Water, an indispensable element

With the current high pressure on water accessibility, it becomes hard to fulfil the human right for access to water and sanitation for all humans. We therefore account for water in our ESG investing process with several mechanisms. ESG stands for criteria in the field of environment, social and governance. In the article below, we’ll dive into the ways water has shaped our ESG investing.

Water is a material ESG factor. Nearly every sector needs water in some way or another for the companies’ production and servicing activities. This is why we assess the materiality of water risks and how they are managed for each relevant company as part of the ESG risk score.

Infrastructure-software companies, for example, rely on data centres for storing large amounts of information they need. For Microsoft, it is assessed how the water crisis can impact the immense water demand needed for the electricity and cooling of data centres.

Another example are personal-care companies, such as L’Oréal, that need water as an input. It can account for as much as 80% of a product’s ingredient. Additionally, water serves as cooling fluid in the manufacturing of products.

Apart from assessing water risks, it is also evaluated how the relevant companies manage the related risks, for example, if strong water-management programmes are in place.

As water can be one of the material factors within ESG, water risk and its management affect which companies are investable for our ESG and impact portfolios, complying with our best-in-class approach.

Companies with a water-related business model, that qualify as water pure-plays are assessed even more. Apart from analysing water-related risks in our ESG data, we also evaluate their fundamental attractiveness from a financial and ESG angle.

Accordingly, for our impact products, we strategically take into account a company’s contribution to the SDGs. American Water Works for example provides water and wastewater services for approximately 3.5 million customers in 16 US states. The company invests in modernising the ageing US infrastructure, in improving the resilience of the network in the face of climate events and in chemical pollution-prevention technology.

Another example is Xylem, a large US water technology and equipment provider, that offers innovative solutions that increase efficiency of water use and treatment, for example biological wastewater treatment. It also offers products and services for climate-related adaptation and management. For these companies, more than 75% of their revenues is estimated to contribute positively to SDGs, particularly to SDG 6. They are part of our ESG investment universe.

We are also engaging with companies directly, asking them to improve their transparency on water-related risks and opportunities. We engaged with three companies in 2023 through the Carbon Disclosure Project: Vestas Wind Systems, Geely Automobile and Equinix. We specifically asked them to disclose to the Carbon Disclosure Project water security framework, as it is an important source when it comes to assessing water-related risks and opportunities of companies.

One of the milestones we have reached in 2023 in this collaborative engagement was the commitment by Equinix, a data-centre provider, to submit the requested water data – a great success, considering the company was not able to disclose this data before. It is important that Equinix assesses and discloses their water risks, considering that the company operates over 200 data centres in need of water for electricity production and cooling worldwide.

All in all, with the three ESG mechanisms in place, water is integrated in our ESG investing policy across the board. With this approach we aim to account for water scarcity and – through our ESG investments – contribute positively to the related SDG and the human right to water.