Clare Dixon, Associate Reporter with Waterbriefing, takes an in-depth look at the issues explored at the second FT water summit ‘Unleashing Returns from Water Investments’ organised by the Financial Times newspaper in association with WWF which took place in London this week.

Clare Dixon: The second FT water summit ‘Unleashing Returns from Water Investments’ went far beyond the traditional financial perspective, which has most often placed a zero value placed on environmental issues in the absence of a quantified number.

The summit focused instead on water stewardship and the understanding of climate risk, primarily a water risk, as a means of creating and protecting investment yields.

No longer is water stewardship an issue that can be separated from financial returns and corporate reputation. Rather, it is becoming a central means of realising cost savings, managing risk, playing an active and necessary part in the corporate contribution to society and a demonstration of good governance; all matters that investors are increasingly valuing and that is beginning to shape the flow of capital.

Investors increasingly interested in ESG factors

Investors are increasingly interested in ESG factors - there is a growing body of evidence that shows that ESG factors are correlated with better returns alongside an increasing rejection of the narrow definition of fiduciary responsibility as being related to the maximisation of short-term financial returns.

As investors, NGOs, customers and regulators move to channel capital away from projects and companies that fail to take account of their impact on the environment, there are significant commercial opportunities and risks that emerge.

Whilst the value of water might be recognised theoretically, quantifying the real value for business, investment and regulation is an emerging discipline. Water and the natural water cycle have largely been overlooked as a resource - the FT Summit presented the business case for leading in this area as investors, utilities, companies and customers. The Summit highlighted both the commercial opportunity and societal responsibility for early engagement.

Climate change is water risk - “water yet to have its Al Gore moment”

Despite the fact that climate change will largely manifest as a water risk, “water is yet to have its Al Gore moment”, said Jean-Francois van Boxmeer, CEO of Heineken, in the morning key note presentation. The head of the global drinks giant suggested there is yet to be a compelling narrative that forms a mass connection with the need for water stewardship and communicates the urgency of the matter.

Water is where climate change bites - collaboration key to mitigation and adaptation

In the panel discussion of the Task Force for Climate Related Financial Disclosures (TCFD), Paul Simpson of CEO of CDP highlighted that one of the four recommendations of the TCFD was scenario analysis and that by undertaking this analysis companies and investors will see that “water is where climate change bites”. This has significant implications for the assessment of risk and is already being incorporated by some investors into portfolio construction, with adaptation and divestment steps being taken on global and UK portfolios.

Collaboration will be critical to developing an appropriate response to the need for mitigation and adaptation to climate change.

Investment analysis will increasingly include large amounts of data on environmental risk, both historic and projected. The material risks are not confined to those within assets themselves- they also extend to those that will affect operations.

The inclusion of climate risk, which is inherently probabilistic, and the inclusion of supply chain, upstream and environmental risks, present two significant challenges and will require significant internal investment to understand and manage effectively.

Companies however do need to identify and understand these risks as a matter of diligence. One motivation for doing so, mentioned by the panellists, was to avoid being exposed by others conducting analysis on the widely available environmental data and publishing results that would be surprising to the company.

Climate change impacts are primarily question of risk

As with all aspects of climate change the impacts are primarily a question of risk; risk reduction and risk management.

UNEPRI highlighted that water metrics are meaningful at the asset level but by the time they are aggregated at the corporate level, the level at which most large investors invest, they can become meaningless. Tom Butler, CEO of ICCM said, “Investors want to know that the Board are engaged management are setting targets at the asset level”.

The TCFD recommendations, whilst currently not obligatory, have equipped and encouraged investors to measure engagement with climate risk. As the recommendations evolve and metrics are developed, demonstrable board engagement can be expected to be included.

Water stewardship and financial responsibility

Paul Simpson from CDP highlighted the correlation between water stewardship and financial risk shown by Barrick Gold’s mismanagement of water systems in Argentina, resulting in sanctions, negligence charges being brought and action from investors.

The cost of mismanagement makes the current levels of c-suite management of water stewardship risky; only 20% of corporations have a c-suite member with specific management responsibility for water. The commercial necessity to have the requisite permission to operate means that the value of water needs to be institutionalised within the company.

Beyond the “permission to operate” logic, there is a growing standard of excellence in environmental stewardship that encompasses both the hygiene factor of responsible water management and includes positive action that improves the watershed and communities in which business is carried out.

According to Heineken CEO, van Boxmeer, water management cannot stop at efficiency as this soon becomes very expensive - balancing and circulation of water deliver much greater returns over the long term.

Delegates heard that it was the responsibility of companies to articulate to investors why decisions are being taken and agree the length of time for returns. While some of the actions that will enable water stewardship will slow the rate of returns, in the long-term they will increase yields and mitigate risks. This approach requires water management to be considered as an integral part of business operations.

The positive and negative pressure from investors was touched upon by the Mars presentation by CEO Fiona Dawson. An initiative with rice growers in Pakistan reduced water usage by 30% GHG by 90% and produced a 32% increase in farmer income and 17% increase in yield.

The fact that the company is a private entity has meant that institutional commitment to behaving in a socially and environmentally responsible way can be acted on without an over-focus on the quarterly returns - the markets’ typical barometer for company success. Collaboration with investors for both private and public companies is essential to including water as a valued resource in operations.

Corporations will also need to collaborate with other stakeholders, including those who also use the water basin. Pepsico VP of Global Water and Environmental Solutions, Roberta Barbieri, commented that their efforts to act responsibly were on their own insufficient without action from other groups that use the basin. It was repeatedly underlined throughout the Summit that collaboration is key to creating sustainable systems of water use and management.

Projected $713bn investment gap in water infrastructure

The need for proactive engagement to ensure healthy water systems was underlined by the projected $713bn investment gap in water infrastructure. Delegates heard that infrastructure is inherently a part of the risk that is carried by corporations and their investors. However, coordination is required on the financial benefit of engaging with infrastructure needs and finance is often siloed, which is where NGOs, such as WWF have a key role to play.

As the public sector cannot provide all of the investment reuired, corporations will need to engage with how they contribute towards the essential infrastructure on which the local economies in which they operate depend.

Investment opportunity from water stewardship

The need to change the direction of capital flows away from investments that degrade the planet and biosphere and towards investments that not only yield returns but also restore the planet and biosphere was a recurrent theme.

The examples from Mars showed that sustainability could improve the profitability of operations. Mondi, the packaging and paper company, shared an example of voluntarily giving up 5% of their plantations in South Africa as a means of contributing positively to the environment in which they operate.

This was done despite the short-term financial cost on the understanding that long-term this responsibility will benefit the society and economy of the region - doing the right thing is ultimately good for business.

Decisive, science-based action needed now

The day concluded with an address from Tony Juniper, Executive Director of Advocacy and Campaigns at WWF, drawing together the themes of the day and underlining the importance of decisive, science-based action now.

Juniper said that the UN’s sustainable development goal 6, ensuring the availability and sustainable management of water and sanitation for all, is of paramount importance. This makes the need for collaboration to achieve this goal, SDG 17, partnership for the goals, even more important.

The complexity of the environment and the creativity needed to arrive at location, asset and culturally specific solutions requires companies, governments, suppliers and all stakeholders to play an active role in ensuring the sustainable management of water.

The task extends to all those working within water management who have the opportunity and responsibility to shape water risk assessment criteria, the best management techniques and the development and review of metrics.

Ultimately, the actions are justified as they will enable the flow of capital to go towards projects that best manage water. Increasing investor interest and the level of corporate activity would indicate that engagement is now the only commercially viable option.