Many companies are beginning to acknowledge clean water as a strategic element of their operations
Global demand for water is growing rapidly, and many companies are beginning to acknowledge clean water as a strategic element of their operations. According to a recent report published by the 2030 Water Resources Group, the world may face up to a 40% gap between available water sources and anticipated demand by the year 2030, with agriculture and industry being the two largest consumers.(1) Developing nations are expected to be particularly affected as middle classes expand and resource consumption grows. At Pax World, we believe that this emerging scarcity, coupled with the fact that water is not only a necessity of life but a major input to the production of many goods and services, creates potential investment opportunities, particularly in industries related to the delivery of clean water.
However, the threat of reduced availability or diminished quality of water also poses material risks to many businesses, especially those operating in water-scarce regions. In 2009, the Carbon Disclosure Project (CDP)—known primarily for its annual company surveys on greenhouse gas emissions—launched the CDP Water Disclosure, a similar initiative aimed to increase corporate disclosure of water-related risks and opportunities. According to the CDP’s 2011 Water Disclosure Global Report, 59% of participating companies in the Global 500 indicated some level of water-related risk, and over one third of respondents have already suffered water-related business impacts.(2)
Water risks give rise to different financial and operational issues within particular industries and geographic regions. There are several types of water-related risks, including lack of access to sufficient fresh water (drought), too much water (floods), water quality issues and higher water temperatures, according to the Intergovernmental Panel on Climate Change (IPCC).(3) All of them have implications for investors.
The risks associated with water may affect a company’s operations anywhere along its value chain—from suppliers to end users. Recently, drought conditions across the southern U.S. have caused the price of cotton to soar, leading to financial implications in the apparel sector. Conversely, severe flooding in Thailand during 2011 interrupted manufacturing operations for major auto makers and electronics companies, among others. Water quality also raises a unique set of risks, particularly relating to regulatory requirements. As an example, concerns over natural gas drilling and its impact on local water supplies have led to bans on hydraulic fracturing, a controversial drilling method, in France and the state of Vermont. Such regulations have introduced new material risks to the energy industry.
As part of our Sustainable Investment strategy—the full integration of Environmental, Social and Governance (ESG) factors into investment analysis and decision making—Pax World seeks to invest in companies that have prepared for the regulatory and operational risks of water-related issues. Pax World’s Sustainability Research Department uses a wide array of information to evaluate a company’s commitment to reducing its water impact, including compliance with regulations (the Clean Water Act, in particular) and a company’s own water disclosure, including, but not limited to, data on water consumption, wastewater discharges, spills, recycling and reduction goals.
Pax World believes companies that approach water as a strategic resource may be better positioned to navigate the anticipated global water shortage in the coming decades. As investors, we actively seek the opportunities associated with companies that understand and mitigate these risks.
“Water Risk in Supply Chain Draws Investor Scrutiny.” Bloomberg, January 2012.
“CDP Water Disclosure Global Report 2011.” Carbon Disclosure Project, November 2011.
“The Ceres Aqua Gauge: A Framework for 21st Century Water Risk Management.” Ceres, October 2011.
The issues highlighted above are illustrative and do not necessarily reflect the full range of the social, environmental or governance criteria Pax World may apply in analyzing a particular security for investment. The availability of information about a company, issues associated with a particular industry, changing social conditions or other circumstances may affect the manner in which Pax World’s sustainability criteria are applied in a particular.
(3) Intergovernmental Panel on Climate Change, “Climate Change 2007: Impacts, Adaptation and Vulnerability,” p. 175., 2007