Investor water risk: the information you need that you don’t (yet) have

Ever since it cropped up in the World Economic Forum’s top 5 global risks back in 2012, water risk has been rising rapidly up the business and investor agenda. Now, after six successive appearances on the list, there is little doubt that water represents a major threat to business viability and investment returns across the globe. Water issues – such as increasing floods, droughts and pollution – have the potential to strand assets, damage infrastructure, increase operational costs, and broadly affect asset profitability.

Increasingly, investors are viewing water as the new carbon and are looking for solid metrics and clear targets to guide their decisions. To that extent, there has been a surge in interest on behalf of investors to get a better grip on water risks (and to a lesser extent, mitigation efforts).

LEFT: Assessing & responding to water risk - a shot of a portfolio assessment from WWF's Water Risk Filter

In addition to traditional environmental, social and governance efforts, CDP Water has grown significantly from 127 investors representing $16 trillion dollars (in 2010), to 643 investors and $67 trillion dollars in 2016. These efforts have also been supported by the growth in tools to map, assess and respond to water risk like WWF’s Water Risk Filter.

But is more information always better information? Is more water use worse (what about where flooding is an issue)? Is less water use materially impacting risk exposure (what if water is abundant, or water use is helping to recharge groundwater)? What does 300,000m3 of water consumed mean to you as an investor (is that a lot/little)?

The answer is certainly not clear. But would you be able to assess a company’s financial performance if you only measured expenses and not income?

As both an individual shareholder, and as the head of WWF’s corporate water stewardship efforts, my answer would probably be: I don’t know, it depends. This issue has been frustrating me (and many colleagues in the field) for some time now: how do we ensure more meaningful numbers for everyone. We need to measure both water use (water “expenses”) AND water availability (water “net income”).

Companies, and their investors, want to know that they are taking meaningful steps to mitigate water risks that stem from shared challenges in the basins in which they operate. Governments and civil society organisations want to know that improvements in water use are benefiting not just the companies, but also the communities and nature that rely on these freshwater systems.

Enter Context-Based Water Targets.

On April 12th, WWF, in conjunction with CDP, the UN Global Compact’s CEO Water Mandate, The Nature Conservancy (TNC), and World Resources Institute (WRI), released a paper outlining the concept of context-based water targets. “Context-based” – as you might imagine – adds the dimension of context to water use. In simple terms, water use becomes the numerator, and basin water availability becomes the denominator.

 Such an approach enables everyone to evaluate how a company’s performance regarding water stewardship is related to the basin’s status. These thresholds (those points when things begin to fail, and disastrous events occur) are informed by science, respect the basin’s environmental, economic, and social needs, consider current and future conditions, and support alignment with public sector objectives, such as the Sustainable Development Goals.

Water is not alone in this regard. Over the past few years, our climate-focused counterparts have been developing an initiative called Sciencebasedtargets.org which evaluates corporate GHG targets in terms of their contribution towards the IPCC’s 2 degree scenario. In short, that a companies carbon reduction targets are meaningful.

Contextual information is essential to understanding performance, and being able to assess both risk and return – the cornerstone of financial valuation and investment decision-making. Having a better sense of context – the denominator of sustainability – enables investors to understand whether water use is meaningful and, moreover, to understand whether mitigation actions are being appropriately placed. In summary, context-based metrics give investors a more meaningful metric to understand water use/risk/mitigation and thereby make better decisions.

 Lastly, it is worth noting that this paper is the start of a broader project that has us working together to develop guidance for companies and investors seeking to employ meaningful and appropriate water metrics and targets, and to in turn, mainstream the concept. So stay tuned, and get engaged – we’re only just beginning!

This blog was first published by Environmental Finance & re-posted to Panda.org