Portfolio Water Footprinting: Investors’ Visual Path To Water Risk & Exposure

By Hugh W. Brown Jr. 17 January, 2019

Ceres' Brown Jr. introduces their Investor Water Toolkit & explores how water risks can be assessed visually

50% of 2018’s deadliest natural disasters related to water; a growing number of investors are beginning to recognise water's true value & weighing its risks & exposures against biz impacts
Ceres' Investor Water Toolkit developed in collaboration with 40+ institutional investors, is the 1st comprehensive resource for investors to evaluate water risks across all asset classes
Now advancing tools around investment water footprinting - identify where a portfolio has large portions of high-water risk industries or stocks; see Florida state pension fund example

Year after year, the world has seen its share of weather-related disasters wreak havoc on communities all over. So far, over 2 billion people have been impacted by some form of weather-related disasters. The common denominator among most of these disasters? Water.

Water-related risks could pose multiple threats for investors

According to a U.S. News report highlighting 2018’s deadliest natural disasters, more than 50 percent of the listed disasters are water-related. Moreover, the World Economic Forum’s 2018 Global Risk Landscape notes that water crises are more likely to happen and will impact more than just local communities. These risks are more than societal and environmental. They are economic.

>50% of 2018’s deadliest natural disasters were water-related

A growing number of investors are beginning to recognise water’s true value and weighing its risks and exposures against business impacts, as well as return on investments. Accounting firms such as PWC’s sustainability unit classify water as a business risk that needs to be actively managed across the supply chain. More environmental, social, and governance (ESG) research providers are working to improve water data, scoring, and measurements.

Investors pressuring co’s & their boards to disclose more & how they are addressing water risks

Investors are continuing to pressure companies to disclose more about their supply chain and governance practices. They are defining water not only as a valuable resource but one that demands fiduciary responsibility. Through shareholder engagements, investors are collectively asking companies and their boards how they are addressing water risks and exposure.

USD459bn in revenue may be at risk from a lack of water available for irrigation or animal consumption

In 2017, Ceres highlighted the top five drivers of water risk and several water impacted companies in the update of Feeding Ourselves Thirsty, which focused on agribusiness. Since agricultural production uses more than 70 percent of the world’s freshwater resources, the companies in this sector have a higher risk exposure to the approaching water crisis, leaving investors questioning the best way to position portfolios. A 2017 MSCI analysis of food companies in the All Country World index noted that USD459bn in revenue may be at risk from a lack of water available for irrigation or animal consumption.

Population growth and deepening climate impacts – as evidenced by the recent U.S. Climate Change Assessment – further compound these water risks. By 2030, demand for water is expected to exceed supply by 40 percent. In some regions, like East Asia, the Middle East, and Central Africa, could see as much as a 6 percent contraction in GDP by 2050, due to water-related impacts on agriculture, health, and incomes. These water-related risks to business have multiple material impacts for investors, which could result in portfolio underperformance, increased volatility, and potentially non-diversifiable risks across asset classes.

Ceres’ Investor Water Toolkit

In an effort to address these water risks with investors, Ceres released the Investor Water Toolkit.

Ceres’ Investor Water Toolkit is the 1st comprehensive resource for investors to evaluate water risks across all asset classes

Developed in collaboration with more than 40 institutional investors from Ceres’ Investor Water Hub,  this “how-to” guide enables investors to evaluate water risks across all asset classes, design strategies for mitigating water risks in their investment portfolios and complements the ongoing work of CWR. It is the first such comprehensive resource created for all investors, from foundations, to pension funds, to asset managers, both large and small.

The Toolkit is designed to:

  • Help investors comprehensively understand water risk drivers;
  • Create a one-stop platform that allows institutional investors to integrate water across
    the decision-making value chain, from asset class analysis to portfolio characterization, to buy/sell decision making;
  • Provide stand-alone guides, resource lists, and databases on specific topics or asset classes, including equities, municipal bonds, and private equity;
  • Provide case studies written by investors that showcase real-life water risk integration practices; and
  • Evolve and capture new ideas through time.

Investment water footprint

In the past year, Ceres continued to evolve research to address investor water risks in collaboration with Investor Water Hub members including in one key area — portfolio water footprinting.

Investment water footprinting is an emerging method to determine where a portfolio has large portions of high-water risk industries or stocks

Water footprinting for investment analysis (or investment water footprinting) is an emerging method to determine where an investment portfolio has large portions of high-water risk industries or stocks. It can assess volumetric use of water by companies, or assess water risk by geography, types of water risk exposure or by water risk scores or other parameters. The approach is adaptable to the needs of the investor end-user.

Overall, it allows portfolio managers to understand aggregate risk exposure and hone in on specific industries and companies for further water risk research. For asset owners, it also provides a useful starting point to engage portfolio managers on the topic of water risk awareness and integration.

Figure 1 shows the market-cap-weighted water footprint of the four major indices by exposure to high water risk industries. An important observation is that more than 50 percent of the components of the four indices are exposed to medium to high water risks, showing that water can be a very material issue for portfolio managers. Given that there is such a high exposure to water-related risks across indices, these results underline the importance of considering more detailed and sophisticated water footprinting to better understand potential risks.

