policy to reduce pollution impacts from its suppliers. After the resolution was supported by 63% of independent shareholders, the company committed to improve water, soil and fertilizer practices on 2 million acres of its supplier land.

As investors move up the learning curve on water's multiple economic and political dimensions, companies can expect ever clearer expectations from shareholders. Increasingly, these expectations extend beyond mere disclosure of water data, to challenging the highest-impact industries to protect and preserve fragile water ecosystems, achieve zero liquid discharge from factories, and support governments and local stakeholders to restore degraded watersheds. Such expectations are both timely and critical to reaching the United Nations' Sustainable Development Goal 6, which seeks to ensure sustainable management of water globally by 2030.

A growing number of investors, including Impax Asset Management, KBI Global Investors and Walden Asset Management, are in fact beginning to assess if their investments are helping achieve SDG6. Dutch pension fund PGGM recently took this type of analysis a step further and recently teamed up with scientists to assess quantitatively its water performance on a subset of holdings.

Some fund managers are setting ambitious quantitative targets. Witness $56 billion asset manager ACTIAM, which has set out to achieve a water-neutral investment portfolio by 2030, which it defines as investing in companies that "consume no more water than nature can replenish, and cause no more pollution than is acceptable for the health of humans and natural ecosystems."

Water represents tremendous risks — and opportunities — for major companies and investors. Yet, as a recent analysis by CDP shows, the vast majority of water-exposed companies are still lagging, with water targets — if they have them at all — that lack in ambition. That needs to change — quickly and across the board.

Brooke Barton is senior director of water programs at Ceres, Boston. This content represents the views of the author. It was submitted and edited under P&I guidelines but is not a product of P&I's editorial team.