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Plumbing the depths of water risks

Norges Bank Investment Management, which manages the 3.1 trillion kroner ($580 billion) Norwegian Pension Fund Global, has reported on the water management risk disclosure of the companies it invests in for the first time.

NBIM reports that water was an important factor at 865 companies the fund was invested in (out of a total of more than 8,000) and it evaluated to what extent 432 of these fulfilled nine criteria for reporting on water management and water-related risks.

For the year to the end of 2010, those companies scored an average 2.7 out of a maximum 9 points. Of these, 131 companies scored zero, and 10 companies scored top marks.

Water management is one of six strategic focus areas for the NBIM’s ownership strategies, and its expectations around disclosure are outlined in the NBIM Investor Expectations: Water Management document which forms the basis of dialogue with these companies.

NBIM identified six sectors as having high exposure to water-related risks, namely: forestry and paper, mining and industrial metals, electricity and multi-utilities, water, pharmaceuticals, and food and beverage.

The report found there was relatively high level reporting on a clear strategy regarding water management and the companies’ water footprint, but few companies reported on their supply chain management systems.

Last week NBIM hosted a seminar on the benefits of managing and reporting on water-related risks, as part of the World Water Week in Stockholm.

NBIM is also a lead sponsor of the CDP Water Disclosure – one of the initiatives of the Carbon Disclosure Project – which aims to increase the availability and quality of information on companies’ water management.

The United Nations forecasts that almost half the world’s population will live in areas facing water stress or water scarcity by 2030. And global demand for water is expected to outstrip supply by 40 per cent within the same time, according to McKinsey.

Magdalena Kettis, head of social and environmental issues for NBIM’s ownership activities, said water may become an increasing cost that hurts profitability at many companies, and this may in turn affect the fund’s investments.

“Far too few companies provide adequate information on water as a risk factor, particularly in their supply chains,” Kettis said. “How companies manage and report on these risks will become increasingly important to investors as concern grows over water issues.”

Companies with inadequate water management face significant operational risks, such as supply interruptions and higher treatment costs, according to NBIM, and there are also risks associated with regulation and opposition from local communities and activist groups to companies’ water use.

At the end of the second quarter of 2011, NBIM invested 60.5 per cent in equities, 39.4 per cent in fixed-income, and 0.1 per cent in real estate.

The nine reporting indicators NBIM used to measure the water disclosure were:

  1. Clear strategy regarding water management
  2. Water footprint and risk analysis
  3. Preventive and corrective action plan for identified risk
  4. Supply chain management systems
  5. Monitoring systems for environmental and social impacts of activities with regard to water, including sustainable water measures
  6. Consultation and/or collaboration with stakeholders
  7. Clear policy on water management
  8. Transparent and well-functioning governance structure
  9. Transparent performance reporting with clear targets and key performance indicators

The six strategic focus areas for the NBIM’s ownership strategies are:

  1. Equal treatment of shareholders
  2. Shareholder influence and board accountability
  3. Well-functioning, legitimate and efficient markets
  4. Children’s rights
  5. Climate change risk management
  6. Water management

To access the water sector compliance report, click here