Institutional investors are paying a lot more attention to the potential financial impact that flooding, water scarcity, water pollution and other water risks could have on their portfolios—and financial advisors should too.
According to an assessment by Ceres, a nonprofit focused on sustainability, more than 50 percent of the components of the S&P 500, MSCI World, MSCI Emerging Markets and Russell 3000 indexes are exposed to medium to high water risks.
Even fund managers whose strategies don’t have an environmental, social and governance (ESG) theme are starting to do more water due diligence, says Monika Freyman, a CFA and the director of investor engagement on water at Ceres.
The Investor Water Hub, a working group Ceres started in 2015 with two-dozen institutional investors seeking to become more water aware, has grown to more than 110 members.
“Climate change risks are often manifesting as water risks,” said Freyman, noting that floods are becoming more frequent and droughts are getting longer. In the near term, water is the climate exposure that’s the “most catastrophic and most material,” she said.
This week, a judge in Brazil ordered Brazillian mining giant Vale SA to pay for all damages related to its deadly dam collapse in January. He said $2.9 billion of Vale’s assets would remain frozen by the courts. Vale, which knew its dam was at heightened risk of collapsing, posted a first-quarter loss of $1.6 billion.
Newmont Mining Corp. (now Newmont Goldcorp) was forced to abandon a $5 billion mine in Peru following community concerns about water pollution and water shortages, noted Freyman.
Another poster-child for water risks, beverage behemoth Coca-Cola, was forced to abandon bottling plants that competed with local water needs in drought-plagued parts of India and has faced boycotts from retailers there, she said. Last year, floods in Japan severely disrupted and caused losses for a Coca-Cola bottling subsidiary.
Water risk is also rising in the U.S. According to Reuters Breakingviews, the Colorado River, whose average flow has dropped by a fifth since 2000 and is set to fall further, supports about $4 billion in GDP and at least $1.3 trillion in stock value across seven U.S. states. Ceres has identified a handful of major food companies with direct exposure to potential disruptions of water supply in the region and noted many companies may be indirectly impacted.
Freyman encourages financial advisors to be aware of sectors with high water dependencies or water risks—including energy production, mining, food and beverages, chemicals and semiconductors.