Instos face a (literal) lack of liquidity in their assets

Water scarcity is emerging as a major climate challenge for institutional investors. While most attention is on the coronavirus impact, this stands to be a big longer-term concern.
Instos face a (literal) lack of liquidity in their assets

Asia’s water resources are in danger of becoming a scarce commodity. 

Large parts of the region are water stressed, with demand for fresh water outstripping available supply and exploitation exacerbating these problems. Asian economies are still growing and urbanisation rates are rising, which puts even greater pressure on water resources. 

Water research groups in Asia say insufficient water resources will become a critical problem in years to come. And yet large asset owners have been slow to consider the issue within their investment due diligence.

Currently it falls to impact investors such as Hong Kong family office RS Group and privately-funded agencies focused on climate and water projects. RS Group is a core backer of specialist consultancy China Water Risk (CWR), set up in 2011 by a former investment banker, Debra Tan. 

CWR’s Hong Kong-based head of investor engagement and water valuation risk is Dharisha Mirando. She used to work for Stewart Investors in Singapore but joined CWR to help investors incorporate water risks into their due diligence and portfolio management. 

“Our whole objective is to try and get the financial sector to start incorporating these risks, because that will impact their bottom line, so this is our saving in the long run,” Mirando told AsianInvestor. “If we can get this sector to move, then other companies will have to follow.”


This is proving a challenge, with asset owners particularly slow on the uptake. 

“The focus is always on the carbon side, and water is taking a bit longer," said Mirando. "I’ve spoken to institutions such as the Hong Kong Monetary Authority. They read our work and come to our talks, but they say they are a bureaucracy and need time to adapt.”  

It’s not an easy sell, because it requires a new way of evaluating risks. Favouring “better performing” companies and diversifying across sectors doesn’t necessarily reduce the vulnerability of investment portfolios to water scarcity. 

Instead, asset owners need to begin by understanding which sectors are likely, as a result of their core activities, to be imposing water risk around their operations, according to Juliette Macresy, head of Greater China and Southeast Asia for ESG consultancy Vigeo-Eiris (VE).

Typically, this means food, beverage, mining, chemical as well as clothing companies. VE’s research indicates that in the mining and metals sector, “water management is one of the most recurrent areas where we find controversies”. 

The beverage sector is also vulnerable. According to the Water Footprint Network, 340 to 620 litres of water are necessary to produce one litre of soda, and 300 litres are required for a litre of beer.


Pat Dwyer, Hong Kong-based founder of sustainability advisory network The Purpose Business, told AsianInvestor that investors should also understand whether companies operate in water stressed regions. 

“I don’t think most investors fully appreciate how risky their portfolio might be against the different physical and regulatory risks,” agreed Mirando. “If you haven’t mapped it, you don’t really fully understand it.”

By engaging with companies and understanding management’s ESG behaviour and approach, investors should then make more informed decisions. 

“If you can understand exposure and management, you will be positioned well to understand water risk through two lenses: The theoretical risk that the portfolio poses to its environment and the actual capacity of the portfolio’s issuers to manage their responsibilities in this regard,” said Macreasy. 

Regulation is also important, and particularly relevant for companies in China. Gabriel Wilson-Otto, head of stewardship for Asia at BNP Paribas Asset Management in Hong Kong said the country’s government has belatedly understood the severity of its pollution and water stress issues. 

“They’ve done a tremendous job with the Yangtse river clean-up,” he said, referring to the conservation and pollution reduction programme that has transformed the third longest river in the world and created a vibrant economic zone covering over 2 million square kilometres. 

China currently co-chairs the G20 Green Study Finance Group and recently published a detailed study of environmental risk analysis by financial institutions. It is also aiming for mandatory corporate environmental disclosure this year. It has particularly focused on reforming textiles and paper companies. Ultimately, China wants to see environmental risks embedded into its credit lending policy. 

This article was adapted from a feature on water scarcity, which was originally published in AsianInvestor's Spring 2020 edition. 

¬ Haymarket Media Limited. All rights reserved.