When it comes to water stewardship, there is growing concern among investors, especially now that climate change is becoming a focal point for investors and companies alike. There is a strong concurrence of both corporates and investors that risk exposure is key and therefore needs to be properly captured. Risk exposure has typically been seen as a function of water dependency and directly connected to water security, 2 crucial issues for sustainable portfolio management.
Eurosif spoke to CDP’s Head of Water, Morgan Gillespy about the obstacles to efficient and comprehensive water risk disclosure. As CDP’s Head of Water, she leads the development and implementation of products and services relating to water as well as the analysis of CDP’s water data.
Eurosif: Which do you deem to be the biggest challenge between having companies report better about water risks or investors truly grasping the relevance of that risk for their portfolios?
MG: Our latest report shows that company reporting is a bigger challenge. We see increasing investor concern on water issues and growing expectations for companies and suppliers to disclose. On the other hand, while half of our Water A List companies are based in Europe, bridging the growing gap between these leading companies and the rest will require more companies to disclose, as the majority still do not do so. Likewise, while in Europe companies are well ahead of global averages on key metrics like water governance, less than half of companies report taking a comprehensive risk assessment beyond their direct operations. Without more detailed disclosure, investors cannot adequately assess their portfolio risk. Given the threat that both companies and investors see from water-related risks, we urge greater disclose on this topic.
Eurosif: What are the main triggers that motivate companies to improve their reporting?
MG: There is a massive business case for better reporting and managing water. One goal of corporate attention to water stewardship is in enhancing shareholder confidence, particularly given the large and growing number of investors seeking disclosure. Investors are looking to ensure the companies in which they invest are behaving responsibly, prepared for challenges and well-positioned to generate sustainable returns. However a significant trigger for improvement is the benefits and opportunities companies realise as a result. 68% of company respondents report that they have identified opportunities by responding to water stewardship issues. These opportunities come via improved water efficiency, cost savings, sale of new products, increase brand value, business resilience and competitive advantage.
Eurosif: How do you think the European Commission can help in this regard?
MG: The European Commission has stated its commitment to implementing the 2030 Agenda by looking to integrate the SDGs into its policy framework. SDG Goal 6 calls for the sustainable management of water for all, and two targets under this goal speak directly to the private sector and requires their action in order to achieve it. This EU-level prioritization is a major step towards greater water stewardship. Increasing regulatory requirements present major incentives for companies to disclose and manage their risk; companies that can give solutions can seize these opportunities, improve their reputation with investors and customers, and win business. Policy integration of the SDGs provides investors and other stakeholders with consistent information about the sector against which they can measure risk accurately.
Eurosif: What do you esteem to be the missing link within companies and the interaction between departments to work towards better water management/reporting? What would you want to see more of?
MG: European companies perform well in terms of governance and strategy, with three quarters including water issues at board-level and 80% in business strategy. Most respondents have identified water-related opportunities. The next stage of stewardship involves more a proactive response; only 42% of the companies to have identified opportunities have strategies in place to realize them. This report also shows the need for greater engagement with suppliers, regulators, local communities and other key stakeholders in the river basin beyond companies’ direct operations, with only 32% extending their risk assessments to this scale.
Eurosif: Where do you see the trends for investors going in the way they look at water ?
MG: Recognizing that water security presents risk, investors are ramping up their expectations for proactive water stewardship in their portfolios. Major regulatory pressures, such as Article 173 in France requiring investors to disclose environmental issues into their strategies, and the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) guidelines, which explicitly include water-related targets, means water stewardship will keep growing as an investor concern. That is particularly the case as investors move their attention from the regulatory to the physical risks associated with climate change – water insecurity being fundamental. In terms of understanding water issues and companies’ performance, investors will favor businesses that proactively respond to these risks and opportunities, and are left no choice but to assume that on average the non-responders are performing less well than those that did respond