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Investors Tackle the Impact of Water Scarcity on Their Portfolios

Dutch pension manager PGGM and U.S. bond shop Breckinridge Capital Advisors are confronting corporate water risk.

  • By Katie Gilbert

On a recent trip to New York, Piet Klop, senior adviser for responsible investment at Dutch pension fund manager and adviser PGGM, took in an encouraging sight. At the headquarters of financial data provider Bloomberg, Klop saw a giant map projected on the atrium wall that highlighted the world’s most water-stressed regions. The map was overlaid with another showing how oil and gas company assets might be exposed to water risk.

Klop recognized the water map as part of the World Resources Institute’s Aqueduct Water Risk Atlas, an online tool he had helped develop while in his previous post as a senior fellow at Washington-based WRI. Last year Bloomberg made this tool part of BMAP, the interactive mapping platform available through its terminals.

For Klop, whose Zeist, Netherlands–based firm manages €188 billion ($203 billion) in assets, encountering the map also signaled a sea change. “Seeing that showed me that [water risk] has definitely moved from what used to be an NGO concern to something that is now about ready for prime time and mainstream investor interest,” he says.

Recent events have concentrated investors’ attention on the problems that water scarcity could pose to companies and portfolios. From California to Asia and South America, many regions of the world are suffering serious droughts. Corporations have taken a hit: Last June officials in northern India ordered Coca-Cola Co. to close a local bottling plant amid protests that the U.S. beverage giant was extracting too much groundwater, and this year a Chilean drought has hampered production for the nation’s copper miners. The World Economic Forum’s Global Risks 2015report lists water crises as the top threat facing humanity when it comes to overall impact.

But a lack of transparent, standardized data on companies’ water use is thwarting real investor action on water risks, concludes a March report from Ceres, a Boston-based nonprofit sustainability advocacy group.

“Investors are still at first base,” says Monika Freyman, senior manager of Ceres’s water program and the report’s lead author. “There’s this growing recognition that there’s a need to spend more time on [water risks], but also they feel that whatever they are doing is really inadequate. There’s a lot more work that needs to be done.”

PGGM’s Klop echoes this frustration as he and his colleagues work to address the potential problems that water shortages could cause within the portfolio they manage for €162 billion Pensioenfonds Zorg en Welzijn (PFZW), which oversees the retirement savings of Dutch health care employees and social workers. Although PGGM and PFZW have identified water as one of the portfolio’s four key sustainable-investment themes, Klop confirms that there hasn’t yet been a single case in which water risk alone has led PGGM to exclude or divest from a particular corporation.

He thinks the best way to quantify a given company’s water threat is as a ratio of water dependency to water security, or how much a company needs compared with its local supply.

A product like WRI’s Aqueduct atlas addresses only the security side of the equation. “What I always thought was going to be the most difficult data, the security data, has in fact moved much faster than the company data — the dependency data,” Klop says. “There’s still a lack of consistent, comparable data on corporates’ water performance.”

Klop points out that few companies are willing to even disclose the exact locations of their production facilities or those of their main suppliers, which would allow investors to begin mapping corporate water security risks. He believes identifying a company’s or a portfolio’s risk level must start with lobbying businesses to be more transparent about water use.

That’s the goal of an engagement effort by the United Nations–supported Principles for Responsible Investment. The London-based investor network’s water effort — its first focus on this particular risk, says PRI managing director Fiona Reynolds — launched last August at the White House, where roughly 30 organizations convened to discuss food security and their roles in President Barack Obama’s Climate Data Initiative.

In what Reynolds says will be a two- to three-year exercise, the PRI has teamed up with Swiss nonprofit the World Wildlife Fund and professional services firm PricewaterhouseCoopers to identify the leaders and laggards in water management across 78 companies from various sectors. The PRI and its investor steering committee will talk with the leaders to understand what best practices should look like, create a set of questions and suggestions for water-guzzling companies and start engaging that group by the second half of this year.

Reynolds says investors are responding enthusiastically: So far, 39 firms representing a combined $4.5 trillion in assets have signed on as participants.

Some investors are trying to integrate water risks into their strategies, using the limited data available. At Breckinridge Capital Advisors, a high-grade fixed-income manager based in Boston, staff formally layered water risks into the investment process about two years ago. Robert Fernandez, director of environmental, social and governance research, says the $21 billion firm scores municipal bonds on their threat of repricing because of potential water scarcity.Those with good scores include bonds for public water utilities in western Washington and west-central Florida; water systems in eastern Alabama and western Texas rate poorly.

Breckinridge draws on information from the U.S. Drought Monitor (a weekly map of drought conditions produced by the National Oceanic and Atmospheric Administration, the U.S. Department of Agriculture and the National Drought Mitigation Center at the University of Nebraska–Lincoln), the Palmer Drought Severity Index (another weekly index, run by U.S. government agency the National Integrated Drought Information System) and reports of water-related violations filed by the Environmental Protection Agency.

To score corporate bonds, Breckinridge uses proprietary data from New York–based MSCI ESG Research and from Sustainalytics, an Amsterdam-headquartered environmental research firm, and pores over companies’ sustainability reports. Information on corporate water consumption at the project or facility level would be very helpful in more precisely pricing water risks, Fernandez notes.

Beyond more transparency about companies’ water consumption, investors need water risk analysis tools that calculate how water problems will eventually affect valuations, says Lenora Suki, New York–based head of sustainable finance product strategy at Bloomberg. This month Bloomberg gave a select group of investors a pilot version of a valuation tool that aims to quantify the blows that individual companies could suffer because of water scarcity.

“The next step is to go beyond just saying, ‘There’s this risk and that risk,’ to be able to say what we think the valuation consequences may be,” Suki says.

Paul Reig, who leads the design and development of WRI’s Aqueduct atlas, says that over the past year or so his team has expanded its analysis of how water risks affect specific commodities in energy and agriculture. “[Focusing on specific sectors] is often a hot-ticket item for investors,” he says.

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