Wall-Street Warriors Becoming Water Aware
Monika Freyman

Monika Freyman CFA, Director Investor Water Initiatives, Ceres

August 02, 2016

Wall-Street Warriors Becoming Water Aware

Monika Freyman

Monika Freyman CFA, Director Investor Water Initiatives, Ceres

August 02, 2016
Rio São Francisco
Remanso, Brazil – With the lack of rain in the headwaters of the Rio São Francisco, the Sobradinho reservoir lives the worst drought in its history. Photo credit: Marcello Casal Jr/Agência Brasil

Devastating droughts in California, Brazil, South Africa and elsewhere, coupled with global trends of groundwater depletion and water quality degradation are motivating investors to become more water aware. Drought in many regions is causing commodity prices for key ingredients to spike or is translating into higher energy costs, with both economic and societal ramifications. South Africa’s extreme heat and minimal rainfall, for example, are crushing crop production, forcing millions to go hungry and dropping the share value of major food producers. Illovo Sugar recently reported a 36.5 percent drop in full-year profit due to the drought. Mining companies BHP Billiton and Valle recently faced over $5 billion in regulatory fines due to a massive tailings pond spill in Brazil that devastated entire communities. Water-related risks like these are beginning to catch investors’ attention on a hotter, more crowded planet.

With support from The Rockefeller Foundation, Ceres leverages the power of institutional investors, who own or lend to many of the world’s largest companies, to play a more decisive role in protecting the Earth’s freshwater resources. Education is a critical component of this work as many investors are just beginning to understand escalating water risks and their far-reaching impacts on financial returns and ecosystems alike. Recently, Ceres surveyed dozens of global pension funds and fund managers on their strategies for integrating water analysis into investment decision-making, and found that their current practices fell far short in light of growing water risks.

Ceres found it rare for investors to have more than a few elements of the following leading practices:

  • Institutionalizing water risk analysis into daily investment practices (including in investment beliefs and policies, proxy voting guidelines and RFPs) and ensuring that upper management understands the importance of water risk integration;
  • Viewing integration of water risks as an opportunity for deepening understanding of investment risks, developing new investment products and building stronger client relationships;
  • Understanding water risk exposure by asset class and developing a proactive engagement strategy with companies or entities with high water risks;
  • Conducting portfolio water foot-print analysis, with geographic and sector specific lenses;
  • Understanding specific sector water issues, especially in high-risk industries such as mining, energy and water utilities, oil and gas production, food, beverage and textile companies;
  • Leveraging the scientific and academic communities to better inform water security analysis and to develop a network of regional experts to gain context for water-related reputational and social license to operate risks;
  • In buy/sell decision-making, capturing elements of water dependency, security and management risk mitigation response.

To accelerate adoption of these practices, investors need to hear from their clients—from large pension funds, endowments, foundations and individuals—that water risk integration is important.

Unlike carbon risks, material water impacts can wipe out entire investments or balance sheets in the blink of an eye. Newmont and Coca-Cola both had to walk away from major projects recently due to community concerns about water impacts. Companies face other water risks, as well, whether from multi-billion dollar wastewater tailings pond spills into drinking water supplies or massive fertilizer-fed algal blooms in Great Lakes in the U.S. Midwest.

“Once water analysis becomes more systematically embedded into the financial markets, investors will play a stronger role to preserve not only their own capital, but threatened freshwater capital, too.”

Both water quantity and quality challenges are of central concern to Ceres’ Investor Water Hub, a working group comprised of dozens of investors in Ceres’ Investor Network on Climate Risk (INCR). “Hub” members meet every month to share best practices and other innovations for elevating water issues in their decision-making. The Ceres-led group, which receives key strategic advise from the University of California Regents, Norwegian pension fund Norges Bank Investment Management, Breckinridge Capital, Impax Asset Management, Sustainable Insight Capital Management and Dutch pension fund PGGM and other advisory board members, is launching an Investor Water “Toolkit” in early 2017. The toolkit will be a “one-stop shop” online portal of resources, best practices and ideas to help investor peers make sound water analysis part of regular mainstream financial analysis.

Ceres, The Rockefeller Foundation and Hub members hope the Toolkit will also drive systemic change, by expressing investor water research needs to key financial market stakeholders such as the Sustainability Accounting Standards Board (SASB), credit rating agencies, industry associations, and research and data providers to improve their investor water analytics. Once water analysis becomes more systematically embedded into the financial markets, investors will play a stronger role to preserve not only their own capital, but threatened freshwater capital, too.

About Ceres:
Ceres, a Boston-based nonprofit, harnesses the power of key capital market actors—business and investors—to take on the world’s most pressing sustainability challenges, such as climate change, water scarcity and human rights abuses. Ceres produces cutting edge research and tools that companies and investors are using to weave sustainable strategies and practices into their decision-making. Over nearly three decades, its successes span from mainstreaming corporate sustainability reporting via the Global Reporting Initiative (GRI), to successfully petitioning the Securities and Exchange Commission (SEC) to mandate climate risk reporting, to convincing major institutional investors and Fortune 500s that embedding sustainability into their institutions’ DNA is not just doing good, but good for the bottom line.