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Water risks in investment – more than just a drop in the bucket?

Water risks in investment – more than just a drop in the bucket?
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On the occasion of the World Water Day, Erste Asset Management published its first water footprint for its sustainable equity funds five years ago. Two years ago, we added the water footprint of our sustainable fixed income funds. This way, we do not only set an important example to convince companies to publish their water data, but Erste Asset Management can also integrate this important information in their investment decisions.

“For years and generations, wars have been fought over oil. In a short matter of time, they will be fought over water.”

This quote by US Vice President Kamala Harris expresses the increasing environmental relevance of water very clearly[1]. The switch to a more sustainable use of water is unavoidable: drinking water, one crucial basis of existence, is becoming increasingly scarce. Although water covers the majority of our planet, only a marginal part of it can be consumed as drinking water. What makes the situation more dire is the fact that the increasing water demand due to the growing world population is in diametrical opposition to the increasing contamination of water by intensive agriculture and the reduction of natural water reserves due to long periods of drought. The World Economic Forum therefore regards a global water crisis, together with a shortage of other important natural resources, as one of the ten biggest global risks in the coming ten years[2], more important than, for example, the global government debt crisis.

Water shortage can entail a variety of implications such as stricter regulation of water consumption, massive price increases, production delays, or even the closing-down of production facilities. Therefore, the assessment of water risk is advisable also from an economic perspective.

Regional component is significant

In contrast to the CO2 footprint, the water footprint also crucially hinges on information from the local component. Companies whose production sites are based in regions with high water stress levels, are exposed to a high degree of water risk, even if the water consumption is average by sector comparison. It makes a difference whether a production site is located in Cape Town, which has had a hard time avoiding the complete suspension of its water supply in recent years, or close to the Alps, which are often considered the “water castle of Europe”.

The categorisation we use at Erste Asset Management into low, medium, and high stress regions is based on the risk classification of the World Resources Institute, which takes into account physical, regulatory, and reputational risks (for more information please visit: World Resources Institute).

Data coverage for water is improving

At the most recent publication of water and environmental data by listed companies for fiscal 2021, the data coverage accounted for 72.9% for the equity funds that we took into account. This means that in comparison to the initial measuring of the water footprint in 2017 (46.8%), the coverage has increased significantly. The coverage in our fixed income funds is 38.5%; here, we can see clear upward potential*.

*Sources: Bloomberg, MSCI-ESG, ISS-oekom, calculations by Erste Asset Management, water and sales data from fiscal 2021

Taking into account water risks when selecting assets

We select companies for our sustainable funds while bearing in mind their responsible use of water; this has been a successful strategy: in comparison with the global equity market, sustainable funds perform significantly better both in terms of overall assessment and risk regions.

This is due to our comprehensive ESG analysis. In order to reduce water risks, the sustainability analysts of Erste AM take into account the management and the regional distribution of the withdrawal of water in the company evaluation. In calculating the in-house ESGenius rating, we register among other things to what degree a company operates in dry risk areas and how much it depends on the withdrawal of water there. Also, the measures taken to improve water consumption towards a higher degree of sustainability are part of the assessment.

EVALUATION  WATER FOOTPRINT
Global equity market vs. sustainable equity funds

Sources: Bloomberg, MSCI-ESG, Institutional Shareholder Services Germany AG, calculations by Erste Asset Management; water and sales data for fiscal 2015-2021; index data as of the end of the respective year

EVALUATION  WATER FOOTPRINT
Global fixed income market vs. sustainable fixed income funds

Sources: Bloomberg, MSCI-ESG, Institutional Shareholder Services Germany AG, calculations by Erste Asset Management; water and sales data for fiscal 2015-2021; index data as of the end of the respective year

When establishing the average water intensity of the companies held by the various funds, we rely on the volume of water withdrawn by the respective companies as key ratio. Water intensity measures water consumption in cubic metres per USD 1,000 worth of sales.

