Fund Solutions

Corporate Transparency on Water-related Impacts Driven by EU Taxonomy, SDGs

A new methodology by AP7 and KBIGI scores companies on their negative and positive contributions to global goals. 

Companies are increasingly recognising the importance of being transparent about their positive water-related impacts to investors, according to a joint report by KBI Global Investors (KBIGI) and Swedish pension fund Sjunde AP-fonden (AP7). 

“[Water-related disclosures] have no doubt been driven up [companies’] agendas by the evolution of reporting regulations and the advance of the highly anticipated European Taxonomy,” said Catherine Cahill, Senior Portfolio Manager of KBIGI’s Water Strategy and author of the report, during a webinar to launch the report. “That said, we acknowledge our role as active investors in driving this evolution.”  

The taxonomy, which includes the sustainable use and protection of water and marine resources as one of its six objectives, is designed to classify economic activities that can be considered sustainable by investors. 

The EU’s Platform on Sustainable Finance (PSF) has published its final proposal for the taxonomy’s remaining technical screening criteria (including water), which is now subject to review by the European Commission. This follows PSF’s final proposals for a social taxonomy and an extended taxonomy. 

AP7 and KBIGI’s joint report outlines progress developing methods and metrics to assess the impact of their investments in a portfolio of water stocks.  

It builds on KBIGI’s Revenue Alignment SDG Scores (RASS) methodology, which calculates the contribution of constituent holdings in its portfolios to the UN’s Sustainable Development Goals (SDGs). AP7 requested that KBIGI concentrated its efforts on aligning investments with four of the global goals: SDGs 6 (clean water and sanitation), 13 (climate action), 14 (life below water), and 15 (life on land). 

There is a growing incentive amongst asset owners to adopt impact investing strategies. Eighty-five percent of 440 impact investors assessed by the Global Impact Investing Network (GIIN) last year said their impact investment strategies focus on SDG-alignment.  

The joint report findings determined that 78% of the revenue derived from KBIGI’s Water Strategy support the four global goals. 

Despite progress and regulatory developments, effectively measuring impact remains challenging, according to AP7’s Johan Florén, Head of Communication and ESG, and Flora Gaber, Manager of ESG Analysis. 

“There is a long way to go before we even begin to approach any form of standardised measurement methods,” they noted in the report.  

“Complexity is a challenge when comparing different companies with different products in different places, even when only one SDG is in focus. Quantifying the benefits is also a challenge, especially if the ambition is to sum up positive and negative impacts.” 

Positives and negatives 

To capture the wide scope of the impact of corporate activities, KBIGI and AP7 introduced a scale system, ranging from –4 (negatively contributing to the selected SDGs) to +4 (positively contributing). Scores were informed by annual corporate reports, publicly available information, communication with management teams, and proxy voting service provider reports.  

“Building out the scoring methodology to define those scores was a key part of this process and formed the basis for engagement with companies on specific areas as the project evolved,” the report said.  

Hong Kong-based water utility China Water Affairs was awarded a +4 by KBIGI and AP7 on its positive impact, with a 91% positive alignment with the four SDG goals – particularly SDG 6, the report said.  

China Water Affairs provided detailed responses and could demonstrate its commitment to environmental and social themes – for example, it has undertaken sustainability feasibility studies by independent third parties. 

As an emerging market-based utility, KBIGI and AP7 noted that China Water Affairs is having a more positive impact than a developed world counterpart due to building out its capacity and supply in areas “where the need is greater”. 

“While many impact measurements to date are mainly focused on the positive effect of a company’s goods or services, our approach looks to balance that with any related negative effect,” the report said. 

To calculate this negative impact and adverse impact indicators, such as controversies or incidents surrounding products or company operations, carbon emissions, and disruption of ecosystems, are considered. If information on these indicators wasn’t available, companies received a default zero score.  

Accounting for water 

Other means of measuring impact have been developed for investors. 

Adding to its existing COMPASS methodology, GIIN recently launched the first in a series of new benchmarks to help investors assess and compare the impact-related performance of their investments against peers.  

The Impact Management Platform was launched last year to improve cohesion between existing standards and support impact-related dialogue between the investment industry and policymakers. 

KBIGI manages €2.3 billion in water-related assets on behalf of global clients, including sovereign wealth funds, endowments and public pension schemes. 

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

Copyright © 2024 ESG Investor Ltd. Company No. 12893343. ESG Investor Ltd, Fox Court, 14 Grays Inn Road, London, WC1X 8HN

To Top
Share via
Copy link
Powered by Social Snap