Episode Transcript
Speaker 0 00:00:00 Welcome to the Definitive Sustainability Perspective podcast, where our goal is to engage and inform our audience from investors to asset managers and portfolio managers, to sustainability leaders and those involved in E S G and sustainable finance. This is Kesa Shreem. Today we're going to focus on a theme that we are increasingly seeing as Anes essential theme in the context of e sg Responsible investing and climate change. That theme is measuring physical and financial water risks in the market. Water risks are multi-dimensional. It's not just about water scarcity, although that's a major part of it. It's also about water related hazards, operational efficiency, and the connection to climate change. Today's guests believe that climate is water, and we're going to talk about that. Our guests are Thomas Schumann of Thomas Schumann Capital, which sponsored the world's first Benchmark Water Risk Index Family, and Marcus Barth, c e o of Annotate Limited, which designed the index series using re Refinitiv water data. And Thomas, let's start with you. Can you explain what you mean when you say climate is water?
Speaker 1 00:01:25 Yes. Hello, Kea. Thanks very much for, uh, having me on this podcast. Um, so calling to the World Economic Forum, uh, nine of the 10 worst globalists are linked to water. Um, water expresses itself to climate and vice versa. So climate change is disrupting weather patterns leading to extreme weather events. So we have floods, we have droughts, we have unpredictable water availability, and, um, all of these factors exacerbates water scarcity and, and also contaminates water supplies. So, um, water and climate are inex, uh, interlinked and interdependent. Um, investors increasing use water risk as a proxy for climate risk. So that was also the, um, one of the main drivers, uh, for, for sponsoring, creating the World's First Benchmark Index family that tracks water risk and equities, and also provides global capital markets, uh, with the first ever water footprint.
Speaker 0 00:02:15 So if we're talking about water footprint, I'd love to expound on that and talk about that in context of what many of our listeners already have heard. And that's carbon footprint. We know a lot about that. We've heard a lot about that. So could you explain to us the water footprint, the parlance of that in context of carbon footprint? What, what, what similarities are there?
Speaker 2 00:02:38 Everyone has become quite familiar with the concept of a carbon footprint and carbon footprint is, is, is absolutely relevant. Um, the water footprint uses a similar approach, uh, but instead of measuring the amount of fluorocarbons and carbons that are admitted into the atmosphere, which is a carbon footprint, you have the usage and discharge of water during a manufacturing or an operation process of a company. So the water footprint of a company, uh, a beverage company, for example, would be very large because they are huge consumers of water. The water footprint for a mining company would very, would be very large because they use a tremendous amount of water in the processing of their mining facilities. Um, a retail distributor would probably have a much lower water footprint because their use of water would be much lower. So we measure the water footprint by looking at three Refinitiv metrics. Total water discharged, I'm sorry, total water? Yes. Total water discharged, total freshwater used and total water used. And these three metrics give you a very distinct picture of the water footprint of a company based upon the definitive data that we use to measure these.
Speaker 0 00:03:56 So let's talk about water being traded on the futures market. I'm wondering, you know, in the context of water as a commodity water being traded, what are the, what does that mean for investors, and does that have any impact on the future of water consumption?
Speaker 1 00:04:14 Yes, uh, that's, uh, that's a great question, Kesa, thank you for touching upon that. First of all, I would, I would like to respectfully, uh, correct, um, um, your use of, uh, water as a commodity. Water is not a commodity. Water is a very precious resource. It's, uh, next, uh, to clean air, the most precious re resource that, that we have on the planet. So, um, unfortunately, for for years now, the media has been, uh, using the narrative of, of commoditizing water and water as the new gold, uh, wall Street, uh, is trading water now. So this is very, very dangerous. Um, that's why I would like to like to point that out. Water, first and foremost requires, uh, integrity, uh, uh, stewardship and, and, and custody. Um, again, it's, uh, the un uh, claimed it, uh, as a, as a, as a human, as a human right, and, um, uh, it should not be traded as a commodity, not viewed as a commodity such as copper, pork, bes, lithium law, or, uh, or silver, uh, for that matter.
