Asset owners may be facing the imminent impact of the coronavirus outbreak on their investments. But over the long term the difficulties of many countries in sourcing sufficient fresh water is going to become an increasing concern.

Meeting this need will become increasingly important. But for asset owners and fund managers alike, a particular challenge for water risk is the lack of established methodologies to value or measure them.

“To be honest, we don’t know how to fully value all of these water risks and put that into a discounted cash flow or weighted risk index,” said Dharisha Mirando, head of investor engagement and water valuation risk at China Water Risk. “Because it’s locational, it’s much harder than valuing carbon, much more complex and time-consuming.

“Do investors have the time or the expertise to do all that? Probably not.”

CWR is currently seeking to establish a valuation methodology and expects to have a report ready by the end of this year. “As an NGO, we are here to try to reach a consensus on where to start on valuing. Then investors, banks and so on, can go off and do their own thing.”

Given the lack of standardisation, what can asset owners quickly do? Juliette Macresy, head of Greater China and Southeast Asia for ESG consultancy Vigeo-Eiris (VE), believes a positive impact is possible in a number of ways.

“The most direct approach might be to undertake engagements with the companies you hold and work to set long term water consumption and emissions standards. Alternatively, you might want to look to drive investments into so called ‘solution companies’.  This includes companies developing desalination technologies, water treatment technologies and rainwater harvesting technologies.”

Investors can also focus their attention on the most stricken areas. In China, for example, dairy product producers Mengniu and Danone are building three provincial water-saving enterprises and seven municipal water-saving enterprises. Pat Dwyer of sustainability advisory firm The Purpose Business suggests there is ample scope for such ideas to be scaled up across the region.

Plus, investors can support the development of thematic indices that leverage the narrative of the Sustainable Development Goals – and invest in sustainability bonds that back water-conserving projects.

One example is the green bond recently issued by the Japan Finance Organisation for Municipalities. Conditions around the use of the bond’s proceeds pertain to water resource conservation, sustainable water management and water pollution control.

Gemma Jones, the head of environmental issues at the UN’s Principles for Responsible Investment, believes institutional investors have a critical role to play: “Asset owners are universal owners. Some regions of the world may experience a decline in their GDP growth rates of 6% by 2050 if the right policies and water management practices are not implemented.”

As water becomes a scarcer resource, investors will need to do more than just apply exclusion filters and avoid fossil fuels. Asia’s asset owners must become more demanding about how their investments handle it.

CHECKLIST FOR INVESTOR ACTION ON WATER

Pat Dwyer of The Purpose Business offers some pointers on how investors can formulate an investment strategy, and the questions they should ask:

The Sustainability Accounting Standards Board offers a basis to understand the commercial impacts water risk and therefore the threats of water scarcity.

Risks centre on the amount of water withdrawn from all sources, which include surface water (including water from wetlands, rivers, lakes, and oceans), groundwater, rainwater and water and wastewater obtained from municipal water supplies, water utilities, or other entities.

Investors ought to hold their investments accountable to the sources of water, based on their different risk profiles. Also, they should know if a large portion of withdrawals are from non-freshwater sources (fresh water < 1,000 parts per million of dissolved solids).

You need to know:

• Whether water is withdrawn in locations with high or extremely high baseline water stress as a percentage of the total water withdrawn

• Understand a company’s water management risks and what mitigating efforts it is taking – especially for water intensive industries such as fashion and textile, food and beverage, agriculture, chemicals. This is especially important for China, a nation with 20% of the world’s population but 7% of its freshwater reserves. A key weakness in China’s infrastructure is that 96% of its power generation requires water 

Investors should also asses their
portfolio exposure to:

• Water sources and location, (e.g. bottling plants in areas of acute water stress)

• Water intensive processes including consumption, efficiency, outflow, involved individual businesses, whether direct or indirect

• Quantify water efficiency, such as how much water consumption is required per dollar of revenue

Where water is a material factor, consider different scenarios, like any other risk item – the likelihood/probability of the risk and the scale of impact. Also note the uncontrollable aspects of water, including geo-political and national policy including levies and supply.

Require invested companies to do a water audit and price water risk into investment decisions. And demand that asset managers both learn about the topic and engage investments on it too.

Finally, invest in innovation that reduces reliance and blind dependence on water – from low-flow water taps to no-water intensive versions of machines, appliances, processing.

This article was adapted from a feature on the risks of water scarcity that originally appeared in AsianInvestor’s Spring 2020 edition.