On World Water Week, Eric Pedersen, head of responsible investments at Nordea Asset Management, answers PA Future’s questions on how the team is engaging with companies on water risk.
How do you engage on water with companies? What are your priorities for a company to take on board?
We have multiple tools at our disposal to identify companies which may have higher risk exposure to water – be it through consumption in water-stressed areas, pollution or effluents – and thus are potentially in scope for engagement. We use, for example, the PAI metrics Emissions to Water (1.8.1), High Water Stress (2.8.1) and Biodiversity (1.7.1) to identify relevant outliers – these companies may be subject to engagement following a further analysis from our responsible investment team. Moreover, we are in the final stages of completing an entity-wide assessment of investee company impacts and dependencies through the ENCORE tool, which will contribute to an even more comprehensive information landscape on water-related risks across our portfolios.
For us, it is important the topics we discuss in our engagement are relevant to the company and are reflective of the risk it faces within its business model, geography, or production processes.
On top of our individual engagements with investee companies, we are also part of multiple collaborative engagements which address water risks more specifically, such as through pollution reduction initiatives including the Investor Initiative on Hazardous Chemicals (IIHC) and the Pharmaceutical Supply Chain Initiative (PSCI).
We expect companies to take a prudent and active approach towards managing water risk and resources to protect themselves from operational, legal, and reputational risk, as well as to safeguard their social license to operate. Priorities may range from pollution prevention measures to policies detailing their approach in water-stressed areas, as well as showcasing trajectories which point to declined consumption or saving measures.
Why is this important for you?
Water crises have been identified as a global risk – by 2025 two-thirds of the world’s population will be subject to water stress. Furthermore, we have seen that economic growth and climate change are putting extreme pressure on groundwater and renewable surface water resources.
Besides the risks faced by the lack of availability, the pollution and degradation of water resources imposes significant costs on society, human health and the environment. The linkage between pollution and degradation has also manifested itself as a direct financial cost to companies, shown for example by recent litigation on PFAS in the US.
How does this engagement vary from sector to sector?
Given that water risks can present themselves in various ways, we need to understand what is material for a sector and should be foremost addressed. While we have general expectations, the actual objectives or material issues will vary between sectors and geographies.
In the chemicals sector, for example, we have focused on the production and usage of PFAS chemicals and the risks this poses to water resources. A similar example regarding pollution would be our longstanding engagement with the pharmaceutical industry in India, which has been running since 2015.
In the mining sector, engagements have focused on both water licensing, as well as the usage of alternative technologies, such as desalination, to alleviate pressure from freshwater resources.
Do you have any case studies you can share where your engagement has implemented change?
- Investment-led engagement case with Varun Beverages
In 2018, we initiated an engagement with the Indian beverage manufacturer, bottler and distributor, Varun Beverages, by conducting a field visit to one of its manufacturing sites to hold dialogues with the plant manager and employees, as well as the CEO and Chairman. Given India’s vulnerability to climate change, which manifests itself amongst other things through an increased frequency and magnitude of droughts, we see it as paramount for a company like Varun to properly manage water, as it is its key raw material.
In our follow-up dialogues with the company, we highlighted it should increase the transparency of its water management activities and have these audited. As a result of this engagement, Varun has implemented several water management programmes. It has reduced the water needed in the manufacturing process, it now recycles 100% of its wastewater, and has improved its replenishment of water through factory harvesting and pond harvesting. The group’s water usage and recharging are now audited by a third party, and is reported more extensively in its shareholder reporting.
2. Collaborative engagement case – Pharmaceutical Supply Chain Initiative
NAM has a longstanding engagement with pharmaceutical companies to address the role they play in India’s water pollution crisis. For us, pharma pollution is critically important as it has the potential to impact people across the globe, not just in India. Because drug manufacturing sites in India are part of the supply chain of the companies we invest in, we have taken field trips to Hyderabad to better understand the situation. We witnessed severe industrial pollution surrounding manufacturing sites and observed its adverse impact on local communities.
On the back of this field trip, we commissioned and published two reports detailing on-the-ground findings. In response to these reports, the industry-led Pharmaceutical Supply Chain Initiative (PSCI) developed an industry-wide action plan for India and later invited us to join a newly established advisory panel. Since 2020, our expectations have been mainly met by the industry. Nevertheless, we have continued our work with the industry and also retained our position on the advisory panel.
