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ESG ESG Newsletter published on October 3, 2016

On Tackling Water Risk

Rising sea levels, multiyear droughts, poor quality of water supply, limited access to drinking water ― each day, the water-related challenges confronting global communities are growing in what seem to be ever more intractable ways.

The World Economic Forum has taken note, listing water risks such as water crises and extreme weather events among 2016’s top 29 global risks. Further, four out of 17 UN-backed Sustainable Development Goals directly or indirectly pertain to water, including clean water and sanitation, climate action, life below water and life on land.

With water risk becoming an increasingly pressing issue, it is no surprise that investors are starting to pay attention and take action. Notably, this concern about water risk and its broader implications is beginning to expand beyond the values-based investor community to a broader range of mainstream investors who are looking at water risk through a purely financial lens by analyzing its growing economic impacts.

At Breckinridge, we believe that water risk is an important factor in evaluating the overall long-term risk/return profile of specific issuers in which we invest. As such, we integrate water-related considerations into our investment research and analysis, both for corporate and municipal issuers. Based on our internal research, we believe that numerous issuers across both of these fixed income sectors are poised to see growing challenges in connection to water risk.

On the corporate side, we consider water risk as part of our analysis of supply chain management, the environmental footprint of operations and product sustainability, among other factors. Our research increasingly indicates that water risk represents a material issue for many companies. According to CDP, 68 percent of Global 500 company respondents reported “exposure to water-related risk that could generate a substantive change in their business, operations, and revenue.” [1] Confronted with these challenges, companies have a unique opportunity to create win-win situations by addressing water-related issues in strategic and innovative ways. For example, Coca-Cola has redesigned its operations to reduce its water use while simultaneously ensuring safe and sustainable access to water for its facilities.

On the municipal side, we pay close attention to water risk in our analysis of water utilities such as water/sewer systems. In particular, our research shows that freshwater sources are increasingly strained, both in terms of quantity as well as quality of water. Freshwater currently represents just 1 percent of total global water supplies. [2] At the same time, we see that ongoing pollution has caused a sharp decline in the quality of freshwater, leading to a 55 percent drop in freshwater species population over the last 30 years. [3] This has, in turn, damaged overall natural ecosystems and, ultimately, quality of water available for residents. Findings such as these place ever greater emphasis on smart planning and effective management of water utilities, especially in drought-affected states like California, Arizona and Texas.

But water can have much more strategic implications. For example, Intel is acutely aware that water plays a key role in its production process, and recently highlighted the high water use required for its new product line as one of its key business issues. Municipal issuers are also finding that a broad-based focus on water risk management over the longer time horizon yields more favorable overall outcomes than do narrowly targeted measures.

As one of the most significant and large-scale challenges of our time, water risk requires urgent action toward intelligent solutions. Collaborative implementation efforts that leverage the resources and capabilities of private as well as public sector players are crucial. The good news is that the level of innovation and creativity in addressing water risk has never been higher, reaching broadly across industries and regions.

In response to growing interest in water risk, but also increasing opportunities to help mitigate it, there has been a notable uptick in sophisticated investment solutions that assess water. The investment case for water risk assessment will only continue to grow in relevance, broadening the overall level of commitment from mainstream investors across asset classes. While challenges are vast and complex, and there is certainly a great deal of work to be done to truly address water risk at scale, we have many reasons to be optimistic.

 

[1] “From Water Risk to Value Creation, CDP Global Water Report 2014,” CDP, https://www.cdp.net/CDPResults/CDP-Global-Water-Report-2014.pdf

[2] National Oceanic and Atmospheric Administration, http://oceanservice.noaa.gov/facts/wherewater.html

[3] UN Water, Fact Sheet on Water and Biodiversity, http://www.unwater.org/fileadmin/user_upload/unwater_new/docs/water_and_biodiversity.pdf

 

DISCLAIMER: The material in this document is prepared for our clients and other interested parties and contains the opinions of Breckinridge Capital Advisors. Nothing in this document should be construed or relied upon as legal or financial advice. Any specific securities or portfolio characteristics listed above are for illustrative purposes and example only. They may not reflect actual investments in a client portfolio. All investments involve risk – including loss of principal. An investor should consult with an investment professional before making any investment decisions. Companies mentioned are provided as illustrative examples and do not necessarily represent past, current or future portfolio holdings. This document may contain material directly taken from unaffiliated third party sources, including but not limited to federal and various state & local government documents, official financial reports, academic articles, and other public materials. If third party material is included, it is believed to be accurate, and reliable. However, none of the third party information should be relied upon without independent verification. All information contained in this document is current as of the date(s) indicated, and is subject to change without notice. No assurance can be given that any forward looking statements or estimates will prove accurate or profitable.