Pension funds must set 'proactive' tone over water-risk engagement

Pension funds have been urged to engage with companies on the risk of water shortages, as a report showed that more than one-fifth of companies view shortages as detrimental to growth.

According to a report by CDP and sponsored by Norges Bank Investment Management (NBIM), the asset manager of the NOK5.8bn (€678bn) Government Pension Fund Global, the detrimental impact on growth will be felt keenly in emerging markets such as Brazil, China and India.

The report said half of the risks identified by the 174 companies, all listed in the FTSE Global 500, were expected to stunt growth within three years.

Paul Simpson, CDP’s chief executive, said companies were increasingly understanding the fact that water-related problems can damage a brand.

“Over two-thirds of Global 500 companies reporting to CDP this year face substantive water risks – therefore, investing to conserve, manage or obtain water has become crucial for some sectors,” he said.

He noted that companies such as Coca Cola and Nestlé had started investing to reduce their water use and improve waste-water treatment.

Of those reporting on risks, 43% expect them to materialise within three years, 15% said 4-6 years and 24% expected it to take more than six years.

The remaining 15% said they did not know how long it would take them to be impacted.

The report, ‘From water risk to value creation’, identified the utilities sector as most exposed to “substantive” water risks, followed closely by the energy sector and those producing consumer products.

Cate Lamb, who heads up the CDP’s water project, urged pension funds to put engagement over water management at the heart of any agreement with asset managers.

She told IPE pension funds were “hugely critical”, due to their influence on the asset management sector and companies they own.

Lamb said the current prolonged drought in California, among the world’s 10 largest economies, had helped raise awareness, as it was a state producing critical commodities, where production changes caused price hikes globally.

Similarly, previous droughts in Russia have driven up cattle-feed prices, which in turn has increased the price of leather for shoe manufacturers.  

“There is quite a significant opportunity for asset owners to set a more positive, proactive tone among their asset managers by including water-related issues in the request for proposals (RFPs) they issue,” Lamb said.

“It’s a topic we hope to work with more pension funds on over the next year, to identify what those opportunities are.”

Dutch healthcare sector fund PFZW recently confirmed that strategies to tackle water scarcity would be part of a drive to quadruple sustainable investments by 2020.

For its part, NBIM has been heavily involved in the issue of water risk, first discussing the matter in 2009.

It more recently called on companies to work on a universal approach to water management reporting.

In an effort to make water-related infrastructure more attractive to investors, CDP has also confirmed its involvement in a new working group by the Climate Bonds Initiative.

The climate bonds water infrastructure expert committee will – similarly to the groups on agricultural and property bonds launched by the initiative – set out ways for investors to assess the credentials of water-related bonds.

Sean Kidney, chief executive at the Climate Bonds Initiative, said the opportunities to invest in the sector were “enormous”.

Explaining the need for consistent standards in the sector, he added: “While it may be tempting to define every water project as ‘green’, water investments that don’t take into account climate change, with, for example, its increased volatility of rainfall – dumps and droughts – will come to be seen as both higher risk and not consistent with green.”

For more on the Church of Sweden’s approach to managing water risk, see the current issue of IPE