Being only days away from my annual summer holiday in Cornwall in the western part of the island I now call home the rain is pouring down outside my office window.  “Another Great British summer” I think to myself as I try to dry up from my 200 meter sprint from the tube through the showers.  In an environment where water quite literally falls out of the sky in bucket loads it is very hard to fully appreciate the risks and future challenges related to water scarcity.

The word climate change has been on everybody’s lips for a decade and most investors are very aware of the potential risks climate change issues represent for their portfolios.  However, surprisingly few investors are even mentioning water – the source of all life on this planet.   Nevertheless I am willing to bet a lot of money that the next it word will be water.  Why?  To start because water scarcity and climate change are highly interrelated; the former is inevitably affected by the latter.  Then due to the mere scale of the water challenge; according to the UN two-thirds of the world’s population will live in water stressed countries by 2025, and more interestingly from an investors perspective as much as 54% companies are exposed to water risks.  Yet, and hold on tight, according to EIRIS’s latest research less than 1% of these companies can currently demonstrate adequate risk management procedures when it comes to water.

The financial risks related to water scarcity are easy to comprehend once you start thinking about them:  Numerous business sectors are heavily (and unsustainably so) dependant on water to grow and to maintain their competitive advantage, directly and/or through their supply-chain (think cotton and retail chains for instance).  Water is currently dramatically under-priced considered that water demand may outstrip supply as soon as in 2030 at the current rate of consumption.  That figure does not reflect the fact that the global demand for energy and food is expected to increase by 30-50% over the next 20 years, and water of course being key to both agriculture and power generation.   In fact, the threat of loss of fresh water is a more pertinent hazard to business than the loss all other commodities including oil.  Then there are naturally several more indirect threats to businesses operating in water distressed countries:  Social unrest as a result of conflict directly linked to access and rights to drinkable water, the cost of companies’ social accountability for pollution to water near their production sites and the settlement of court cases, etc.

Few things wind me up quite as much as the topic of water.  I recently attended an EIRIS event on water in Paris with speakers such as Michel Camdessus (former General Director of the IMF) and Xavier Leflaive (the Chief Administrator of the environmental management department of the OECD) who both seemed to share that sentiment that there is something very wrong when it is socially acceptable that companies to a large degree monopolise fresh water supplies in water-stressed regions.  Whether one shares these values or not, and whether one can afford to make investment decisions on the back of them is a separate debate.  However, from an investment-risk perspective water should still be high up the agenda of any responsible investor.  Both Xavier and Michel highlighted the very likely scenarios of changing legislation and revised corporate taxation on water consumption which could severely impact companies’ bottom line, but they also mentioned business opportunities arising from a better management of water scarcity issues.  Investors who understand water related risks and that demand increased levels of corporate reporting from their investee companies will hence have a clear advantage when water for real gets on the agenda.  By encouraging companies to govern their water use, have a dedicated water strategy, practise high levels of disclosure and performance data one can help mitigate both direct and indirect investment risks.

I know general sustainability is high up the agenda for most Finish investors and I hope I’ve made the point that the global crisis in energy, food and climate change cannot be addressed in a satisfactory manner without considering the role of water.  At EIRIS we have decided to take water so seriously that we have made it an integral part of some of our flagship products.  In addition to integrating EIRIS water research into our core research platform – EIRIS Portfolio Manager - we have  incorporated water criteria in our overall Sustainability Rating product, our Convention Watch service and our PRI Toolkit. So whereas I might not appreciate the amount of water I will be exposed to during my holidays in Cornwall, I will at least try to appreciate some of these very precious drops as they fall.  Perhaps whilst I do that you should consider whether there is a drought in your portfolio?   

Marthe Nordby is responsible for EIRIS’s activities and market development in Finland and across Scandinavia.  EIRIS is an independent ESG research house with 28 years of experience in the field of responsible investments.