In a world of climate stress, water can be an investment opportunity. But the physical risks – floods and droughts, pipes, pumps and pollutants – are not the only ones investors may encounter. Deborah Ng, director, Strategy and Head of Responsible Investing at the Ontario Teachers’ Pension Plan, enumerated two more: reputational and regulatory risk. She was speaking as part of a panel discussion called “Water Shortages and Solutions.”
As she explained, reputational risk, ironically, reflects political gridlock. “A lot of governments haven’t been able to get together and put in place the policies and regulations that they need to promote the market-efficient allocation of water resources,” said Ng, “The result can be something similar to climate policies, where the public look to large investors like us to resolve the problem, and that actually creates a lot of reputation risk for us if we’re seen as not doing anything about it. “
Managing reputational risk means grappling with the physical risk of an asset from the outset, argued Andrew Maddocks, communications and outreach lead for the water program at the World Resources Institute. His organization has mapped individual site locations against 12 indicators of water risk for prospective investors.
“We’ve seen a lot of the partners we work with do water risk assessments,” he said. “If people don’t know where in the world they’re facing water risk and what those water risks look like, they’re not going to be able to move to the later steps of really innovative, solution-oriented processes.”
Monika Freyman, water program director at Ceres, a non-profit sustainability group, said this is the kind of information that needs to be incorporated into a fund manager’s strategic thinking. investors should assess if companies understand the strategic value and importance of water in their businesses. Water risks often materialize as loss of social license to operate due to regional or community perceived risks to water resources by company or sector water use, or as rapid change to the availability of water or unexpected regulatory evolution.
“If a company doesn’t get water right, they can lose the ability to deploy capital, secure revenue or grow their business or enter new markets,” Freyman explained. “Water is so much more than just an operating input.”
In benchmarking investments, managers might for example come across credit risk associated with companies in the water sector, she added. But there is also social licence risk – for example, how water developments affect a watershed and indigenous communities.
“You really need to engage all the stakeholders and talk to the governments, talk to the watershed managers, individual people, domestic users and farmers,” said Maddocks. He pointed to the shutdown of a Coca-Cola bottling facility in india, after farmers complained. Water conflicts abound in urban areas too, as, for example, in Sao Paulo: “A whole lot of things are impossible if you can’t get water out of your taps,” he added.
This leads back to regulatory risk. “You think you have secure assets to hold, but at some point in the future there is no water,” cautioned Ng. “is it going to go to agriculture, is it going to go to power generation or is it going to go to people? i think you can figure out which way the government is going to go.”