BRIDGE – Water risks and institutional investors: novel approaches to bridge ESG data gaps

Samenvatting project

Existing frameworks designed for institutional investors to assess Environmental, Social and Governance (ESG)-data have not yet fully addressed the complexities associated with water. These frameworks, whether focused on reporting or rating, have encountered challenges in adequately understanding water-related aspects. Issues such as water stress, handling spatial and temporal variability, limited consideration of response strategies, missed opportunities, strategic value, and a narrow scope and context approach have hindered the effective interpretation of water data. Consequently, it has become difficult to prioritize the right issues within the value chain (materiality) and make meaningful comparisons among companies in terms of their water performance. Nevertheless, efforts are underway to bridge these gaps and to enhance the evaluation of water-related ESG factors. A growing push towards context in recent years, along with greater data, holds promise for stronger performance assessments in relation to water and ESG concerns (A. Morgan et al., 2022).
This study will bring a new perspective against the traditional ESG data approaches, by combining current and future basin water risks with water-related performance of companies and balancing the outputs from the analysis on expected basin risks and company responses.
It will introduce a new approach by focusing on geographies and supply chain to map water risks and seek engagement with investees. By applying more location-specific tools and conducting a systems analysis of cascading risks, it aims to bridge the gap between location-specific risks and portfolio-wide risks. In parallel it also aims to provide a translation of water risks into finance-language, so these risks can be taken into account in corporate reporting in an appropriate way.
Overall, the project is encouraging a shift in how investors understand and consider water related risks.

Doel van het project

Why this project?

Our project aims to advance the integration of the topic of “water” in ESG data, investment management and active ownership3.
When it comes to mainstream ESG water-related data, investors currently lack contextual focus and common definitions. Insufficient information and data on investments and value chains often lead to a limited understanding of water risks and opportunities.
Recognizing the importance of assessing water risks in the geographical areas where their invested companies operate, institutional investors seek to engage with companies located in these areas and mitigate such risks. They aim to protect their assets and contribute to international agendas such as the SDGs and the international biodiversity and climate change agendas.
Traditionally, investors would assess risks on an individual company basis. Our project introduces a new approach by focusing on geographies and supply chain to map risks and seek engagement with investees. By applying more location-specific tools and conducting a systems analysis of cascading risks, we aim to bridge the gap between location-specific risks and portfolio-wide risks.
In 2021, in a first step the partnership of Achmea IM, WWF and Deltares produced a discussion paper4 to identify gaps in ESG-data concerning water. The paper outlined some of the current weaknesses of water-related ESG data and systemic challenges around data availability, and aimed at encouraging a shift in thinking by investors. The report aimed to reevaluate water-related ESG data to maximize their usefulness to investors, such as informing shareholder engagement and providing insights on accounting for water risks and opportunities as material investment issues.
Building on the recommendations and findings of the discussion paper, our project will use two economic zones and their specific water risk context to explore in more detail how risks should be accounted for in that geography. The objective is to translate the paper's insights into actionable steps by addressing the identified gaps in ESG-data on water and to give water a more mature place in (responsible) investment practices, ESG-data and reporting from investees.

Aim of the project

With this project we aim to demonstrate how water related risks within specific sectors and portfolios can be mapped effectively, providing valuable knowledge and information to enhance the sustainability and risk management practices of institutional investors and their investees. We will address findings from the discussion paper in two selected socio-economic zones that play a key-role in supply chains, biodiversity and human development, and are known as being hot spots regarding water stress. We will identify (cascading) risks, identify exposed assets of listed companies, and their supply chains in these two economic zones and map which information is not yet reported on or covered in corporate policies and actions. Recommendations for corporate reporting, corporate action and ESG-data will be published and these recommendations will be translated to more impactful active ownership strategies.

For the participating organisations, the outcome of this project will be instrumental in supporting them and their investees to internally promote a shift in thinking on how to consider water related risks in the economic zones where they are exposed to water related hazards.
The strength of the project lies in the partnership that will carry out the study. Coupling the experience and knowledge on risk management of institutional investors to water risk assessments as developed by a water research institute such as Deltares or an NGO such as WWF is unique. It will combine complementary expertise and combine different understandings of what is currently needed in the investment world.
There will be a challenge in bridging the two worlds, the one of investors and the one of water system experts. It will bring the knowledge of water systems closer to the experience of institutional investors and multinationals and vice versa. Innovation will be key to solving challenges related to anticipated knowledge and data gaps on exposure and vulnerability of companies and their suppliers.