[1] Sen. Kamala Harris Predicts Wars Will Be Fought Over Water | CNS News

[2] WEF_The_Global_Risks_Report_2022.pdf (weforum.org)

ERSTE RESPONSIBLE STOCK DIVIDEND

The fund employs an active investment policy and is not oriented towards a benchmark. The assets are selected on a discretionary basis and the scope of discretion of the management company is not limited.

For further information on the sustainable focus of ERSTE RESPONSIBLE STOCK DIVIDEND as well as on the disclosures in accordance with the Disclosure Regulation (Regulation (EU) 2019/2088) and the Taxonomy Regulation (Regulation (EU) 2020/852), please refer to the current Prospectus, section 12 and the Annex “Sustainability Principles”. In deciding to invest in ERSTE RESPONSIBLE STOCK DIVIDEND, consideration should be given to any characteristics or objectives of the ERSTE RESPONSIBLE STOCK DIVIDEND as described in the Fund Documents.

ERSTE RESPONSIBLE BOND EM CORPORATE

The fund employs an active investment policy and is not oriented towards a benchmark. The assets are selected on a discretionary basis and the scope of discretion of the management company is not limited.

For further information on the sustainable focus of ERSTE RESPONSIBLE BOND EM CORPORATE as well as on the disclosures in accordance with the Disclosure Regulation (Regulation (EU) 2019/2088) and the Taxonomy Regulation (Regulation (EU) 2020/852), please refer to the current Prospectus, section 12 and the Annex “Sustainability Principles”. In deciding to invest in ERSTE RESPONSIBLE BOND EM CORPORATE, consideration should be given to any characteristics or objectives of the ERSTE RESPONSIBLE BOND EM CORPORATE as described in the Fund Documents.

ERSTE RESPONSIBLE BOND EURO CORPORATE

The fund employs an active investment policy and is not oriented towards a benchmark. The assets are selected on a discretionary basis and the scope of discretion of the management company is not limited.

For further information on the sustainable focus of ERSTE RESPONSIBLE BOND EURO CORPORATE as well as on the disclosures in accordance with the Disclosure Regulation (Regulation (EU) 2019/2088) and the Taxonomy Regulation (Regulation (EU) 2020/852), please refer to the current Prospectus, section 12 and the Annex “Sustainability Principles”. In deciding to invest in ERSTE RESPONSIBLE BOND EURO CORPORATE, consideration should be given to any characteristics or objectives of the ERSTE RESPONSIBLE BOND EURO CORPORATE as described in the Fund Documents.

ERSTE RESPONSIBLE BOND

The fund employs an active investment policy and is not oriented towards a benchmark. The assets are selected on a discretionary basis and the scope of discretion of the management company is not limited.

For further information on the sustainable focus of ERSTE RESPONSIBLE BOND as well as on the disclosures in accordance with the Disclosure Regulation (Regulation (EU) 2019/2088) and the Taxonomy Regulation (Regulation (EU) 2020/852), please refer to the current Prospectus, section 12 and the Annex “Sustainability Principles”. In deciding to invest in ERSTE RESPONSIBLE BOND, consideration should be given to any characteristics or objectives of the ERSTE RESPONSIBLE BOND as described in the Fund Documents.

ERSTE RESPONSIBLE BOND GLOBAL HIGH YIELD

The fund employs an active investment policy and is not oriented towards a benchmark. The assets are selected on a discretionary basis and the scope of discretion of the management company is not limited.

For further information on the sustainable focus of ERSTE RESPONSIBLE BOND GLOBAL HIGH YIELD as well as on the disclosures in accordance with the Disclosure Regulation (Regulation (EU) 2019/2088) and the Taxonomy Regulation (Regulation (EU) 2020/852), please refer to the current Prospectus, section 12 and the Annex “Sustainability Principles”. In deciding to invest in ERSTE RESPONSIBLE BOND GLOBAL HIGH YIELD, consideration should be given to any characteristics or objectives of the ERSTE RESPONSIBLE BOND GLOBAL HIGH YIELD as described in the Fund Documents.

ERSTE RESPONSIBLE RESERVE

The fund employs an active investment policy and is not oriented towards a benchmark. The assets are selected on a discretionary basis and the scope of discretion of the management company is not limited.

