While carbon concerns have been dominating conversations among institutional investors looking to mitigate environmental risk, the issue of water usage should be higher on their list, according to a paper by Russell Investments Group.

“Overall, we have concluded that the current water-related investment tools available are insufficient and inhibit investors from converting insights into meaningful action,” the research noted.

So where to begin? The paper identified four key considerations for institutional investors seeking to incorporate this issue into their portfolios.

Read: Institutional investors seeking disclosure on water risk

First, water withdrawal, the technical term for actually using water, isn’t monitored very well. Less than half (41 per cent) of the global large cap universe disclose their water withdrawal. However, these numbers are better in industries such as chemicals, metal and mining and semiconductors (all about 80 per cent), where water usage is a material issue.

Many companies for which water is a key factor aren’t disclosing their usage, which suggests there’s room for conversations between investors and investees, the paper said.

Second, water usage, as with carbon, is highly concentrated among a small number of companies. Among the global large cap universe, 10 per cent of companies take up 91 per cent of water withdrawal, with the highest usage by those companies in the utilities, materials and energy sectors.

Read: Investment manager releases guide to ending plastic pollution in oceans

Third, a regional lens is helpful when considering water risk, according to the report. The current data isn’t granular enough to specifically delineate how much water is consumed in high-stress regions. While a company might have a significant portion of its operations in a region with high water risk, it may not be a major user of water, the research noted. However, without better data there could be unknown risks to these regions, and 32 per cent of companies operating in these regions don’t disclose their water use.

Finally, it’s important for institutional investors to consider companies’ forward-looking targets around water. More frequently, these goals are part of corporate reporting in sectors that use more water, according to the paper. Nearly a third (29 per cent) of companies for which water is a material factor have set water-usage targets, demonstrating their elevated commitment to managing water use compared to their peers.

While the paper noted many potentially useful frameworks have popped up in the last few years,  their full potential can’t be realized given the limited nature of the current data available.

Read: Risks and opportunities for investors as plastics lose popularity

Copyright © 2020 Transcontinental Media G.P. Originally published on benefitscanada.com

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