Water, Water Everywhere: Managers and Investors Weigh Water Risks & Opportunities

Water doesn’t get the same level of attention from ESG-focused investors as carbon emissions do. But water issues bring a long list of risks and opportunities that can have major impacts on a company’s performance and stock price, let alone the lives of people who face floods, droughts, rising sea levels, water pollution and more.

To that end, institutional asset owners and asset managers have been sharpening their focus on water risks, and water-related opportunities, in their investment portfolios. That includes pressuring their portfolio companies to improve their own water practices, use water more sustainably, and take appropriate measures to mitigate against water risks.

They’re also pushing for improved industry-wise standards regarding how to measure those risks.

There’s a lot of room for improvement though. Water issues “don’t have the same sense of urgency that climate change has,” says Illinois State Treasurer Michael Frerichs, who has been active around water issues with the $50 billion in state funds he oversees. “It’s easy to pay lip service to water issues,” he adds. “But that head-nodding doesn’t always translate into a sense of urgency or real action on water.”

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Indeed, water risks still get far less attention from institutional investors than do other climate risks. “To be honest, we rarely get questions and interest on water,” said Monika Freyman, Mercer’s head of sustainable investments for Canada, speaking on a CleantechIQ webinar this week. Instead, she said, much of the focus to date has been on carbon emissions. “There has just been so much focus on climate change and carbon emissions, and meeting net-zero targets and transitioning to a low-carbon world.”

Water risk takes many forms. It can be too much — rising sea levels, floods, torrential rain — or it can be too little, like a drought. Water can become polluted, or can be overused by industry or agriculture. A growing global population and increased urbanization are increasing the need for water, at the same time that climate change is altering traditional patterns of rain and snowfall. It all adds up to water stress.

Such stress can cause a severe hit to water-intensive sectors like agriculture, food and beverage makers or power generation. But it will impact every industry one way or another. Water stress will damage a company’s bottom line and thus its stock price, underscoring the need for investors to pay attention to water.

But there’s a flip side too. “We’re looking for opportunities as well as risk,” says Justin Winter, portfolio manager at Impax Asset Management. He says companies have slowly gotten better at disclosing the risks they face.

“We’ve seen, in the last few years, an increased focus on disclosures around water risk, and that’s helpful for us in terms of making investments. We are better able to assess risk.”

Corporation Action

There’s also been some signs of progress in recent years around how companies approach water sustainability. In the food and beverage sector, for instance, a recent analysis by Ceres found “some encouraging signs of progress on corporate water management,” the nonprofit group says in a new report.


And CDP, in its own study, found nearly two-thirds of companies overall are “reducing or maintaining their water withdrawals, and more than half are monitoring the quality of their wastewater discharges — a basic action that all companies should be taking.”

Among the positive changes cited by the nonprofits:

  • L’Oréal has created “waterloops” that let it treat and reuse water at some of its factories.
  • Mars has implemented a wet-dry irrigation system for rice growing that should reduce water use by 30%, while also saving the company tens of millions of dollars annually.
  • Textile company Formosa Taffeta uses artificial intelligence in its fabric dyeing to reduce water consumption.


But “much more work needs to be done by companies to help ensure sustainable water supplies,” Ceres adds. “Overall, Ceres’ analysis found companies do not have adequate practices in place across categories of water management.”

Asset Owner Action

That’s where asset owners and asset managers are stepping in, encouraging those companies to improve their water practices, and using the heft of their investment portfolios to push for greater action around water.

“Institutional investors are beginning to wake up to the threat of water risk. Every week, we hear from more and more investors who want to get involved in our water engagement work,” says Kirsten James, director of water at Ceres. She cites as one example the Global Investor Engagement on Meat Sourcing, a water-focused coalition organized by Ceres and the investor network FAIRR that has grown by 75% since launch in 2019. It now includes more than 90 institutional investors.

“These efforts are making some inroads. But we need more sustained, collective engagement to move companies at the speed and scale necessary to mitigate water risk,” James says.

Swedish pension AP7 has been especially active in the water space, hiring Impax and KBI Global Investors for a green equity mandate in which water was a key focus in 2018 and partnering with Impax on a research project that resulted in the publication this summer of an in-depth report on water risks and opportunities. That report also stressed the need for market participants to improve water reporting standards.

Another industry-wide effort is the Valuing Water Finance Task Force, convened by Ceres and the government of the Netherlands. The point, Ceres says in a report on the task force, is to “drive corporate action on water-related financial risks and raise awareness within the capital markets of the widespread negative impacts of corporate practices on water supplies. “

Member organizations include AP7, the California State Teachers Retirement System, the New York State Common Retirement Fund, the UK’s Local Authority Pension Fund Forum, Cathay Financial Holdings, Sweden’s Skandinaviska Enskilda Banken (SEB) and Australia’s HESTA.