A market-cap-weighted water footprint of the four major indices shows >50% of their components are exposed to medium to high water risks…

The added complexity with water footprinting is that unlike carbon, water is a local issue

The future of water footprinting is evolving rapidly in exciting new directions with investors actively seeking ways to understand the materiality of water across industries as a first level indicator of water risk exposure. The added complexity with water footprinting is that unlike carbon footprinting, water is a local issue. Water risks are multifactorial issues based on water resource dependency (industry-specific) and water security (location-specific) and management’s response to mitigate these risks. Ceres is continuing to build water footprinting methods in 2019 building on efforts by investors such as those by the Florida state pension fund (SBA Florida) (see Figure 2).

Assessing water risk in a visual way can stir critical conversations within portfolio teams. The water risk heat map in Figure 2 was designed to quickly provide a visual assessment of overall risks and where to perform a deep dive on any sector or specific company for further review driving both water risk and exposure, as well as engagement and buy/sell analysis. This heat map clearly illustrates where the portfolio has large sector holdings, and which holdings within a sector have the potential to be a significant water risk position (e.g. consumer staples, industrials). Figure 2 also displays smaller holdings in real estate, utilities, and energy – that, in aggregate, expose the portfolio to potential water risks.

It will take a large swath of global investors to revalue water analyses on Wall Street

Overall, new horizons are ahead as investors, ESG research providers, and other stakeholders adapt their water footprinting methods even further. Water represents tremendous risks – and opportunities – for major companies and investors. Although investors are beginning to assess their exposure to water risks, there is much more work to be done on this increasingly material issue. It will take a large swath of global investors to revalue water analyses on Wall Street and visually interpret water risk and exposures in terms of economic impacts.


Further Reading

  • Financial Water Risk: A Unique Investment Opportunity – The first water risk index has been launched by TSC. Founder, Thomas Schumann, explains how the waterBeta model benefits investors and why we should mainstream water risk into portfolios
  • Blended Finance For Water – Oxford University’s Dr Alex Money shares a new blended finance approach that could help attract finance for difficult to finance water infrastructure projects, while also delivering high returns
  • Cape Town’s ‘Day Zero’: Where Are We Now? – Daily & agriculture water use restrictions and the return of rain have bought time but is Cape Town really past ‘Day Zero’? Ahmed Khan from the Department of Environmental Affairs shares his views & lessons learnt
  • The Future Of Low Carbon Cities In China – China has launched 42 low carbon city pilots. Who is doing what and who is doing the best? Get the latest from Professor Andreas Oberheitmann of FOM University
  • Drink Without Waste: Re-Thinking Single-Use Plastic Beverage Packaging In HK – With over 80% of beverage packaging ending up as waste in Hong Kong’s landfills, leading bottlers & produces with NGOs have launched a working group to reduce single use plastic. ADM Capital Foundation’ Sophie Le Clue expands
  • Water Risk Valuation – What Investors Say – See what 70+ investors have to say on different valuation approaches we applied to 10 energy stocks listed across 4 exchanges. Is there consensus? What are they most worried about?
  • Where Is The E In ESG Disclosure In China? – China is moving to mandatory environmental disclosure with a tentative 2020 deadline, but where are listco’s now? China Water Risk’s Dawn McGregor & SynTao’s Dr. Peiyuan Guo share 8 key takeaways from their newly released joint report, “CHINA PRIORITISES ENVIRONMENT: More Disclosure Needed To Match Rising Risks”
  • Environmental Risks: What, Where & When? – Hubert Thieriot explains his new venture, Environmental Risk Profiler, an online solution to identify, monitor and anticipate environmental risks – find out how it works
  • Upgraded Water Risk Filter: From Assessment To Response – WWF’s Water Risk Filter has been upgraded, from expanded data sets & climate change projections to new response & valuation sections. Their Ariane Laporte-Bisquit highlights everything new
  • Connecting Finance & Water Risk – Natural Capital Coalition’s Mark Gough & Joseph Harris-Confino on their newly launched supplement for the finance sector – see how can this help bankers, investors and insurers alike amidst increasing ESG adoption
  • How To Manage Water Risk In Your Growing Business – Water risk is financial risk. So how do investors and business overcome challenges and manage water risk? Trucost’s Byford Tsang and Rochelle March expand and also share the benefits

Hugh W. Brown Jr.
Author: Hugh W. Brown Jr.
Hugh helps lead the Investor Water Hub, a working group of the Ceres Investor Network made up of more than 90 institutional investors with $19 trillion in assets under management. The Hub promotes peer-to-peer learning and has recently developed a how-to-guide on water integration called the Investor Water Toolkit. Hugh drives research that deepens investors' understanding of sustainability and water risks (and opportunities) in their portfolios and how to practically embed those considerations into daily investment decision making.Hugh previously worked at SBA Florida, the $150bn state pension fund, where he focused on ESG and water integration across asset class analysis and risk management research. Hugh has also worked for Morgan Stanley and Northwestern Mutual. In addition to his thought leadership in ESG integration, Hugh has served his country and others through service in the U.S. Air Force and by sitting on several non-profit boards.
Read more from Hugh W. Brown Jr. →