Skip navigation
Three Reasons Advisors Should Care About Water Resources Lake Oroville, California. Photo: California Department of Water Resources.

Three Reasons Advisors Should Care About Water Resources

Poor water stewardship poses a real financial risk for investors.

For years, you’ve been diligently turning off the faucet each time you brush your teeth. You’ve replaced harsh cleaning chemicals with more natural alternatives and even installed a low-flow showerhead. What more can you do to preserve our planet’s finite supply of water?  

Although the aforementioned individual efforts are laudable, household usage accounts for just 11% of global water withdrawals each year. The real culprits, i.e., those that can contribute most to preserving our water resources, are companies. Although there are many reasons that corporations should evaluate their water management practices, we’re focusing here on the financial risks of poor water stewardship. Without further ado, here are three that may well rain on investors’ parades: 

Reduced (or costlier) production capabilities and supply chain disruptions, which have the potential to dramatically impact companies across all industries. After all, water is essential for the cultivation and production of raw materials, the manufacturing process, and the distribution of products. In fact, the far-reaching effects of climate change–induced water scarcity can already be observed in Europe, where a summer of severe droughts has threatened livestock production and crop yields. Vital waterways such as the Rhone, Danube and Po rivers are drying up, hampering transportation of goods and impeding nuclear energy production. 

The timing, arguably, couldn’t be worse for a continent that’s already grappling with soaring inflation and energy shortages following Russia’s invasion of Ukraine earlier this year. But nature waits for no one, and the effects of our collective procrastination are now yielding notable economic effects in the form of elevated shipping costs, supply shortages and likely production cuts. Some economists have warned that dry conditions in Germany, long considered mainland Europe’s economic powerhouse, could stall the country’s overall economic growth by as much as half a percentage point this year.

Legal action and reputational damage, as companies are taken to task for their roles in excessive water usage or contamination. Recent research has indicated that half of the United States’ waterways are now so polluted they are considered “impaired,” meaning they are unsafe for swimming, fishing or drinking. Among the contaminants garnering increased public attention are per- and polyfluoroalkyl substances (PFAS), commonly referred to as “forever chemicals” because they don’t break down easily. These man-made substances, which have been linked to a variety of negative health impacts in humans and animals, are now so ubiquitous that they can be found in even the most remote areas of the world. 

As awareness of PFAs grows, so too do efforts to hold companies accountable for releasing these harmful chemicals into surrounding waterways—more than 1,200 PFAS-related lawsuits were filed in the United States last year. Corporate defendants could subsequently find themselves embroiled in protracted litigation, spending considerably on legal defense, settlements, judgments and crisis management communications. For some companies, the financial risks are formidable—well-known chemicals manufacturer 3M devoted 15 entire pages in last year’s annual report to its PFAS-linked legal exposures. 

Stranded assets in water-stressed regions, often emanating from inaccurate projections regarding water availability and access, failure to implement appropriate risk mitigation and stewardship plans, and/ or unfavorable regulatory responses. Stranded assets, in case you were wondering, are those that no longer generate revenue for a company. They often transpire as a result of adverse environmental conditions (yes, that includes drought) or significant disruptions in terms of consumer demand, regulatory activity and technological innovation. 

Again, this isn’t a hypothetical scenario: Some major publicly traded companies have already seen their assets become albatrosses as a result of water-related events. One particularly prominent example is that of mining behemoth Barrick Gold, which spent two decades and billions of dollars attempting to get its once-touted Pascua Lama mining project underway. This Andean project, straddling the borders of Chile and Argentina, was met with dogged and unrelenting opposition from environmental groups and local stakeholders concerned about its destruction of nearby glaciers, as well as depletion and contamination of local water supply. These concerns were seemingly not unfounded and in 2013, upon determining that Barrick Gold did not have adequate protocols in place to prevent water pollution, a Chilean court imposed a $16 million fine and ordered that the company suspend construction on the project (cue class action lawsuits from irate investors). Last month, drawing a line under the sorry saga, Chile’s Supreme Court ratified the definitive closure of Pascua Lama project. 

Far from being a cash cow, Pascua Lama has become a cautionary tale for other companies, and its fate now hangs in the balance. Barrick Gold is currently exploring whether the Argentine side of the mine remains viable, but for now, the project represents an extremely expensive thorn in the company’s side. 

 

What is the role of financial advisors in addressing the water crisis? 

Financial advisors, who are well positioned to help their clients identify and manage water risks in their portfolios. Given the politicized and polarized nature of recent dialogue surrounding environmental, social and governance (ESG) investing, some advisors might be hesitant to raise such issues with their clients. However, regardless of clients’ political inclinations, there’s a chance they are already experiencing the day-to-day effects of prolonged prevarication on water issues. Droughts might be affecting their livelihoods. Water pollution may be impacting their ability to enjoy much-loved hobbies such as fishingscuba diving or boating. They might even have good reason to doubt that their home water supply is safe for consumption. 

Importantly, advisors wishing to help clients target the encroaching water crisis are not merely limited to ESG funds, which have contributed to skepticism of the broader sustainable investing movement (particularly when it comes to a lack of transparency concerning these funds’ underlying selection criteria). Direct indexing solutions instead allow advisors to customize portfolios to clients’ specific values, financial preferences and tax situations. Many such platforms also afford investors the flexibility to decide whether divestment or engagement is their preferred impact approach; indeed, some independent shareholders have been lending recent support to proposals that urge disclosure and mitigation of water risks. 

The time to act is now—the water crisis is not a nebulous, theoretical concept. It’s here, and it’s already having profound social and economic impacts. As other industry participants have observed, “by failing to account for water security in financial decision-making, financial markets are contributing significant financial flows that are increasing exposure and vulnerability to water-related risks across the global economy.” Advisors shouldn’t be afraid to discuss this financially material issue with clients; it’s part of their fiduciary duty. 

Emma Smith is director of communications at Ethic. Ethic is an independent provider of personalized direct indexing strategies for financial intermediaries. Its scalable technology platform enables advisors to create custom portfolios tailored to clients’ unique values, financial goals and tax preferences.

 

Hide comments

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Publish