Liquid capital: how investors should tackle the water crisis Water 昀氀ows into 昀椀nancial performance As mentioned earlier, water risks take on di昀昀erent forms Awareness appears to be increasing about how and require a thorough understanding of a company’s water – both the scarcity and excess of it – can have a entire supply chain, the locations of those activities, and the signi昀椀cant economic impact on companies. Agriculture governance around those risks. In addition, controversies is an obvious example, but many industrial activities are related to water pollution are becoming headline news, also heavily reliant on water. A less obvious example is which can translate into negative risk performance. the semiconductor industry. For instance, in 2021 Taiwan- Regulatory screening based factories had to reduce production due to droughts MiFID II and the formal Principle Adverse Impact 14 and use tankers to provide water. In turn, this raised 2(PAI) or Do No Signi昀椀cant Harm (DNSH) screens tensions with farmers, who su昀昀ered the same issue but were all introduced by European Union regulators in 2022. had to share this constrained – though vital – resource. Three of the 14 PAIs on sustainability factors are speci昀椀cally 16 How should investors quantify these impacts? While aligned to biodiversity factors with one of these speci昀椀c data continues to evolve, one relevant key performance to “emissions to water”. However, water also touches on indicator (KPI) would be the water intensity of the the notions of negative biodiversity impact and waste production process. But getting this data might be hard, management. Alongside the disclosure regulations from and the resulting 昀椀gures may not be exact. Nor does this the EU, there will be evolving country-speci昀椀c and investor- data tell the whole story: sectors such as 昀椀nance and led demands, as well as higher expectations on risk and energy have indirect exposures to water. For example, opportunity governance for companies. 昀椀nance companies may have a high revenue exposure to Impact-focused investing sectors with an aggregated high exposure to water risks. Given all the challenges, there is a signi昀椀cant In the energy sector, hydropower is evidently reliant on a 3sustainability (and 昀椀nancial) opportunity in direct supply of water, while nuclear and thermoelectric developing new solutions and technology to address the plants require signi昀椀cant amounts of water for cooling. di昀昀erent water challenges. These opportunities include: These dependencies were evident in the summer of 2022 in France when the drought impacted the functioning of – Directing capital to opportunities aligned to SDG 6: 15 UNESCO has estimated a USD 114 billion annual cost dams and power plants. We hope and expect that the understanding and measurement of water materiality in to providing the necessary infrastructure for safe sector and company pro昀椀les will increase. drinking water and sanitation in 140 low- and middle-income sovereigns. Absorbing water into investments – Water e昀케ciency solutions: these will not solely be We anticipate an increasing integration of water risk focused on minimising water intensity, but also on materiality and opportunity into investments in 2023. developing new production processes and products There is likely to be far greater disclosure and commentary that are less reliant on water, addressing pollution, and in both 昀椀nancial and sustainability reporting suites, while creating e昀케cient water infrastructure. we expect an expansion of water data and KPIs: Water risk materiality Genuine thirst for innovation For investors seeking unconstrained universes, it will Water-related challenges are already evident around the 1 be important to identify material ESG risks relating world and are likely to rise. Water solutions bene昀椀t industry, to the water impact on companies and sectors, including: society and the planetary fabric that sustains life on this planet, while those entities and companies that fail on – Water intensity: there is rising scrutiny of water usage water performance or disclosure are likely to be penalised. and management, especially for regions at high risk Putting an appropriate value on water will likely be key to of droughts or 昀氀oods. Water intensity is nuanced given protecting this essential but undervalued resource. the intensity, availability and reliance factors across a company’s supply chain. – Physical risks: the proportion of revenues, earnings or assets in locations with severe or very severe risk of droughts or 昀氀oods. – Controversies are always an indicator, but these will mostly highlight companies with direct exposure to water issues (through local pollution incidents or overuse) without revealing issues related to water dependency across the extended value chain. 14 Forbes, 2021, No Water No Microchips: What Is Happening In Taiwan? 15 World Economic Forum, 2022, 5 unexpected impacts of drought in Europe 16 PAI biodiversity factors are activities negatively a昀昀ecting biodiversity-sensitive areas, emissions to water and hazardous waste and radioactive waste ratio 4