Motivatie

The project will contribute to both Mission MMIP C1 and MMIP C3. It focusses on water stress and expected water shortages that have an impact on economic zones vulnerable to hazards like extreme drought. Institutional investors and their investees will be better served with the right ESG data to encourage measures reducing water scarcity risks which are better suited to the geographical areas and the water risk context where they are investing and operating.
This applies to both rural and urban areas alike. The private sector is anticipated to play a progressively significant role in the implementation of climate adaptation measures through their water stewardship programs. Therefore contributing to for example improving the robustness of water supply in cities and their neighboring economic zone or reducing risks faced by suppliers connected to the agricultural sector.

[KIA-MMIP C1]: Klimaatbestendig landelijk gebied: voorkomen van wateroverlast en watertekort (in Dutch) / Climate-proof rural area: prevention of flooding and water shortage (in English)
[KIA-MMIP C3]: Waterrobuust en klimaatbestendig stedelijk gebied (in Dutch) / Water-robust and climate-proof urban area

Locatie

Niet ingevuld

Uitgevoerde acties

The project is divided in the following 6 activities, which will be carried out consecutively.

Activity 1 – Inception phase and selection of two socio-economic zone

In activity 1 the project team including the investors will select the two economic zones where the study will take place. One zone was already selected, based on its vulnerability to water stress, the current data and activities by Deltares and WWF and based on the expected exposure of the investors. That is the Tiete basin in Brazil where the city of Sao Paulo is located.

For the second economic zone, a few zones were suggested but the feasibility of it will need to be assessed in this activity based on the following criteria:
1) the level of water stress currently expected and predicted for the future;
2) the exposure of the contributing investors in this economic zone;
3) the availability of data on the hydrological system and data on the exposure of companies;
4) the local network of organisations known by Deltares and WWF that can be instrumental in gaining access to data.

Activity 2: Estimation of investor exposure to most important (10-20) companies dependent on water in that region, industrial activity

An inventory of listed companies linked to water issues in the chosen economic zone will be carried out based on public information and data available through the existing networks of Deltares and WWF. Additionally available relevant portfolio investment data by Achmea IM, NN group and/or SCOR will be used to estimate the exposure of investors to most important companies dependent on water. This activity will rely a lot on existing data and the accessibility to it. This will also be the activity that will reveal how easy or challenging it will be to find workarounds to map exposure of relevant companies. Through earlier engagements with organisations like CERES active on this topic and the experience of WWF, the team indeed concluded that the data is scattered and many times only available for specific sectors.

Activity 3: Analysis of current and future basin water risks for that specific region, industrial activity

Both the local tool WaterLOUPE developed by Deltares and the global tool Water Risk Filter developed by WWF will be used to assess water related risks in the right context in the two economic zones.

WaterLOUPE processes technical and socio-economic data from the local to the global scale to assess water risks for separate water user groups for the current and future situation. This tool also includes the vulnerability of water user groups which distinguishes itself from other water risk assessment tools.

The Water Risk Filter (https://riskfilter.org/water/home) is a screening tool to help companies and investors to prioritize action on what and where it matters the most to address water risks for enhancing business resilience.

We will reuse data, information and methods from both tools and identify which data sources from these tools are complementary and most valuable for questions by investors and investees when assessing current and future water risks. The assessment of future water risks will be based on scenarios incorporating both climate change scenarios as well as Shared Socioeconomic Pathways scenarios (SSPs). We will also identify highly relevant data gaps and which level of effort is needed to fill these data gaps to support companies in rightfully assess their water related ESG risks.

Activity 4: Analysis for water-related performance of relevant companies, industrial activity.

Using readily available ESG reports like CDP reports, an analysis will be carried out of how the selected companies are performing with respect to dealing with water related risks and what corporate level policies they currently have in place.

Activity 5: Reporting: Conclusions & recommendations for engagement, industrial activity.

In this activity, the output from activity 2, 3 and 4 will be combined to present the main conclusion and recommendation for the investors to engage with the companies they invest in. We will balance outputs from the analysis on water risks, company responses and relate that information to their weight in the total investment. We will also validate how our findings compare to traditional ESG data approaches.
The report will be written by WWF and Deltares with a review role by the institutional investors on the table of content and drafts.

Output: A publicly available report with illustrative visuals will be delivered which will present conclusions and recommendations for engagement of institutional investors with their investees. This report will be in line with the earlier discussion paper and balance outputs from the analysis on water risks with company responses. It will show the benefits of this approach against traditional ESG data approaches and also present critical data gaps.

