According to the September 2017 Ceres report “Feeding Ourselves Thirsty,” food companies rely on 70% of the world’s freshwater to grow crops, feed livestock and process ingredients. Water demands are expected to increase with rising food demands.
Ceres’ Investor Water Toolkit, rolled out in December 2017 and posted on Ceres’ website, helps investors understand the physical, regulatory and social risks associated with water. The toolkit also provides steps for establishing priorities, buy/sell analysis, portfolio and asset class analysis, and water engagement with companies.
Whether looking at equities or fixed income, “investors really have to accelerate their water awareness,” said Freyman.
Know What You Own
Financial advisors concerned about water risk shouldn’t just assume an ESG fund has this covered because these funds “are not all created equal,” said Cyrus Lotfipour, who leads the models and R&D function within the ESG research team at MSCI, a provider of indexes and portfolio analysis tools.
With any fund, “advisors need to understand what’s under the hood,” he said, and to ask fund managers about their processes. For example, does a portfolio underweight or exclude companies “that run the risk of having a water-related production disruption or losing their license to operate as a result of community opposition?” he said.
Water stress is one of the many metrics evaluated by the MSCI ESG Ratings tool. How big a risk it is for a company depends on its industry and on the geographic exposure of its assets, said Lotfipour.
According to MSCI, 37 percent of companies in the MSCI ACWI index have more than 50 percent of their operations located in high stress water regions. Twenty-two percent of companies in the index have a quantifiable water reduction target. Consumer-facing companies tend to be more transparent about water targets, said Lotfipour.
Emerging market economies can be more vulnerable to water risk. Large global equity funds tend to have less water risk, he said, because they’re diverse across geographic regions and industries.
“Know what you own,” he said, “and what the exposure is.”