Take a step back and reflect on how we value and manage the world’s most vital resource, ask Thomas Schumann, Markus Barth and Teresa Russell.
2021 World Water Day is March 22nd. This day provides the opportunity to reassess how water is consumed and managed globally. This year’s theme of ‘valuing water’ is especially pertinent in the asset management context.
Water is invaluable to humanity in supporting life and overall well-being. However, there is also a business case for prioritizing water resource management.
Water risks including infrastructure breakdowns, pollution, and water-related natural disasters negatively impact a company’s bottom line, and these risks are only expected to grow as climate change effects intensify. Not only that, but the business costs associated with these risks are projected to be $300 Billion or five times greater if left unaddressed.
Until recently, climate risk has focused solely on the level of carbon emissions. However, companies can continue operating even while spewing massive amounts of carbon into the atmosphere. Without access to water, many companies simply have to shut down, which severely impacts their future viability and profitability. As a result, investors increasingly use water security as a proxy for climate security.
As the financial pressure to remedy these issues mounts, so too does the value of water security. Good water stewardship by consumers, corporations, and investors alike is clearly key to a flourishing society and sustainable global markets. However, according to a recent update by UN-Water, we are not on track to meet Sustainable Development Goal (SDG) 6 and achieve a water-secure world by 2030. 785 million people still lack safe drinking water and 2 Billion people lack improved sanitation, and the COVID-19 pandemic has the potential to exacerbate water scarcity worldwide if no actions are taken.
As a last-ditch effort, UN-Water developed the SDG 6 Global Acceleration Framework which outlines how we can fast-track the path to water security. Its top recommendation is to optimize financing, calling out the financial sector’s capacity to create a game-changing positive impact.
The stage is set for firms and investors. The question is, what is the most effective engagement strategy for improving water management?
The World Economic Forum identifies transformational investment as the solution to systemic risks such as water crises. These investments can tackle long-term water risks while also generating competitive returns, a win-win-win for the environment, society, and investors.
One responsible investment approach recommended by the DWS Research Institute for improved water management is Risk Control, which involves investing in the broad market while reducing exposure to companies with high water risk. This strategy is the best of both worlds: it provides attractive returns and encourages water stewardship. Thomas Schumann Capital’s investable water security indices and investment products embody this approach by simultaneously promoting water security and delivering sustainable returns while providing global capital markets with the world’s first ever water footprint in equities.
Other investment types include Thematic Equity Funds, which invest in water utilities and companies associated with water purification equipment manufacturing; Positive Approaches, which only invest in companies demonstrating good water stewardship, and Direct Investor Engagement with corporations on their water policies. These approaches can be limited by accepting greater trade-offs between return and positive impact.
Water is not a commercial “commodity” such as gold, oil, gas, sugar or wheat, and is neither sustainably viable nor commercially suited to be traded as such on Wall Street. Access to clean water and sanitation are recognized by the United Nations as human rights.
Clean air, and clean water are the world’s most precious resources, resources that require utmost stewardship, appreciation, and integrity. The value of water cannot be understated. Water risks are present in all industries and geographies. By aligning investor and business objectives with integrated water management, we can turn things around and achieve universal access to clean water in the coming decade.
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Thomas Schumann is the founder of Thomas Schumann Capital® (TSC) is the only sponsor for investable indices and products for water security and responsible investing. TSC’s solutions enable investors to integrate water risk into investment decisions to achieve sustainable performance, positive impact, water stewardship, and engagement, fast-tracking the path to a water-secure world.
Markus Barth is an index pioneer who has designed, developed highly successful investable indices throughout his over 30 years career. In 2007, Markus developed the first-ever climate-focused investable indices that included proprietary valuation metrics to ensure both a low carbon footprint and attractive valuations.
Teresa Russell is a sustainability communications expert with an MS in global sustainability science and BS in finance. She provides business services to mission-driven companies and collaborated with the Frankfurt School of Finance & Management to develop the Strategic Development of Sustainable Financial Investments workshop.