Water Neutrality: The Next Frontier in ESG?

By Monika Freyman, CFA Posted In: Drivers of Value, Economics, Future States, History & Geopolitics, Performance Measurement & Evaluation, Standards, Ethics & Regulations (SER)

Water scarcity and water crises are top global risks, according to the World Economic Forum. Climate change is already having a profound effect on global water cycles, resulting in both longer and more severe droughts and more frequent extreme precipitation and flooding events. Increasing competition for finite water resources among industry, agriculture, and an expanding population is exacerbating these impacts and the underlying risks. For all of these reasons and more, water risk has attracted widespread investor attention and the Dutch asset manager ACTIAM is at the forefront of both research and action on this issue.

With $63 billion in assets under management (AUM), ACTIAM proactively shares its approaches and key lessons learned on water issues with the global investor community. For example, it contributed to the development and launch of Ceres’s Investor Water Toolkit, a “how-to” guide for institutional investors on integrating water issues into portfolio management practices.

ACTIAM has also set itself a groundbreaking goal: By 2030, it hopes to be water neutral. In practical terms, this means the companies in the firm’s portfolio will “consume no more water than nature can replenish and cause no more pollution than is acceptable for the health of humans and natural ecosystems.” This commitment provides important insights for investors pursuing portfolio-wide approaches to understanding water risks and sets a high bar for mitigating those risks.

I recently spoke with Hans van Houwelingen, ACTIAM’s CEO, about the importance of water risks to investors and ACTIAM’s unprecedented, portfolio-wide water neutrality goal.

Monika Freyman, CFA: When did ACTIAM first start looking at water risks? What was the impetus?

Hans van Houwelingen: For decades, water risk has been one of the environmental, social, and governance (ESG) criteria we look at. In 2016, we developed and implemented a systematic methodology for evaluating water risks. The issue is important for so many reasons. Global population growth and greater prosperity are putting increasing pressure on water supplies and other natural resources. Clean drinking water, and the food supplies which it enables, are increasingly out of reach for large groups of people. By 2030, only 60% of the world’s population will be able to meet their water needs. According to the Organisation for Economic Co-Operation and Development (OECD), global water demand is expected to increase 55% by 2050. For investors, water scarcity is a hugely relevant investment topic, both from a risk perspective (such as price increases) and an opportunity perspective (water innovation).

How does ACTIAM integrate water risk considerations and related issues into daily investment decision making?

We don’t just put this ambition on paper. We also put it into practice. We use several tools to decrease our exposure to water risk and decrease our impact on water stress. Among those are active ownership (engagement and voting), exclusion, and ESG integration. We believe that combining these tools has the utmost value.

Can you provide a specific example of how it influenced a particular decision or was financially material?

One example is our ACTIAM sustainable fund range, in which we score companies based on a proprietary scoring methodology on financially material sustainability topics like water. One German utility company showed no willingness to contribute to ACTIAM’s engagement strategy. It also didn’t disclose water consumption and water intensity data. It didn’t have water reductions targets. The company was lagging relative to its peers and received such a low score that it didn’t meet our threshold to be included in our investable universe.

Can you describe ACTIAM’s water-related engagement strategies?

Engagement is an important tool for ACTIAM. Our goal is to establish behavioral change. Through company dialogues and proxy voting, we can stimulate companies to perform better on ESG issues, which we believe leads to better long-term financial performance. We see our engagements as a positive value-add, but it takes two to tango.

For example, we engage with electric utilities about water sourcing and with garment companies about water pollution. Less obvious, perhaps, is our dialogue with consumer companies about plastic pollution, which is a major water-related challenge. By working with other investors and organizations on these engagements, we believe they will deliver more impact. Shared knowledge means a better understanding. Representing a larger amount of AUM also increases the incentive for companies to listen.

We also believe there is a big upside for the companies themselves: Consumers are increasingly aware of their consumption patterns and the impact they have. Public opinion is changing rapidly, and consumers are pushing companies to take on more responsibility in moving to a low-carbon and sustainable economy. Companies that respond appropriately will certainly benefit.

ACTIAM’s water-neutral goal is unprecedented. What prompted you to set this ambitious target, and how have your clients and others reacted?

Water issues should rise to the leadership and board level of organizations in order to lift all boats. For ACTIAM, socially responsible investing (SRI) is a strategic priority. As such, it is a responsibility for the whole firm — not just an investment theme for products or a responsibility of the chief investment officer. Within the SRI framework, we have identified water, climate, and land as key focus areas. We have set firm-wide objectives for each of these areas.

Clients have responded positively to our goal setting, including water neutrality by 2030, for a few reasons. First of all, clients who would like to lead in responsible investments look for an asset manager that leads in this area as well. Second, pressure from local regulators toward asset owners is increasing. For example, the Dutch regulator has identified water scarcity as a key financial and ecological risk for Dutch institutional investors to address.

How is ACTIAM tracking year-to-year progress on meeting the water-neutrality target?

It is important to recognize that we won’t achieve this goal in one go. Currently, we measure our progress by calculating the water footprint of all our investment funds. We do this by measuring total water use in high-risk areas by all of ACTIAM’s portfolio companies. The tool we use is the World Resources Institute’s (WRI’s) Aqueduct Water Risk Atlas. ACTIAM calculates the portfolio’s water footprint by analyzing total water consumption per company of business activities in areas where high or greater levels of baseline water stress prevail. ACTIAM then calculates an aggregate portfolio-level water footprint by using the percentage of the company value owned by ACTIAM. By adding up the estimated water footprint of all the companies it holds, ACTIAM can calculate the total water footprint of its investment portfolios. However, the current footprint does not yet include reused water or untreated wastewater discharge. It is a learning curve, and we are constantly refining and optimizing our methodology.

Can we expect that companies and industries you invest in — or reduce your exposure to — will be influenced by your water-related strategies and performance?

Yes, that is certainly the case. One example that comes to mind: In 2017, we started engaging with a large Eastern European mining company. Its initial response was rather slow and underwhelming, but as we intensified our engagement efforts, the company eventually became keen to set specific goals. These goals include a reduction in the use of water as well as a reduction in the wastewater produced. The company also took major steps to address water management governance, adopt concrete pollution reductions, and conduct water risk analyses. These steps are all being included in its annual social report.

The company’s water consumption improved, and the same goes for the information supplied to stakeholders. The company informed ACTIAM that its environmental management system now contains a dedicated clean water component and that feasibility studies into mining technology now include water management factors. The company’s latest annual social report also highlights examples of water-saving technologies that were implemented over the past four years.

The bottom line: The 22 consultations as part of the ACTIAM engagement strategy with this company show that persistence can pay off.

What are you most excited about? Are there any major breakthroughs and innovations underway?

As a CEO, I am proud that ACTIAM as a Dutch asset manager was one of the first in the world to strategically address water as a serious investment risk and opportunity. Of course, this is due in part to the Dutch being long accustomed to pioneering on water issues since a large part of our country is below sea level. Even our king actively advocates for water stewardship. I am most excited that water risks are becoming more globally recognized by all kinds of stakeholders.

This change is shown, for instance, in the United Nations Sustainable Development Goals, the SASB Materiality Map, the Task Force on Climate-related Financial Disclosure, and local regulators. I am especially excited that these forces are coming together — collaborations with Ceres and FAIRR are among those — to achieve the best possible results and impacts.

For more on ACTIAM’s water neutrality goal, read the Investor Water Toolkit Case Study, “Aiming for Portfolio-Level Water Neutrality.” For a broader exploration of portfolio water footprinting, see the “Portfolio and Asset Class Analysis” chapter from the Investor Water Toolkit.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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