The Role Investors Play in Addressing Global Water Challenges
(Above photo credit: Getty Images, courtesy of Calvert Research and Management)
Responsible investors seek the potential for long-term value creation and positive impact throughout the global capital markets. In doing so, asset managers like Calvert Research and Management look to invest in companies and other issuers that balance the needs of financial and nonfinancial stakeholders as well as demonstrate a commitment to the global commons and to the rights of individuals and communities. Climate change has been a key investment strategy focus, as more investors subscribe to the overwhelming conclusion of climate scientists that the Earth’s climate is warming, and human activity is the primary driver of this warming.
Amid all of the key factors related to climate change, water stands out as the most nuanced – it is both a symptom and a cure. Higher atmospheric temperatures are one of the primary culprits of climate change, causing the expansion of sea water and melting of polar ice, which are projected to raise global sea levels by 0.26-0.77 meters by 2100 in a 1.5-degree scenario and even higher in a 2-degree scenario (note: we are currently on a path above 2 degrees).
In certain regions, water scarcity will likely continue to emerge as a threat to daily life. Different regions face different problems such as access to clean drinking water and adequate wastewater treatment in more agricultural regions and infrastructure and water distribution challenges in cities. Similarly, companies face their own water-related challenges based on what they produce and where they are located. But water also has some of the greatest potential to mitigate the effects of climate change by decarbonizing power generation, industry and transport – which, in total, comprise over 65% of global greenhouse gas emissions.
This naturally leads to the question of the role companies and investors can play. Companies that are leaders in water efficiency and water reuse practices as well as companies offering innovative solutions to global water challenges may be in position to outperform their competition over the long term. Investors can play their parts by allocating capital to companies equipped to meet these challenges. We believe that driving capital to responsible companies in the water industry will drive more investment in solutions to global water challenges.
Ways to Look at Water
The reality of water scarcity is that stewardship is a financially material issue for many industries. Water is essential for natural resource inputs along manufacturing supply chains; negative impacts on scarce water resources can influence a company’s social license to operate and can impact consumer preferences.
A multipronged approach to investing in water is needed to actively address global water challenges as well as to ultimately balance the risk and opportunity. Our ESG research framework identifies water as a scarce resource for the vast majority of the industries that comprise the global economy, with a particular focus on companies that limit their own usage or that of others.
Four key areas of focus are:
- Water utilities and distributors: Responsibly deliver and provide clean water at affordable rates, which we view as essential for economic growth and development.
- Water technology: Have proven or emerging technologies that test, monitor or improve the quality of water, or address the efficient use of water, helping reduce consumption globally.
- Water infrastructure: Are addressing the growing and urgent need to invest in the rehabilitation of aging infrastructure or expand infrastructure in order to deliver clean water to communities and drive economic growth.
- Solution providers: Are leading their peers in water efficiency and reuse practices in the most water-intensive industries, effectively reducing overall water demand.
Companies that are low in water intensity and have implemented closed-loop systems, such as those in health care and technology services, may be in better short- and long-term positions to limit water usage. Our approach to solution providers is grounded in understanding the impacts of technology, infrastructure and services limiting the use of our most precious natural resources.
Within this universe of companies, it’s also important to consider water usage leaders that provide solutions to other issues. Companies mining metals such as copper and lithium are critical to electrification but often operate in water-stressed regions such as South America and Southeast Asia. Instead of avoiding companies exposed to those regions, we have found many of these companies understand their geographic predicaments and have responded by implementing groundbreaking desalinization and solution mining techniques that close the loop.
Finally, responsible investors can play a role in water stewardship efforts through engagement. One critical need is for better disclosure on industry-specific water impacts. Industries’ impacts on their local watersheds vary. Some industries consume vast amounts of water, while other industries’ water impacts come from the conditions of water discharge. Understanding the specific impacts of a company on the environment and the communities it operates in is dependent on better company disclosure. Active engagement directly with company management is one way to advocate for more transparency and consistency of this information.
Article by Suleyman Saleem, Vice President and ESG senior research analyst for Calvert Research and Management, which specializes in responsible and sustainable investing across global capital markets. He is responsible for environmental, social and governance (ESG) research coverage of the industrials and materials sectors. He joined Calvert in 2019.
Suley began his career in the investment management industry in 2010. Before joining Calvert, he was a senior equity research associate at BMO Capital Markets and Susquehanna Financial Group. Previously, he was a research analyst at Episteme Capital Partners.
Suley earned a B.A. in economics and history from the University of Pennsylvania
The views expressed are those of Suleyman Saleem and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Calvert disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Calvert are based on many factors, may not be relied upon as an indication of trading intent.
Investing involves risk including the risk of loss. There is no guarantee that any investment strategy, including those with an ESG focus, will work under all market conditions. Investors should evaluate their ability to invest for the long-term, especially during periods of downturn in the market.
Calvert Research and Management is part of Morgan Stanley Investment Management, the asset management division of Morgan Stanley.