Verwachtte resultaten

Zie Geplande acties

Innovativiteit

In this project the innovation lies mostly in the four following aspects:
1) The use of both a local tool (WaterLOUPE by Deltares) and a global tool (Water Risk Filter by WWF) to assess water related risks in the right context.
WaterLOUPE processes technical and socio-economic data from the local to the global scale to assess water risks for separate water user groups for the current and future situation.
The Water Risk Filter (https://riskfilter.org/water/home) is a screening tool to help companies and investors to prioritize action on what and where it matters the most to address water risks for enhancing business resilience.
We will reuse data, information and methods from both tools and identify which data sources from these tools are complementary and most valuable for the investors and investees when assessing current and future water risks. We will also identify highly relevant data gaps and which level of effort is needed to fill these data gaps for future assessments.
2) The type of partnership in which a water research institute like Deltares, an NGO like WWF and institutional investors are cooperating to create a common understanding on how water risks can be assessed in the right context. Bridging the communication gap between the water research world and the investment world will be a challenge as the language used by water risk experts and financial risk experts to describe perceived risks is different. This project will be instrumental in promoting the transfer of knowledge and experience present at research institutes and NGO’s towards the private sector and vice versa.
3) Water reporting is currently lagging behind when compared to carbon and climate in terms of quantity and quality of data. The International Sustainability Standards Board (ISSB) highlighted the importance of considering local context on water risk assessments as a key challenge for the sector currently. Moreover, current ESG metrics do not account for water dynamics considering future scenarios and geographic (site-specific) risks. Therefore, through this project, Deltares and WWF are co-creating water risk understandings with investors to support the investment management sector to identify, understand and act on potential water risks related to their current and future investment portfolio. Better water reporting will provide investors with better tools for informed decision-making pertaining water risks and companies’ resilience.
4) This project will help build more clear definitions on materiality for investors, going beyond operational water use and capturing a more complete economic value of water by creating long-term scenarios within the active basins. Better understanding and quantification of water related risks will help investors to mitigate exposures and engage with companies. Providing a water materiality definition is an innovative knowledge development for the research and private sectors.
The project will partly build on the former WaterLOUPE TKI projects by using the experience on assessing water scarcity risks in the right context at the right scale. It is our intention to use one of the existing WaterLOUPE basins as one of the socio-economic zones (Sao Paulo, Brazil). The other socio-economic zone will be selected, based on a few predefined criteria, during the first activity of the project (see 3.4).
This project will complement and support existing initiatives such as The Valuing Water Initiative (through WWF and Achmea IM), The UNPRI (especially the Water working Group), Ceres - Water Toolkit, CDP Water, Sustainalytics (Localized Water Management).

Valorisatie

A publicly available report with illustrative visuals will be delivered which will present conclusions and recommendations for engagement of institutional investors with their investees.

Outreach and valorisation will be carried out through all the partners involved in the cooperation, each one targeting the audience they have the most contact with. This will be done at the end of the project when the recommendations and output have been well reviewed by all parties involved. Achmea IM will for example share results with two networks like the UN Principles for Responsible Investment and the Valuing Water Finance Initiative, where both Ceres and the Dutch government have a role. Achmea IM is a member of both those networks.

As was done in 2022 for the discussion paper, we aim to organize a webinar to create a momentum to share the results and the main messages of the study. The target audience will be institutional investors and other organization involved in reporting and rating on ESG.

Hoe gaan de participanten van het project om met intellectueel eigendom dat voorkomt uit deze projecten?

A publicly available report with illustrative visuals will be delivered which will present conclusions and recommendations for engagement of institutional investors with their investees. This report will be in line with the earlier discussion paper and balance outputs from the analysis on water risks with company responses. It will show the benefits of this approach against traditional ESG data approaches. It will also present critical data gaps. All partners from the partnership will contribute to the report and make sure it resonates with the expected reader, which are other institutional investors or investees with an interest in the same socio-economic zone or an interest in the novel approach.

The cooperation agreement, in which IP is addressed, will be signed by all partners if the proposal is approved.

Op welke wijze wordt de informatie over dit project op eenvoudige wijze voor het algemene publiek kenbaar gemaakt (beschrijving van het onderzoek, deelnemers en de planning en voortgang)?

The project and report will be published though the websites of at least Deltares and TKI and though Linkedin posts. WWF will be instrumental as well in sharing updates towards their network. Achmea IM, SCOR and NN group will share progress and outputs in their investors and investees networks. In preparation of the proposal a few investors were already contacted to participate and most of them have expressed the wish to be kept informed on developments around this research.

Projectvoorwaarden

Het consortium zal een samenwerkingsovereenkomst sluiten die aan de eisen van de regeling tegemoet komt

Projecteigenaar en projectleider(s)

Er is geen projecteigenaar aan dit project toegekend.
Er is geen projectleider aan dit project toegekend.

Partners

  • Achmea B.V.
  • NN group N.V.
  • SCOR
  • World Wildlife Fund (Netherlands)

Resultaten


Er zijn nog geen resultaten voor dit project.