by Boston Common Asset Management
If you have funds to invest, you almost have certainly have access to one of the great benefits of a developed economy: clean running water. You don’t worry that you risk falling ill that by washing your hands, filling up a coffee mug, or brushing your teeth. Water is so important and so ubiquitous that, strangely, we often forget about its importance, not only to ourselves but to all of the businesses in which we invest and the communities which those businesses serve.
As unlimited and accessible as water may seem from the sinks of our homes and offices, the twenty first century has revealed more than ever that our economy and our ecosystem rest on the wise stewardship of constrained freshwater supplies. We are facing rising challenges ahead. According to projections from the research organization CDP, under current “business as usual” water management practices, approximately $63 trillion – 45% of projected global GDP – will be placed at risk by 2050. It is time for executives in every firm to realize that if water is a growing constraint, then those who enable customers to be water efficient are likely to be better performers in the long run.
The Need for Water Stewardship
Though our planet is covered with water, most of it is undrinkable. Only three percent is freshwater, much of it distributed unevenly. On the demand side, agricultural, industrial, and residential use has risen with population growth, now targeted to increase to 18.5%, to 8.8 billion people, by 2020. The World Bank forecasts that by 2030 half of the world’s population will be living in water stressed areas. For example, India currently holds 4% of the world\’s water but supports 16% of its population. Given new demand by key industries such as manufacturing and agriculture, increasing infrastructure, and growing urban populations, by 2020 India will be well on its way to becoming a water scarce nation.
Inadequate water not only threatens the prosperity of businesses, it actively harms local communities. Poor water supplies dramatically increase the risk of disease. Women often find themselves forced to carry heavy containers over great distances to obtain water for their homes and sustenance crops. Such necessary trips also expose women to attack in transit.
As water becomes more scarce, communities increasingly must compete with their neighbors for supplies, a form of “hydropolitics”. According to researchers at Oregon State University, there are 276 trans-boundary river basins in the world. While water scarcity may act as a trigger for discord between nations, superior water management can also lead to international collaboration. Over the last decade, there have been nine hostile actions, such as troop movements, in response to water supply disruption, and 394 incidents where leaders used combative language to address water management. However, there were also 580 incidents where leaders used positive or supportive language in policy talks and 250 agreements between nations to support water management projects.
Water Related Risks for Investors
Ignoring the problem of water endangers shareholder value by creating physical, reputational, and regulatory risks for businesses. The urgent biological necessity of water, combined with its deep significance in every culture, mean that people react powerfully to its absence. Water scarcity can thus raise production costs, hurt brand image, and in the extreme, impair a company’s license to operate at all in a community. If water becomes limited, companies and their suppliers may find their ability to grow, or continue operations, constrained.
Investors also underestimate the significance of water as a key input in many industries. In the energy sector, water is critical for extraction, refining and electricity generation. In the semiconductor industry, water is central in making and rinsing chips. In the apparel industry, water is used to make and rinse fabrics in laundry mills, as well as to grow cotton, which soaks up three per cent of the world’s agricultural water. Indeed, agriculture currently accounts for 70% of total global freshwater withdrawals while polluting local watersheds through effluent control and fertilizer runoff.
Water limitations may arise not only from physical scarcity or from policy and allocation decisions. When communities feel that their water is threatened, they act aggressively to protect it. The Canadian firm Barrick Gold, in pursuit of 15 million ounces of gold reserves at the Pascua-Lama mine on the border of Chile and Argentina had to suspend construction after concerns about local groundwater pollution surfaced. The company had already invested $5 billion into the project. In order to continue mining in Chile’s Atacama Desert, BHP Billiton had to built an unforeseen $2 billion water desalination plant.
Coca Cola, which sees India as an important future market, has faced challenges in multiple communities in that country around its perceived contribution to water shortages. In 2004, in Kerala, Coca Cola was unable to renew its industrial license because its operations were believed to be contributing to a drinking water shortage. In July of 2014, after concerns were raised over its use of groundwater led to regulatory delays, Coca Cola also froze the expansion of a bottling plant in Varanasi.
For these reasons, executives must learn to manage the company’s water supply not only under their direct control but also within the supply chain. Though Nike only uses 6% of its water in directly owned and operated facilities, a whopping 73% of its water use comes from the production of its raw materials, primarily cotton. Molson Coors has very minimal direct exposure to water scarcity in the actual production of beer, but the production of barley and other agricultural commodities within its supply chain account for 98% of its water use.
In addition to the potential loss of a license to operate, there are risks associated with the costs of procuring increasingly scarce water. Needing to drill deeper wells, to pipe water from greater distances, to build desalination facilities, etc., all undermine a company’s long-term profitability, shrink margins, and increase uncertainty in operational forecasting.
