Personal values have long driven individual philanthropy. Donors connect to charities based on shared values or interests. In recent years, financial investors have also sought to better align their monetary investments with their personal values. To facilitate this values-based approach to investing, a set of standards referred to as environmental, social, and governance (ESG) investing arose to enable investors to screen potential investments. The environmental component of ESG evaluates how well a company’s policies and practices address climate change and safeguard the environment. Although much of investors’ ESG focus is on traditional climate change metrics like carbon, water as an environmental concern is quickly gaining prominence among responsible investors and consumers alike.
Increasingly, investors are wanting companies to disclose how much they rely on water, both their direct use of water and the use by businesses in their supply chain. According to the 2019 Royal Bank of Canada (RBC) Global Asset Management Responsible Investment Survey, water ranks among investors’ top three ESG concerns, falling behind only cybersecurity and anti-corruption. In particular, investors want to understand (1) how dependent companies are on water in their value chains, (2) the regulatory requirements associated with water use and disposal in their operations, and (3) the measures being taken by the company to manage and mitigate water resource risks.
In recent years, the World Economic Forum has listed water as a key driver of global risk, including conflicts over water resources, human migration, and health crises. We have historically thought of these risks as issues affecting developing nations, but they are growing risks here in the United States, and investors and consumers are wise to evaluate them. A quick review of the recent news headlines across the country bears this out. From the water scarcity and drought issues impacting communities reliant upon Lakes Mead and Powell in the desert Southwest to the water treatment challenges of Jackson, Mississippi, to the industrial “forever chemicals” water pollution of the Cape Fear River basin in North Carolina, water risks pose existential threats to both businesses and the communities where they operate.
Using ESG investing guidelines, investors can use their market power to help elevate the consideration and mitigation of environmental risks, like water. If the water where a business operates is not drinkable or fishable, the sustainability of that location for future operations is at risk. Safe drinking water is the lifeblood of all communities. As we have seen in Jackson, when water supply is disrupted or is not safe for consumption, the whole community is disrupted – schools do not operate and medical care is at risk. For companies to attract and retain qualified talent, employees need to know that their drinking water is safe and abundant. ESG-focused investors know that their financial assets are inextricably linked to the communities where their businesses are located. As a result, developing new water footprinting methods that investors could use to better understand the potential water-related risks presented by a particular investment would serve to highlight the importance of water as a key environmental issue for corporate leaders and help focus attention on water issues and drive solutions.
Nonprofits and institutional investors are at the forefront of using water-risk analysis in their investment decisions. With the growing concerns over water quality and scarcity in the United States, it is only a matter of time before more investors begin to evaluate water risks (as they currently do carbon risks) as part of their ESG investing. Like individuals donating to charities based on shared values or interests, ESG investors are looking to do the same with their financial investments.
About the Author: Catherine Edwards is Chief Operating Officer of Corix Infrastructure Inc. Corix owns and operates water, wastewater, district energy, electricity, and gas distribution utilities across North America. With nearly $2 billion of assets under management and more than 1,300 utility systems in operation, Corix owns and operates utility systems under a variety of delivery and governance models. Corix currently operates in 20 states and three Canadian provinces, serving over one million people and counting through ongoing development and expansion activities.