30 December 2021

Investment and water scarcity: Who is actually helping?

Good water management has the potential for a high 'social return on investment' – and a company ranking shows investors where to look, writes Alberto Monzonis

Potable water is and always has been a scarce resource, and its scarcity remains one of the main causes of global mortality; and the number one cause of infant mortality.

The UN provides some relevant data in this regard:

  • 28% of the global population lack access to safely managed drinking water services.
  • 297,000 children under five die every year from diarrhoeal diseases due to poor sanitation, poor hygiene, or unsafe drinking water.
  • 90% of natural disasters are weather-related, including floods and droughts.

Alberto MonzonisThe climate crisis has only accentuated the process, accelerating the water cycle, generating longer droughts and expanding desertification. Drastic changes in the seasonality of rainfall are also expected, as well as an increase in the probability of water-related natural disasters. To give a concrete example: according to this study, by 2071, nearly half of the freshwater basins in the US may not be able to meet their monthly water demand.

Governments around the world have identified this problem and, as a result, there are a wide range of initiatives to mitigate the potential negative impact. The private sector is also stepping up with potential solutions that reduce the impact of corporations on water scarcity.

Within ESG funds, water-related risks and opportunities are becoming increasingly relevant. Impact-focused investment funds seeking to obtain a high 'social return on investment' are looking for opportunities to invest in businesses that contribute positively to the cause. But, do the opportunities with the greatest impact add up? Or, to look at it another way, which sectors are actually helping?

For this analysis, I have relied on information provided by Ethos ESG, a provider of listed companies' data based on impact indicators about specific causes. In this case, the impact indicator "clean water access" is based on 31 sub-indicators related to water management.

From a sectoral point of view (average of the scores from 0 to 100 for the different companies), the top positions are occupied by the Technology & Communications sector, followed by the Transportation, Services and Financial sectors, all of which are close to 60 points. The sectors with the lowest positive impact are Basic Materials and Energy, both of which score below 16 points on average.

However, if we look at the top 100 companies (all above 90 points) individually, the sectoral picture changes slightly. The leading sector in terms of positive impact on clean water access is the Consumer Goods sector, which places 22 companies in the top 100, with names such as Adidas, Electrolux, Inditex and Unilever. Next in line is the Technology & Communications sector, with 12 companies in the top 100. Examples are Alphabet, Microsoft, Cisco and HP. At the bottom of the list, reflecting the sectoral breakdown, is the energy sector, which sees only one company, First Solar, in the top 100.

Several of the sub-indicators provide additional helpful detail. The indicator, 'Business model contribution to clean water access', for example, makes it possible to assess the degree of impact of each individual company's business model in ensuring access to clean water.

In this case, the sectors with the greatest capacity to generate positive impact according to their business model are the Industrials and Utilities sector. The data show that the first position in terms of average impact is the Utilities sector, with Industrials coming in second. However, when measuring individual companies, the Industrials sector, with 64 companies in the top 100, pulls ahead. In both cases, we can find leading companies in water management solutions, such as Aqua America and Suez in the Utilities sector or Xylem and Takuma in the Industrials sector.

"A high-impact water management business model must ... consider risks and opportunities within strategy, research & development and day-to-day operations"

Another relevant sub-indicator is 'Summary impact on water security', which integrates data from CDP Water, one of the world's most relevant water management rankings. As CDP uses its own sectoral categories to establish modifications in the assessment process (sector-specific methodologies exist), the results are not comparable with those of this analysis. However, it is interesting to note that some of the companies mentioned above are also part of CDP's A list, such as Electrolux, Unilever or HP.

From a more qualitative approach, the next sub-indicator, 'public commitment to water stewardship', highlights companies that have signed the CEO Water Mandate.

This is an initiative made up of business leaders who want to get involved in this cause, commit to improvement targets, and seek to influence others in a positive way. According to Ethos, only 66 of the 7,500 listed companies within its scope are signatories to this commitment, including names such as Microsoft, PepsiCo, Siemens, Stora Enso, Bayer and Nestlé.

But what could a company do to climb the rankings? The first thing to ask themselves would be: is water a material aspect for my business? High scores are reserved for companies that, due to their internal operations or the type of products and services they offer, have the capacity to generate a high level of impact. To do so, they should carry out a review of their business model. Is the company part of a water-intensive sector? Is it located in areas of high water stress? Does the product or service have a high capacity for water pollution if not properly managed? Could the company create some kind of product or service that drastically improves the efficiency of current techniques?

The evolution towards a high-impact water management business model must be approached from a holistic perspective, considering risks and opportunities within strategy, research & development and day-to-day operations. Finally, the company has a moral obligation to communicate and share what it has learned, leading by example and establishing sectoral and cross-sectoral collaborations to generate global progress.

Access to clean water is necessary to sustain life on our planet. If done well, proper water management has the potential for a high social return on investment. As we have seen, it is important to encourage both public and private investment toward the development, production, and maintenance of this crucial resource if society is to continue to thrive in the years to come.

Alberto Monzonis is an independent advisor expert in the inclusion and development of ESG aspects in corporate strategy.

Ethos is a ESG software for financial advisors, institutions, and investors.