The global water challenge: risks and opportunities that all investors should consider

Not enough and too much—understanding the facets of our world's water crisis

The United Nations describes climate change as “primarily a water crisis,” observed through increasing water scarcity and more acute water-related hazards, such as floods, droughts, and storms. Today, more than 50% of the world’s cities and 75% of all irrigated agricultural areas experience water shortages on a recurring basis. At the same time, water-related disasters accounted for 70% of all natural disaster-related human fatalities over the past 50 years and cause more than $200 million in economic loss every day.

Climate change and unsustainable overuse of limited water resources in certain regions across the world are further contributing to increasing scarcity, resulting in measurable negative economic, social, and environmental effects. In the context of increasing scarcity, global populations are growing, and water demand is projected to continue to increase by as much as 30% by 2050.

Increasing demand for water at the same time as increasing scarcity presents real and fundamental challenges for industry, society, and the environment now and, more acutely, in the future. The potential negative effects of unsustainable water use may become more critical in the absence of robust and coordinated water governance, policy, and management, which is a key component of the UN’s Sustainable Development Goal 6: water and sanitation for all.

Against this backdrop, the publication of the Manulife Investment Management water statement recognizes the importance of water to the future of the investment management landscape. Because access to usable fresh water is fundamental to livelihoods, health, ecosystems, and the global economy—and water-related natural hazards such as floods and droughts can have such devastating effects—we believe that water-related risks and opportunities can be financially material factors that should be integrated into investment strategies and operational asset management.

Improvements in water technologies and the promise of continuing future advances present real opportunities to improve water efficiency and generate greater value from water that’s used. Advances in water-related technologies paired with improvements in how water is valued through natural capital accounting and a greater focus on nature-based solutions—solutions inspired and supported by nature—represent one of the greatest opportunities to mitigate the future impact of climate change, water scarcity, and water-related natural hazards.

How Manulife Investment Management navigates water risks and opportunities

“If climate change is the shark, water is its teeth” is a phrase that highlights that a material portion of future climate risk to investments of various types, and their operational management, stems from too much, or not enough, water.

Given the key importance of water to investments and their management, we’ve built a dedicated in-house global water team to drive competitive insight, operational optimization, strategic investment targeting, and reputational management.

Adequate water is essential to the success of agricultural investments

Of the many investment asset classes exposed to water risk, water may have most direct relevance for the agriculture asset class because without it, food, fiber, or feed cannot be grown. Access to reliable, affordable, and appropriate-quality water resources is essential to the viability of agriculture investments. Expert management and stewardship of water resources are also vital to the viability of interdependent ecosystems and communities in which agricultural production occurs and on which it depends.

Our dedicated team of water resource experts and operational leaders proactively includes water considerations into the investment portfolios we manage and incorporates market-leading irrigation technologies and techniques for conserving water and providing crops with the water they need.

Our investment approach requires the implementation of advanced technologies to monitor and manage water resources, such as evapotranspiration technologies and precision irrigation techniques. The use of these technologies allows us to use water efficiently, ensure effective application, and support the highest possible value outcome for our clients. 

Timberland investments play an important role in protecting and improving watersheds

Forests and sustainable management of forestry assets are critical to regulating streamflow, water quality, and drinking water catchments and to mitigating the effects of flooding. Recognizing the importance of forests’ role in water management and the ecosystems and communities that depend on water, our timberland management team deploys holistic silviculture techniques to best protect watersheds and ensure sustainable management.

Robust and detailed water quality policies are interwoven into our timberland stewardship principles, policies, procedures, and standards. In addition, we ensure compliance with regulatory and voluntary water quality standards, and our operations are regularly audited for water quality compliance.

Robust water efficiency standards in real estate positively contribute to our future

Buildings are major consumers of energy and water, and as global urbanization rises and the effects of climate change on water availability become more apparent, sustainable water use has become a primary issue for the commercial real estate sector. As sustainable managers of global real estate assets, we consistently seek to minimize our environmental impact by investing in resource efficiency and embedding conservation practices into our operations.

Our real estate team deploys proprietary Sustainable Building Standards (SBS) that include water-related targets and stewardship approaches. For existing assets, our SBS include minimum expectations of our third-party property managers to conduct water audits every three years. These audits assess the buildings' water systems to identify potential water conservation measures that can then be used to inform capital plans and asset strategies. For new developments and construction, we employ minimum design requirements, such as considering the installation of green roofs for all usable roof space, which contribute to sustainable rainwater collection.

Our design specifications also encourage all buildings to achieve LEED Building Design and Construction certification, which includes rainwater management and water efficiency initiatives, such as reducing outdoor water consumption and installing submeters. As part of our development partner and contractor agreements, contractors must implement a runoff and soil management plan that aims to protect natural water systems, soil function, and habitats by controlling water runoff from the construction site and restoring disturbed soils.

Improving water efficiency in equities and fixed-income assets

For publicly traded instruments, we engage investee companies where we identify water-related dependencies and effects. We encourage these companies to work toward assessing and monitoring these dependencies and impacts, setting targets and reporting their activities, reducing their water consumption and pollution, ensuring board and senior management oversight, and investing in solutions. We expect companies to mitigate their impacts on ecosystems critical for water supply and aquatic biodiversity protection, ensure access to water and sanitation for communities affected by their operations or products, and assess water-related risk in their value chain. This is especially important for companies operating in areas of high water stress, sectors with high dependency on water, and in industries with high water quantity or quality risks.

For example, the production of semiconductors requires material volumes of water: Considering this exposure to water risk, we engaged with one of our semiconductor holdings operating in China that we had assessed to be particularly exposed to water risk through its rapidly rising water use. We encouraged the company to conduct water risk assessments, target increased wastewater recycling, reduce overall water consumption, and disclose physical climate risk based on the Task Force on Climate-related Financial Disclosures’ recommendations.

Since our engagement, the company has taken several steps to better manage water risk, including strategic identification of water stress in its manufacturing and setting targets to reduce water consumption. Notably, a third-party data provider subsequently upgraded the issuer’s rating in this area.

Investors need improved tools and methods to account for water

We invest within a global economy and society dependent on water, but in an environment in which material water challenges and policy uncertainty exist, making informed investment decisions is more challenging. To enable more educated investment decisions that better account for water-related factors, investors need:

• Repeatable methodologies that appropriately value water and evaluate potential risks to identify the potential future value of water-related investments
• Robust data to identify, analyze, and mitigate these risks (and areas of opportunity)
  
• Expertise to successfully navigate water-related policy, regulatory change, and its potential impact on assets and investments (asset value/income return)
  

By focusing on these factors, Manulife Investment Management believes there are potential opportunities for investors to more accurately calculate and value relevant water-related opportunities—and risks to those that can’t.

Value protection and creation

We believe water-related risks and opportunities can be financially material factors that may drive positive or negative outcomes for investments into the future. Looking forward, we recognize two fundamental opportunities for investors who better integrate water into the investment process: value protection through identifying water risk that could harm an asset’s value over time and potential value creation from opportunities to capture the financial benefits associated with positive water characteristics. Furthermore, water is a core part of the conversation around natural capital accounting and nature-based solutions, which represents an exciting investment innovation that can achieve a range of positive effects.

Led by the expertise of our dedicated water team, broader sustainability professionals, and deeply experienced investment teams, we’re increasingly integrating new water-related tools and methods into our investment processes and operational asset management. We see this effort as integral to the future success of our clients' investments.