History will be made in New York next week when heads of state from around the world gather for the first United Nations Water Conference in half a century.
The fact that it is being held at all underlines the growing importance of water to the global sustainability project. Water-based issues, from pollution, stewardship, overuse and waste have rapidly risen up the ESG agenda for financial institutions as the risks they pose to capital becomes ever more apparent. A recent report by the Harvard Law School Forum on Corporate Governance predicted that “water metrics will quickly become an incredibly close second to emissions-related disclosures”.
The summit also comes at a time when data and technology is available to help investors direct their money towards the companies and projects that promise to ease those ills. That, according to Cate Lamb, the global director for water security at CDP, couldn’t have come too soon.
“At the moment, most financial institutions are not undertaking any form of water-related due diligence when they make their either investment, loan or insurance or underwriting decisions,” Lamb told ESG Insight. “There are no regulatory requirement to ensure that they report on this topic in the same way that we’re seeing now with climate.
“As a result, we can only assume that the vast amount of money is being used in ways that are enabling unsustainable growth of businesses and the impacts on freshwater resources to keep increasing. But they can be the key to changing all of this.”
Natural Disasters
While the use and abuse of water has long been on investors’ radars, the issue has been given greater focus in recent years courtesy of natural disasters. The devastating wildfires and drought in the western states of the US and torrential rains and floods in Pakistan highlighted how economies are dependent on sustained and sustainable water supplies but can also be threatened when they’re not managed properly.
The profile of water issues has also been given a boost by the recently created Taskforce for Nature-related Financial Disclosures (TNFD). Like the much-adopted Taskforce for Climate-related Financial Disclosures (TCFD), the TNFD offers financial institutions and companies a strategy for reporting their impact on biodiversity in the expectation that disclosure will help identify where and how issues can be mitigated.
Data and technology companies are rising to the challenge of aiding the financial sector’s role in funding change.
In September, for instance, ISS ESG introduced a Freshwater Index series, which helps investors benchmark their portfolios’ water risks. Based on geo-located data, the index is constructed by overlaying water data onto asset and instrument data to offer a picture of how well water is being managed and how water stress and other risks are impacting assets.
“For any given company, based on a geographic footprint, we will classify them as negligible risk, low risk, medium risk and high risk, taking into account both exposure to the risk as well as the job that the company does in managing the risks,” ISS head of index strategy Hernando Cortina told ESG Insightat the tool’s launch.
UK-based NatureAlpha, which provides biodiversity data to MSCI, and Net Purpose, which offers impact data to investors, also incorporate water factors into their metrics. And Ceres has built an Investor Water Toolkit, which provides a wealth of resources including datasets and other tools.
Alternative data companies have also entered the space. Paris-based QuantCube, for instance, uses sophisticated technology to analyse satellite imagery data and assess factors such as declining water levels around the world, proximity of risky assets to stressed water sources and the impacts of water pollution on biodiversity.
Data Gaps
The CDP’s Lamb argued that the chief hurdle to investors’ due diligence is the lack of company-reported data. A recent report by the Future of Sustainable Data Alliance (FoSDA) ranked the volume and quality of data on freshwater use and stresses as “partial”, the second level on a three-level assessment scale. The quality of data on water pollutants and marine ecosystem use was given the lowest ranking.
With regulations on the topic still being developed, corporates lack the motivation to disclose the necessary information, Lamb said.
“It’s easy to identify where water stress might be and to a large extent, where a company’s factories are, however, data associated with how much water those factories are consuming, or whether they are treating wastewater to appropriate levels or indeed, whether the CEO understands and has a plan to bring the company’s growth projections in line with a water secure future – that’s the challenge,” Lamb said.
In the absence of regulations, companies can cherry pick the data they declare. Lamb relates the experience of a mining company that in its annual water disclosure via CDP it had excluded all its mining operations from its disclosure and focused data solely on how much water and soap it was providing employees in its offices.
CDP, along with other non-government organisations such as the WWF have sought to help fill those gaps. The WWF’s Water Risk Filter is a screening tool available to investors to help them find and assess water risks. An update is expected to enable users to identify ways to mitigate those risks. CDP, with more than 4,000 companies reporting, has now built the world’s largest database of corporate water data and provides scores to investors according to the quality, volume and pertinence of the data they supply. Lamb says this has been popular among investors, many of whom have joined CDP in a “non-disclosure” campaign that has seen an increase in the number of companies offering data.
“Companies that are achieving good scores, that are getting an A, are typically benefiting from lower rates of interest in their loans or lower costs of capital,” she said. “So that in itself is a strong market-based incentive for them to make comprehensive disclosures.”
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