For further information on the sustainable focus of ERSTE RESPONSIBLE RESERVE as well as on the disclosures in accordance with the Disclosure Regulation (Regulation (EU) 2019/2088) and the Taxonomy Regulation (Regulation (EU) 2020/852), please refer to the current Prospectus, section 12 and the Annex “Sustainability Principles”. In deciding to invest in ERSTE RESPONSIBLE RESERVE, consideration should be given to any characteristics or objectives of the ERSTE RESPONSIBLE RESERVE as described in the Fund Documents.

The fund employs an active investment policy and is not oriented towards a benchmark. The assets are selected on a discretionary basis and the scope of discretion of the management company is not limited.

For further information on the sustainable focus of ERSTE RESPONSIBLE STOCK EUROPE as well as on the disclosures in accordance with the Disclosure Regulation (Regulation (EU) 2019/2088) and the Taxonomy Regulation (Regulation (EU) 2020/852), please refer to the current Prospectus, section 12 and the Annex “Sustainability Principles”. In deciding to invest in ERSTE RESPONSIBLE STOCK EUROPE, consideration should be given to any characteristics or objectives of the ERSTE RESPONSIBLE STOCK EUROPE as described in the Fund Documents.

The fund employs an active investment policy and is not oriented towards a benchmark. The assets are selected on a discretionary basis and the scope of discretion of the management company is not limited.

For further information on the sustainable focus of ERSTE RESPONSIBLE STOCK GLOBAL as well as on the disclosures in accordance with the Disclosure Regulation (Regulation (EU) 2019/2088) and the Taxonomy Regulation (Regulation (EU) 2020/852), please refer to the current Prospectus, section 12 and the Annex “Sustainability Principles”. In deciding to invest in ERSTE RESPONSIBLE STOCK GLOBAL, consideration should be given to any characteristics or objectives of the ERSTE RESPONSIBLE STOCK GLOBAL as described in the Fund Documents.

The fund employs an active investment policy and is not oriented towards a benchmark. The assets are selected on a discretionary basis and the scope of discretion of the management company is not limited.

For further information on the sustainable focus of ERSTE ETHIK AKTIEN GLOBAL as well as on the disclosures in accordance with the Disclosure Regulation (Regulation (EU) 2019/2088) and the Taxonomy Regulation (Regulation (EU) 2020/852), please refer to the current Prospectus, section 12 and the Annex “Sustainability Principles”. In deciding to invest in ERSTE ETHIK AKTIEN GLOBAL, consideration should be given to any characteristics or objectives of the ERSTE ETHIK AKTIEN GLOBAL as described in the Fund Documents.

The fund employs an active investment policy and is not oriented towards a benchmark. The assets are selected on a discretionary basis and the scope of discretion of the management company is not limited.

For further information on the sustainable focus of ERSTE RESPONSIBLE STOCK AMERICA as well as on the disclosures in accordance with the Disclosure Regulation (Regulation (EU) 2019/2088) and the Taxonomy Regulation (Regulation (EU) 2020/852), please refer to the current Prospectus, section 12 and the Annex “Sustainability Principles”. In deciding to invest in ERSTE RESPONSIBLE STOCK AMERICA, consideration should be given to any characteristics or objectives of the ERSTE RESPONSIBLE STOCK AMERICA as described in the Fund Documents.

The fund employs an active investment policy and is not oriented towards a benchmark. The assets are selected on a discretionary basis and the scope of discretion of the management company is not limited.

For further information on the sustainable focus of ERSTE ETHIK ANLEIHEN as well as on the disclosures in accordance with the Disclosure Regulation (Regulation (EU) 2019/2088) and the Taxonomy Regulation (Regulation (EU) 2020/852), please refer to the current Prospectus, section 12 and the Annex “Sustainability Principles”. In deciding to invest in ERSTE ETHIK ANLEIHEN, consideration should be given to any characteristics or objectives of the ERSTE ETHIK ANLEIHEN as described in the Fund Documents.

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Prognoses are no reliable indicator for future performance.

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