Understand water risks

Water-related risks, including climate variability, overuse, and pollution, significantly affect business operations and financial performance. Key drivers include increasing competition for water, weak governance, and climate-induced variability. For instance, over 70% of global freshwater is consumed by agriculture, creating vulnerabilities for food and beverage industries. Physical risks such as droughts, floods, and water scarcity lead to higher operational costs, regulatory challenges, and reputational damage. Social risks include community pushback, exemplified by Coca-Cola and PepsiCo losing millions in Tamil Nadu, India, due to groundwater depletion concerns. The Investor Water Risk Dashboard provides a structured framework to assess water dependencies, geographic vulnerabilities, and corporate responses.

Establish priorities

Integrating water risk into investment strategies involves a structured five-step process:

• Leadership commitment: Boards must prioritise water risks within broader ESG policies, creating governance structures like sustainable investment committees.
• Material issues identification: Research is crucial to identify water risks specific to sectors and geographies. For example, energy and agriculture industries face unique challenges due to their heavy reliance on water resources.
• Set priorities: Investors should align water priorities with international norms, such as the U.N.’s Sustainable Development Goal 6 (SDG 6), which aims to ensure sustainable water management and sanitation for all by 2030.
• Policy development: Investment policies should explicitly address water risks, guiding manager selection, proxy voting, and active ownership practices.
• KPI tracking: Establishing performance indicators, such as the percentage of portfolio companies disclosing water-risk data, allows firms to monitor and improve their water-related impacts.

For example, ACTIAM’s water-neutrality goal by 2030 involves measurable reductions in water use and wastewater impacts across its portfolio.

Buy/sell analysis

Embedding water risks into investment decisions requires assessing material exposure at both the company and portfolio levels. Metrics include operational water intensity and dependency on high-risk geographies. Scenario analysis and stress-testing help quantify potential financial impacts, such as increased costs or loss of revenue due to water shortages. High-risk sectors like mining, agriculture, and utilities are particularly vulnerable, especially in regions with limited water governance. Investors are encouraged to actively engage with companies demonstrating weak water management practices.

Portfolio and asset class analysis

Portfolio-level water-risk analysis provides a systemic view of vulnerabilities across asset classes. Heat mapping tools identify industries and regions with high water-risk exposure. For instance, analysis of global indices like the MSCI World and S&P 500 revealed significant holdings in medium- and high-water-risk industries, such as utilities and food production. Geographic dependencies, such as reliance on water-stressed regions like South Asia and the U.S. Southwest, are particularly concerning. Coordinated risk mitigation efforts, including engagement with policymakers and corporate actors, can address interconnected water challenges across portfolios.

The Florida State Board of Administration (SBA) conducted a water-risk heat map analysis for its equity portfolio, revealing risks in sectors like materials, consumer staples, and energy. This analysis informed targeted engagement strategies to reduce systemic exposure.

Engagement

Active engagement on water issues allows investors to influence corporate behaviour and improve long-term value. Collaborative approaches, such as joining stakeholder initiatives or working with regional water authorities, amplify impact. Proxy voting guidelines that prioritise water-risk disclosures and sustainable management practices are essential for driving accountability. Systems-level engagement across regions facing water scarcity, such as agricultural or industrial hotspots, can mitigate cascading risks within portfolios.

Case studies

The report includes detailed case studies showcasing water-risk management strategies:

• Florida SBA used heat mapping and geographic analysis to manage water risks across a passive portfolio, identifying opportunities for engagement.
• ACTIAM implemented portfolio-wide goals for water neutrality, aligning with SDG 6 and reducing water intensity in its holdings.
• Citi’s Drought Stress-Testing Tool demonstrated how scenario analysis identifies vulnerabilities in water-dependent industries, enabling informed risk management.