The task force “has been working to fill gaps in research about the physical and financial risks associated with water use within their portfolios in order to compel investors and companies to act on water risk,” James says.

Group members are “working together to encourage the adoption of better water management practices and to drive market wide changes,” says Frerichs, another member. “The task force is laying the groundwork for future investor engagement,” he adds.

Engagement & Taxonomies

Engagement has been a key driver behind many corporations paying more attention to water risks, and taking more action to avoid or minimize those risks, experts say.

“Investor engagement is a key part of [fiduciary] duty. Engagement works, and persistent investor engagement works better,” Frerichs says. “We’ve found management teams and boards are increasingly willing to collaborate with investors” on water issues.

But he says, in comments that echo his statement about lip service, Frerichs adds that engagement sometimes brings a “mixed bag” of responses — and not always action. “Different companies react differently, but I’d say generally people appreciate water,” he says. “There’s not a lot of pushback. People are happy to acknowledge that it’s something they need to consider. It’s just a question of prioritization.”

Investors push companies to improve their practices around water sustainability, including reducing their water use where possible, but also to sharpen their reporting of water issues and work for industry-wide standards. “Investors must engage with companies and standard-setters to improve reporting by companies,” Impax says in a statement. When it comes to water data today, the company adds, “decision-useful information is scarce and is not easily available to investors.”

That’s because, similar to many other ESG factors, there is no industry-wide standard or taxonomy when it comes to water risks, making it a challenge to measure and manage those risks.

“There’s no single framework that captures all of the risks around water,” says Winter.

For that reason, Impax and other asset managers look to a range of frameworks when looking to assess a company’s exposure to water risks. Those frameworks cover different angles of the issue and come from Ceres, the World Resources Institute,, the US Environmental Protection Agency and the World Health Organization, among others.

However, “None of the existing frameworks fully reflects the role of listed companies providing water solutions,” Impax says. “The focus is often on water projects and on measuring positive water stewardship within those projects.”

Some asset managers, like Impax, have developed their own methods to measure water risk and invest in water-related opportunities. “We have been investing in companies providing water solutions for more than 20 years and have created a water market taxonomy or classification system,” said Lisa Beauvilain, Impax’s head of sustainability and ESG, also speaking on CleanTechIQ’s webinar. “For the last seven years, we have been measuring how much water our companies have saved, treated or provided as part of our annual impact measurement and reporting.”

And institutional investors are showing rising interest in water reporting. “There are a number of challenges with measuring the positive impact, but there is tremendous interest as well from our investors in seeing the concrete illustration of what the water solution providers are actually doing with these products and services and what the outcomes are.”

More broadly, there has been some effort, and some progress, made toward developing industry-wide standards that address a large swath of water-related risk. However, “We are still a ways away from having a unified framework,” Winter says.

Perhaps that’s one reason why there aren’t, as yet, a large number of water-focused funds. Still, a small number of asset managers offer pensions and other investors water-focused strategies. Impax is one; its water strategy has been around since 2009 and now has about $9.2 billion in assets.

It’s an all-cap global equity strategy that buys stocks of companies in sectors like water infrastructure, treatment and utilities. “There’s this massive problem” with water, Winter says. “We look for companies that can provide solutions to those problems.” Holdings include names like American Water Works, Agilent Technologies, Kurita Water and Cintas.

Other managers offer sleeves of portfolios or indexes with water focus; other managers that have water-specific funds include KBI Global Investors and RobecoSAM. The RobecoSAM strategy buys equities in areas like wastewater treatment, water analytics and infrastructure. Among its top-10 holdings are Thermo Fisher Scientific, Ecolab, Suez and United Utilities Group.

Such strategies don’t have a huge investment universe to pluck names from; Impax, for instance, has roughly 250 names that meet its criteria, Winter says. The fund generally holds between 40 and 60 of those stocks.

That universe seems likely to expand, however, as investors and managers start to pay more attention to water risks and related issues.

Corporations that use and are affected by water risks — that is, all of them — are “taking global water risks more seriously,” Ceres says, with 71% saying they incorporate water risk into their business planning and investment decisions, an increase from 58% two years ago.

There’s plenty of room to improve however. “Many companies simply aren’t moving quickly enough to ensure sustainable water supplies,” Ceres says. That means asset owners and asset managers will need to keep the pressure on their portfolio companies, the same as they do around carbon emissions, social issues and other ESG factors.

Experts sound cautiously optimistic. “There is of course an increased attention on climate change overall,” Winter says. “And water is a key part of that.” Particularly for companies that are heavy water users like beverage companies and consumer goods manufacturers, “There’s an increased focus on sustainability and water issues,” he adds. “There’s definitely more goal-setting.”

Investors tend to agree. “Water risk disclosures are improving, and many companies are moving to tangibly tackle water challenges,” Frerichs says. “But we still have a ways to go.”

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