Threats to water systems driven by corporate practices across multiple industries.
Asset owners need to be aware of the extent to which water-related industry practices pose significant threats to investments, a recent report by US investor network Ceres highlighted.
The report, which has outlined five key threats across 12 industries (within seven sectors), has raised serious questions about systemic and extensive water-related risks spanning investments, and emphasised actions institutional investors need to take to mitigate them.
Where are the risks?
According to Ceres, threats such as groundwater depletion, metals contamination, plastic pollution, diversion and transfer of water, and eutrophication are being driven across multiple industries.
Currently, the food products, beverages, household products, and textiles industries are causing “excessive nutrient loading” into water, a practice known as eutrophication.
Ceres’ analysis said the extent of the risk across these industries is “very high” in terms of its severity, systemic nature, and overall impact.
Meanwhile, activity across industries such as food products, oil and gas, and metals and mining are driving groundwater depletion, whereby groundwater wells are drying up due to “excessive water extraction”.
The metals and mining, semiconductor and circuit board, battery, and high-tech and electronics industries, are responsible for “high levels” of metals contamination, the report found, which causes a danger to human health through the pollution of drinking water.
Personal products, food products, beverage, textiles, automobiles, and chemical industries are responsible for a high level of plastic pollution, Ceres said, while food products, metals and mining, and renewable power (hydroelectric power) are causing high levels of diversion and transfer of water, which can result in eco-evolutionary damage in certain areas.
The consumer staples sector poses the largest threat to water systems, according to the report, but for many industries, risks were found throughout supply chains, across direct operations and into product use/end of life.
The beverages industry, for example, is exposed to “very high” risks throughout its supply chain operations, both in terms of water quality and quantity, and poses “high risks” in its direct operations, and “very high” levels of risk in its product use due to water quality factors.
Textiles, apparel, and luxury goods carry high levels of water risk throughout, including in direct operations where water quality carries “very high” levels of risk.
The report was published in partnership with the Valuing Water Initiative, a Dutch government programme, and the Global Institute for Water Security (GIWS) at the University of Saskatchewan in Canada, which conducted research and analysis on linkages between industries, their practices and water supplies.
Addressing historic failures
Historically, firms, investors and regulators have been slow to take action on managing water use effectively.
While regulators are introducing climate-related reporting rules, mandatory requirements for corporates to report on water use are limited, leaving investors to rely on use of reporting frameworks developed by voluntary sustainability disclosure standard-setters.
Last year, the International Financial Reporting Standards Foundation (IFRS) made the decision to take a “climate-first” approach to the development of standards for sustainability reporting by its International Sustainability Standards Board, eclipsing critical environmental factors such as water scarcity and biodiversity.
A 2020 report by reporting platform CDP revealed just 4.4% of companies recorded their progress against water pollution targets for the year.
But a recent report from KBI Global Investors (KBIGI) and Swedish pension fund Sjunde AP-fonden (AP7) said water-related disclosures have climbed up company agendas, partly due to its inclusion in the UN Sustainable Development Goals and the impending greater emphasis on the sustainable use and protection of water in the EU Taxonomy.
Having initially addressed climate risks, the taxonomy’s screening criteria is now being extended from climate to cover biodiversity, water, pollution and circular economy risks. The EU’s Platform on Sustainable Finance (PSF) final proposal for the taxonomy’s remaining technical screening criteria (including water) is currently being reviewed by the European Commission.
Further, the expected completion of the Global Biodiversity Framework at COP15 in Kunming in August and the recent release of the Taskforce on Nature-related Financial Disclosures’ proposed reporting framework are also expected to focus investor attention on nature-related risks in their portfolios, including water use.
What should asset owners be doing?
The Ceres report outlines seven actions companies should take to reduce the impacts of systemic water risk on both society and future business, each key areas of engagement for asset owners.
Companies should, according to Ceres, ensure their practices are not harming water availability, polluting water bodies, or degrading natural ecosystems.
They should also support efforts that drive access to clean water, ensure water-focused risks and opportunities are fully integrated into governance practices, support public policy, and collaborate on, and invest in, industry efforts that challenge traditional practices.
“Many of the world’s largest institutional investors have yet to consider the private sector’s impact on freshwater when making investment and engagement decisions,” said Kirsten James, Senior Program Director of Water at Ceres. “Investors have a critical role to play in spurring greater corporate engagement on water stewardship, and we hope this assessment is a useful tool to help them strategically focus their efforts.”
According to Dylan Waldhuetter, Director of Water Stewardship Solutions at The Water Council, corporate water stewards should develop strategies to ensure they are adequately mitigating the water-related risks that are most material to companies, and implement changes throughout their value chains.
Stewards should also consider that, often, water challenges are “hyperlocal” and diverse, as well as the fact that water is a shared resource and, therefore, issues impact multiple stakeholders.