“Positive approaches and engagement have the highest potential as drivers of change”, according to DWS Research Institute.
Investors are being urged to adopt more direct and impactful investment strategies to address global water risk in a new report published by DWS, the asset management arm of Deutsche Bank. Risk avoidance will not lead to the transformational water-related change required, according to a new DWS Research Institute report which calls on asset owners to go beyond standard ESG integration in their portfolios.
DWS says assessment of negative impacts of existing and new investments is necessary but insufficient, recommending asset owners seeking real-world impact to shift from an ‘outside-in’ ESG integration focus, to an inside-out, more direct and holistic investment approach.
According to the World Health Organisation, 785 million people lack basic water-drinking sources, and a further two billion do not have access to basic sanitation. Almost 1.6 million deaths were attributed to sanitation and hygiene deficiencies in 2017. Two of the United Nation’s 17 Sustainable Development Goals directly relate to water risk, with water linked to several others. Despite this, the European Environment Agency has stated that most water related targets for 2020 will be missed.
To directly address these issues, DWS recommends that investors should demand a shift from a linear to a circular economy, one in which the water cycle can be fully accounted for and costed. Investment into green infrastructure, and the integration of grey, i.e. waste-related, infrastructure into a sustainable model are also suggested to improve water management.
Investors in listed equities, corporate bonds and high yields must develop an understanding of the impact that global trade has on water risk, says DWS, including water usage within different industries. Assessing water impact is the first step but assessing sustainability of water related practice must come next, the report states, also acknowledging the need for improved reporting from companies and supply chains.
DWS says investor actions and impacts will differ across asset classes, but suggests that active engagement and stewardship are more likely to contribute to real-world change than tilting of equity portfolios or even investment in thematic funds.
“Positive approaches and engagement or stewardship approaches have the highest potential as drivers of change, but they are limited thus far and more due diligence is required in understanding their specific aims when it comes to managing ‘water risk’,” the report says.
As well as deepening engagement by investors with companies, DWS calls for “more and better engagement with policy makers on appropriate water sustainability governance.”
“Better incorporation of water risks and opportunities into investment decision-making across asset classes is required, but will need governments to set stronger disclosure requirements on companies,” the report adds.