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August 05, 2009
ESG Disclosure by Water Services Sector is Insufficient, Report Finds
    by Robert Kropp

Survey by the Interfaith Center on Corporate Responsibility of ESG reporting by water companies finds that investors are provided too little information on which to make informed investment decisions.

Global water scarcity is becoming an increasingly critical issue, and the Millennium Development Goals (MDGs) call for halving the number of people without sustainable access to safe drinking water and basic sanitation by 2015. To do so, according to the MDGs, additional investments of $11.3 billion per year will be needed.

Investors concerned about the sustainability of investments in the drinking water and sanitation services sector "need consistent, comparable data on water utilities' environmental, social, and governance (ESG) performance in order to identify opportunities for investment in the water services sector that will support local and regional water capacity," according to Laura Berry, the Executive Director of the Interfaith Center on Corporate Responsibility (ICCR), a coalition of nearly 300 faith-based institutional investors representing over $100 billion in invested capital.

Leslie Lowe, Director of the Energy and the Environment Program at ICCR, said, "More than 15 water-focused mutual funds and exchange-traded funds, or ETFs, have been created in the past several months. Responsible investors are asking, How green are these investments?" According to a recently issued report from ICCR on the ESG reporting performance of 12 public and private water utilities, few water utilities in developed countries use such established reporting frameworks as the International Benchmarking Network for Water and Sanitation Utilities (IBNET) to provide ESG information that investors need in order to make informed investment decisions.

The report, entitled Liquid Assets: Responsible Investment in Water Services, assessed management response to ESG risks, whether effective systems were in place to monitor ESG performance, and whether the ESG data presented by water utilities were consistent, comparable, and easily accessible. According to the report, "The absence of essential information needed to benchmark ESG performance is a serious impediment to investment and policy decisions."

Of the 12 public and private water utilities examined in the report, the Department of Water and Energy, New South Wales, Australia, which covers 111 water and sanitation utilities, scored the highest in reporting ESG performance data. The City of New York Department of Environmental Protection followed. Both are public utilities.

The ten private water utilities scored lower, and only the Manila Water Company in the Philippines and the water services sector in the United Kingdom, privatized in 1989, had positive scores. The worst score was posted by Veolia Water North America, which operates over 90 drinking water treatment and 190 wastewater treatment plants that serve approximately 14 million people in 600 communities in the US. The report noted that although the Southeastern US faces a severe water crisis, "Veolia Water North America provides no information on how this situation is affecting its operations or planning."

Patricia Jones, the manager of the Environmental Justice Program at Unitarian Universalist Service Committee (UUSC), said, "The human right to water poses a legal risk for water and sanitation service providers throughout the world." The ICCR report asserted, "As the human right to water gains ground in national legal frameworks and more courts uphold this right, investors would be well advised to consider carefully the new risks that water services or industries affecting water resources may encounter."

The report detailed opportunities for investment in water services. Because over 90% of the water utilities worldwide are publicly owned and financed by governments, such instruments as municipal bonds offer opportunities for investment that are often tax-exempt.

As Lowe of ICCR noted, private investment in the water industry has been on the rise, with numerous mutual funds and ETFs launched since 2007. The replacement of aging water infrastructures and demand for new infrastructures in developing countries are likely to continue to fuel this trend. However, despite the marketing of water funds as "implicitly sustainable", not all apply environmental or social screens to their portfolios. As the report noted, "there is little to support the notion that portfolios focusing on the water theme are intrinsically green or environmentally beneficial. The diversion of rivers and construction of dams can have devastating environmental consequences; drinking water and wastewater treatment plants can themselves be major sources of pollution, pathogens and odors."

One such water fund that does apply screens is the Calvert Global Water Fund, an actively managed fund launched in 2008. Among the screening criteria used by Calvert are equitable access to water as a fundamental human right, commitment to environmental protection, and good corporate governance. According to the report, "Calvert has made an explicit commitment to use the fund as an advocacy platform."

The report observed, "The greatest need for capital to meet the MDGs is in sub-Saharan Africa and south Asia." Unfortunately, the poorest countries attract the least private investment, and it is generally left to government to finance development. However, the report did find opportunities for private investment by socially responsible investors in poor countries as well. Investors can invest in such independent intermediaries as rating agencies and bond insurers, as well as revolving loan funds modeled on the Infrastructure Finance Corporation Limited, (INCA) in South Africa.

Regarding the risk to investors due to insufficient ESG reporting by water companies, Lowe of ICCR said, "ESG risks have led to cancellations of contracts and major losses for investors."

And Berry of ICCR said, "Our new report finds that water company disclosure is murky at best, and we are urging faith-based and other investors to push for major improvements in the reporting of investor-owned and public utilities."

Lowe added, "Much of the disclosure, to the extent that there is disclosure, is driven by regulatory mandates, emphasizing the importance of sound regulatory oversight of this sector."


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