Blue is the new black in green investing, according to a recently-published Russell Investments paper.
The study, authored by Russell quantitative research analyst Emily Steinbarth, says while carbon is the number one concern for sustainable-focused investors, another issue looms large.
“A lot of work has gone into identifying how carbon can be measured, managed and invested in for tomorrow’s green economy,” the paper says. “But there is more to the ‘E’ in environmental than carbon… for us, it’s water.”
But investors won’t be able to treat water in the same way as carbon when designing portfolio solutions, the study says.
“Unlike carbon risks, water-related risks primarily relate to physical risks associated with climate change. Physical risks can be broken down into direct and indirect,” the Russell paper says. “Physical risks include direct damage to assets while indirect risks cover supply chain disruptions and water availability, for example.”
Despite the universal importance of to life and its “multi-dimensional” influence on business, investors have yet to develop a systematic method of channeling water factors into portfolio decisions.
Nonetheless, a number of global agencies have developed some water insights that serve as a starting point for thematic investment strategies. Based on those studies, the paper says investors need to identify industries where “water really matters to the portfolio”, include location-specific analysis, recognise the current limitations of the data while looking out for companies that are “proactive” on water management.
Russell also developed a list of four key water features for investors to consider, namely:
- data reporting is poor overall;
- usage is concentrated in a “handful” of companies;
- the market as a whole is highly-exposed to water-stressed regions; and,
- only about a third of firms in water-sensitive sectors have set usage targets – this could be a proxy for identifying investment contenders.
“… we have concluded that the current water-related investment tools available are insufficient and inhibit investors from converting insights into meaningful action,” the report says.
The Russell study proposes a “decision-tree approach” as the best way for investors to build a “simple actionable framework” on water.
“This tree can be used to sort companies into three buckets: those targeted for improved water disclosure; those added to a water watchlist or underweighted and finally those where no water-related action necessary,” the report says.
In NZ, the sustainable investment firm, Pathfinder, launched a Global Water Fund in 2010, which holds a portfolio of 50-100 international stocks related to the liquid theme. The fund returned about 11 per cent over the five years to April 30, according to the Aon NZ investment survey, putting it mid-pack among the ‘alternative’ global equity category.