Amplifying the Investor Voice in Corporate Water-Risk Discussions
Companies and investors can both take steps to promote regular and substantive conversations about corporate water risk. At Ceres Conference 2016 in Boston on May 4, Monika Freyman, director of the Water Program at Ceres, led a session in which 100 investors, corporate representatives, and social-sector leaders showed remarkable unity on this topic.
Both the panelists and audience members agreed that two of the primary goals should be to have companies disclose the water risks in their value chains and to work together to develop mandatory, standardized, and sector-specific water disclosure requirements.
So where are the pain points in the relationship between companies and investors on water risks when there seems to be so much consensus on next steps? As it turns out, the main challenge is finding the right time, venue and people to discuss the topic.
In multiple sessions throughout the conference, representatives from corporate entities such as GE, DuPont and General Mills dug into this topic along with investment thought-leaders from TIAA, Pax World Funds, Morningstar, Glass Lewis & Co., and Breckinridge Capital. The group acknowledged that water – and sustainability, more broadly – is not currently getting airtime in investor-corporate conversations.
Pain Points
There are a number of reasons why investors and corporations have difficulty discussing water issues.
The first reason is that water systems are complex. Topics like source-water-to-groundwater-to-surface discharge are not easy to boil down into pithy conversations.
Water problems are also experienced locally. They are based on factors such as ground cover, topography, urban and agricultural activities. Not only is each company facing a different type of water challenge – like quality, quantity, regulatory risk, or stakeholder pressure – but each facility within a company portfolio may be facing a different obstacle as well.
Second, there continues to be a lack of clarity around what metrics investors should request. Even then, individual data points, such as “gallons withdrawn per day,” don’t tell the whole story.
For example, Exelon withdraws 39 billion gallons of water per day for power generation, according to Bill Brady, its director of corporate environmental strategy. However, 98 percent of that water goes back into the supply from which it came.
In this case, calculating withdrawals would be a huge oversimplification of the risks, which range from warming surface water temperatures to regulatory risk under Clean Water Act 316(b) related to cooling-water-intake structures.
By contrast, investors in food companies may be most interested in how water risks like drought or flooding at the crop level may disrupt the supply chain. Receiving information on the dollars of value at risk may be a more apt metric. In either case, a robust discussion around how water is used is required to pick the right metric and understand the full range of material risks.
Third, there is limited information flowing about corporate water use to investors. At the moment, companies are not required to report to investors on water issues at all. In the interim, CDP is acting as a unifying force. The global NGO receives more than 1200 corporate responses per year via its Water Information Request, a voluntary questionnaire on water risks and management.
Outside of CDP, companies are sharing data in piecemeal ways, through sustainability reports or in their 10K.
SEC disclosures are still rare, said Sarah Wilson, responsible investing associate at TIAA, who uses the information to judge water “leaders and laggards” in various industries.
Ceres hopes to help investors streamline their search for water information in 10Ks through its SEC Sustainability Disclosure Tool.
Conversation Opportunities
With that said, where and when are the best times for investors and companies to start discussing water issues – from metrics, to management, to information disclosure? In some instances, it may be on quarterly investor calls.
Robert Fernandez, director of environmental, social and governance (ESG) research at Breckinridge Capital Advisors, said this is only appropriate when sustainability issues have a direct tie to corporate strategy and/or financial performance.
General Electric, a company that integrates its financial and sustainability reporting, has a different vision. Ann Condon, director of resource and environmental strategies at the company, said, “At the end of the day, if it’s a serious issue to an investor, it needs a separate discussion. Investor calls are the wrong venue.”
In addition to selecting the best venue, companies and investors need to bring the right people to the call. They should also inform the other party in advance about who is attending, and make sure all attendees are prepared.
Courtney Keatinge, director of ESG research at Glass Lewis & Co., said she learns a lot about companies when corporate directors join calls on sustainability. However, that doesn’t mean she always leaves the call impressed. She believes that collaborative engagement beyond governance and portfolio managers is “really, really important,” but said that company directors do not often prepare well enough when they join the calls.
On the flip side, the investor community acknowledges that many of its own colleagues are not up-to-snuff on material environmental issues companies face. Stephen Kibsey, vice president of equity risk management at Caisse de Dépôt et Placement du Québec, says that analysts need support. “They are expected to be financially savvy and understand business operations - and now they need to be experts in environment, social and governance issues.”
Wilson said she agreed that there is a “high learning curve on water” for investors and proposes that mandatory reporting of key sector-specific data points could create a curriculum of sorts to learn about the issue.
Forward Movement
So why is it important for companies and investors to carve out time for water? The most obvious reason is that water challenges are causing real risks that investors need to know.
For example, Exelon is in the process of closing down its Oyster Creek, New Jersey power plant after regulators demanded that the company invests in closed-cycle cooling towers. Brady said the most economical outcome for the company was to close it down in 2019.
For many other companies, water risks can be equally devastating, according to Pax World Management’s senior vice president for sustainable investing, Julie Gorte. “Water risks are not constant, but when they arise they wreck your whole day.”
And, while this may be frustrating for investors, the price of water cannot be used to signal its value at this time. Evaluating its value requires a qualitative discussion.
Both companies and investors know that water is only one of hundreds of risks that companies are asked to manage. But it’s time for companies and investors to get a better handle on ways to track, manage and disclose information on this important issue.
Here are just a few of the things that companies and investors can do to help jump-start the conversation.
Companies
- Develop science-based goals investors can trust
- Move to integrated reporting to elevate the sustainability conversation
- Tie corporate sustainability goals and actions to corporate strategy
- Create a comprehensive PDF of the sustainability report so that investors have one comprehensive source for the information
Investors
- Give company a “heads up” on what topics you want to talk about so they can bring the right people to the meeting
- Be clear with companies about ESG metrics that you need to see publicly on their website, so that they don’t remove during web cleanups
- Ask questions about board and sustainability team while looking at the location of the sustainability team within the organization and evaluating their individual qualifications
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