Water is a human necessity, but it is also a systemic and unpriced global challenge with significant economic and societal risks. It is the primary medium through which the effects of climate change will be felt globally through drought, flooding or sea level rise. According to the UN, by 2025, 1.8 billion people are expected to be living in countries or regions with absolute water scarcity and two-thirds of the world population could be under water stress conditions.
Corporate water disclosures have long lagged those of carbon and climate, although there are signs that this is beginning to improve, as businesses focus more on water risk and corporate water withdrawals begin to slow down. However, disclosure around water quality issues continues to lag. For example, fewer than 5% of companies polled by the Carbon Disclosure Project (CDP) in 2020 were able to provide evidence of any progress against water pollution targets. This matters, as the annual cost to human health in Europe alone from one group of chemicals alone — per-and polyfluoroalkyl substances (PFAS) commonly known as “forever chemicals,” that are increasingly being found in drinking water — is estimated to be up to €84 billion every year.
Water and watersheds also provide critical ecosystems services. Wetlands are major carbon sinks, storing more carbon than most terrestrial ecosystems. We are losing wetlands three times faster than natural forests, with up to 87% of global wetlands lost since 1700 and an 84% decline in freshwater species population sizes since 1970, compared to a 68% decline across all species.
Measuring water impact
Given this context, Impax has joined forces with Swedish public pension fund Sjunde AP‑fonden (AP7) for a project to investigate how best to assess, measure and report on water impact. The report, which will be published later this year, focuses on the companies providing the solutions and technologies that are critical to solving current and future water challenges.
In our report we aim to provide “real-life water impact” insights by assessing the current methods to measure water impact, the gaps and challenges that these methodologies present, and suggest what data is needed to provide decision-useful information for investors.
Our research will shape our future water impact reporting to our clients and inform our engagement with our investee companies.
The cost of inaction
The stakes are certainly high. CDP estimates that the potential financial impact of water risk inaction is more than $300 billion, while the capital required to mitigate the risks is $55 billion. This means that the cost of inaction would be five times higher than the cost of action.
Will Sarni of Water Foundry has developed an excellent framework for understanding and visualizing a business-focused water strategy, in which he describes building blocks of water management, stewardship and innovation, with increasing value add and impact at each step.
This model is helpful given the context that the most important water innovations and solutions for solving water risks, entail water savings, efficiency and reuse, as well as water treatment, nature-solutions and pollution control. These enable reductions in absolute water withdrawals and improvements in water quality and resilience. OECD projections of global financing needs for water infrastructure range from $6.7 trillion by 2030 to $22.6 trillion by 2050.
Classifying water solutions
Impax has invested in water solutions for more than two decades, focusing on the following areas:
- Water infrastructure – water savings and efficiency
- Water treatment – water purification, treatment, testing and recycling
- Water utilities – water treatment and distribution services
It is a broad and evolving investment universe: Water solution investments span diverse end-markets from consumer to industrials sectors globally, as all economic activities require water.
The evolving landscape of water solutions
In a rapidly evolving space, data is possibly the fastest moving area. As an example, an interesting recent development was the acquisition of water data company Innovyze by software specialist Autodesk in February 2021. This will allow data modeling and predictive analyses for cost-effective and sustainably designed water distribution networks, water and wastewater treatment plants, and flood protection systems for 3,000 water utility and engineering consultancy customers. This highlights the increasing role of data and software in water solutions.
Data is of course crucial to understanding risk and impact. Impax has measured the positive water outputs of our investee water solution companies for six years in our annual Impact Report and have focused on three metrics: water saved, water treated and water provided.
Following the project with AP7, we will be enhancing our water impact reporting this year to include water withdrawals and positive water outputs of companies. We are also investigating the opportunity to assess local water contexts to determine “net water impact” more precisely.
We look forward to publishing our full research, which will enable us to better assess and measure both the systemic risk and the opportunities that water present. Water is inextricably linked to climate change. It is high time that corporates’ water disclosure caught up with that of carbon.