Investors size up long-term water risks

Major investor Insight Investment has begun evaluating the long-term risks posed by water scarcity. Firms in water-intensive sectors, such as food and drink, clothing and metal and mining, need to manage the risks to their profitability, it warns.

Insight Investment, one of the UK’s largest asset managers, predicts water will become one of the "defining issues of the 21st century, setting boundary issues on how businesses operate." Companies which ignore this increasingly significant issue "do so at their peril", it warned in a report issued in March.1"The theme of water was identified by both our investor responsibility team and our global investment team as an issue which is rising up the agenda," said Jennifer Kozak, an investor responsibility research manager at Insight. "We are interested in the risk posed to the companies in which we already have investments and those we are thinking of investing in."

According to the United Nations, if present consumption patterns continue, two out of three people will live in water-stressed conditions by 2025. In its 2000 Global Environment Outlook, it says the declining quality and quantity of the world’s freshwater resources may prove to be "the dominant issue on the environment and development agenda of the coming century".

Insight underlines how these trends could translate to significant business risks: increased input costs, capacity constraints, supply chain disruption, poor product quality, compliance expenses and possible plant closures. All of which, they say, could lead to higher operational costs and capital expenditures, which might ultimately impact on business profitability.

Firms in sectors relying heavily on water - such as utilities, food and drink, metals and mining, pulp and paper, textiles and chemicals - are particularly exposed, Insight warns.

It wants to see these companies consider water in their business strategies and develop "effective, proactive strategies" for dealing with potential problems relating to water quality and supply.

The issue has already been rising as a business risk for the largest water users. Brewers are working to reduce their water footprint (ENDS Report 381, p 9 ) and food multinationals, such as Unilever and Nestlé appear to be taking the issue seriously.

Nestlé, which has 49 factories in water-stressed countries, claims it is focusing on these sites to "understand the challenges" and "prompt local stress assessments that generate new water-saving projects." Our concern, it says, "is for our operations, but also the sustainability of water resources in future."

It is currently developing its own water stress index to "better understand and monitor [the] specific risk any potential water issue would pose on operations and the wider community" and to inform future strategy development.2

But this is by no means standard practice according to Rory Sullivan, head of Insight’s investor responsibility team: "Some companies are still at square one. They haven’t brought the issue together and dealt with it in a strategic way. In terms of investment performance, it’s important that the company controls or manages these risks properly."

Whether the rest of the investment community is alert to these risks is uncertain. Many still view water scarcity as an opportunity to be pursued through investment in companies providing water solutions" such as water-saving gadgetry or treatment technologies. Few questioned by ENDS could confirm that they systematically considered impacts on major water users beyond the top water-using industries.

"I’m not sure whether the investment community clearly understands the risks when companies are operating outside the UK," said Jennifer Kozak. "Really, it is only now starting to look at it more closely."

One problem is there is no standard way to cost or assess water risks. The UN Environment Programme’s Finance Initiative is working to increase awareness of water risks among financial institutions and to develop a common means of assessment.

It has established an advisory group of commercial banks, investors and asset management firms which are developing water-related risk management guidelines. It hopes this will provide a way for financial institutions to identify risk exposure when engaging with businesses within different sectors.