Corporate Water Stewardship
Though many companies emphasize water efficiency, companies must further ingrain water stewardship into their cultures and their supply chain practices. It is our role as an engaged investor to encourage firms to do so. Boston Common expects that corporate water resource management strategies include the following:
• Community Engagement. Companies should engage with local communities around water needs and participate in public policy that supports healthy water ecosystems.
• Assess Impact. Companies should conduct assessments of water use and water related risk in their business strategy and supply chain.
• Reduction in Use. Companies should set goals, in direct operations and within the supply chain, for water consumption, pollution reduction, and efficiency efforts. They should show improvements over time in meeting these goals. They should seek opportunities to formulate their products to enable greater water efficiency by the end user.
• Transparency. Companies should publically disclose their water management programs and water use footprint and participate
Board Involvement. Companies should discuss water strategy at the board level, with executive management taking responsibility for integrating water into the company’s business plan, as well as ensuring compliance with water related policies.
In particular, public corporate disclosure and reporting are necessary for investors to be able to assess the effectiveness of water stewardship programs. Increased corporate transparency around water accounting and reporting helps provide investors with both quantitative and qualitative assessments of their portfolio’s exposure to countries and sectors facing water risks. A number of tools have been developed to help encourage useful disclosure for investors. CERES a coalition of investors and companies focused on sustainability leadership has helped set higher expectations for how companies manage water.
Investors Addressing Water Risks
At Boston Common, we integrate water concerns into our portfolio construction process. We also actively engage with companies held in our portfolio to help them understand their exposure to water risks and adopt appropriate policies and procedures within their operations and supply chain.
Portfolio Construction
Water use and management are criteria used in evaluating potential risks and opportunities of our portfolio companies and prospective investments. We work to identify companies that integrate a water resource management strategy into their business planning. We also seek industry leaders that develop innovative products and provide solutions that help tackle water pollution, improve water quality, enable water efficiency and increase water savings.
“Solutions Companies”
Currently, approximately 5% of Boston Common’s global strategy is invested in companies that are involved in water, waste water quality, or water management product offerings. We evaluate these revenue streams on a case-by-case basis. Some examples of past or current investments include companies that lead in home drinking water systems (3M), develop water purification and sewage treatment plants (Kubota), or develop non-potable water sources for their hydraulic fracturing operations (Apache), amongst others. We also look for companies leading in their direct and indirect water use management, such as Unilever which has conducted a baseline assessment of supplier water use and is working with a subset of its contractors to reduce their water use.
Active Ownership
As long term oriented investors, Boston Common also partners with companies and a wide range of stakeholders to encourage greater attention to the risks and opportunities relating to water. As investors, we encourage industry-wide responses to water scarcity. This has included encouraging companies, particularly those in Asia, to respond to the CDP Water survey. For many Asian companies the CDP Water Survey is a starting point to begin to assess and manage water resources within their own operations and their supply chains.
Boston Common has also helped to establish best practice standards for the fracking industry to reduce water use and encourage water recycling. We have also worked with the Interfaith Center on Corporate Responsibility (ICCR) to develop resources around corporate community consultation practices. Boston Common has worked directly with individual portfolio holdings such as Veolia and PepsiCo to discuss access to water and sanitation as a human right and J Front Retailing and VF Corp to examine water management in the supply chain.
Looking Forward
At Boston Common Asset Management, we care about water management from many angles; as investors, environmentalists, and humanitarians. With every passing year we are learning that growing water scarcity poses serious risks for businesses and communities alike. Industrial activity, unsustainable consumption, and pollution have all put pressure on global water reserves and availability. In addition, climate change related events, such as extreme droughts and frequent floods, have further exacerbated the water crisis, making water flows inconsistent and unpredictable.
We can no longer afford for this life-giving resource to be invisible and taken for granted. To be good stewards of their assets, investors, corporate board members, and policy makers must increase their attention to water and the essential role it plays within healthy ecosystems and economies. We must tap the power of measuring, reporting, managing, and wise stewardship to make progress. Otherwise, as Joni Mitchell sang at the beginning of the environmental movement, “we won’t know what we’ve got ‘til it’s gone.”
Article by Boston Common Asset Management, an investment manager and leader in global sustainability initiatives. The firm\’s unique investment process enhances conventional investment analysis with its proprietary Environmental, Social, and Governance (ESG) framework. Through targeted engagement efforts, Boston Common seeks to improve transparency, lower business risks, and promote long-term thinking by corporate management. Since its inception in 2003, Boston Common has built a strong investment record and has meaningfully improved corporate practices in the U.S. and abroad. For more information go to- www.bostoncommonasset.com
The information in this document should not be considered a recommendation to buy or sell any security. There is no assurance that any securities discussed in this report will remain in an account’s portfolio at the time you receive this document. The securities discussed do not represent an account’s entire portfolio and may represent only a small portion of an account’s holdings. It should not be assumed that any securities transactions we discuss were or will prove to be profitable. Past performance does not guarantee future results. All investments involve risk, including the risk of losing principal.