Speaker 1 00:05:11 Um, the commodity approach is still part of the, um, I call it the old, old paradigm. The mantra of Wal, the mantra of Wall Street Creed is good. Uh, everything that has to do with, uh, um, E S G response investing, sustainable finance impact, uh, is all about patient capital, is all about stakeholder versus shareholder capitalism. So greed is good, is really no longer, um, you know, applicable. I always speak about greed for good. Um, so having said that, um, I don't think trading water as a commodity or as a future is the right way to approach water security and United Nations sustainable development code number six, because it, because it, it doesn't do anything in effect for investors as well as for stakeholders in terms of, um, uh, water security, water management engagement with corporates to become better water stewards. It, it, it's basically just profit driven and, uh, completely defeats the purpose.
Speaker 0 00:06:10 Hmm. And with that, I would love to talk more about, um, tsc, your organization, your company. What do you do and how do your products fit into the overall picture of asset ownership and portfolio management?
Speaker 1 00:06:25 So, tsc, uh, focuses on solutions that advance and fast strike responsible investing, specifically water security, which is, uh, un sustainable vertical development. Goal number six, um, investors, asset managers, global capital markets increasingly face the challenges, uh, to price, uh, water risk and climate risk in portfolios. It's very, very difficult today with climate risk, but it's much more, much more easy to do with water risk. So thanks to Refinitiv, uh, water metrics, we were able to create the first investible, uh, solution product, which is the index series that will be followed by, uh, by a series of ETFs as well, and other products that, uh, um, that embrace, uh, water risk as a, as a portfolio risk across all asset classes. So this is the service that we provide. These are the solutions that we provide to help financial institutions, asset managers, wealth managers, sovereign wealth funds, central banks, investors, and also corporates to, uh, incorporate water risk into the investment decisions and, uh, and into portfolios, you know, to adapt, uh, research back to climate change and water risk mitigation strategy.
Speaker 0 00:07:37 So we talk about, we, you mentioned obviously climate change and, and the research strategy. If we wanted to position the water risk indices that you sponsored as being different from other types of climate change initiatives or even even other types of assets that have a similar focus, how could we position the water risk indices as being different, as having a different value prop?
Speaker 1 00:08:02 I deferred to Marcus on that question so that we have a little bit equity in the podcast.
Speaker 2 00:08:06 No problem. Um, first thing to think about when it comes to environmental or, or climate type investing, you have to distinguish between the impact of climate on the environment and the impact of climate on company profitability, company earnings company growth, company stock prices. If, if a manufacturing facility is spewing carbon into the air at an alarming rate and polluting the atmosphere, it doesn't stop them from manufacturing their product and it doesn't stop them from selling their product, profiting from their product and continuing to grow their business. If a company that needs, if, if Coca-Cola is unable to get water, they close. So water risk is a considerably more serious, um, risk for a company than climate, than than carbon risk, because water risk directly impacts their ability to operate to function. And I think that's really the big distinguishing factor between all of the traditional climate products, which are all carbon focused, and what Thomas Schumann capital has designed and developed along, along with annotate, which is the first ever water risk measurement. Our approach to water risk is that it not only impacts the environment, but it also directly impacts the future profitability of companies. And that's why it's so important to incorporate, to incorporate water risk into portfolio construction because it has a direct impact on the future viability of those companies.
Speaker 0 00:09:39 And Marcus, while we're talking about the viability of companies and how water risk plays a role there, could you let us know how are companies being assessed in this way? Could you give us some detail into the assessment process?
Speaker 2 00:09:51 Sure. Um, we start with raw water data that's supplied to us from Refinitiv. And you know, we mentioned there's, there's three types of water risk that we're looking at here. Three types of metrics, the first I alluded to earlier, which is what we'll call water usage, water utilization. These are pure, you know, cubic leaders or cubic centimeters of water that are used, consumed, recycled or put back into the environment. That really speaks to what is a company doing now? It talks about the present, where are they now? The second set of metrics we look at have to do with where are they headed? And these relate to the Refinitiv, uh, data items that we collect that, that talk about the presence or absence of water policies in the company. Do they target water conservation and do they have technology to utilize, um, or to improve their water utilization?
Speaker 2 00:10:49 So this is, this is a forward looking aspect of water risk, where's the company headed? And then finally we add a, what we call kind of a sanity check. We take a look at any recent environmental controversies. We want to avoid not penalizing a company for having what we'll call environmental mishaps in the last 12 months. We're certainly not going to penalize a company that had a problem five years ago because we've actually discovered that companies that have had environmental accidents in the past actually have spent a tremendous amount of effort and money to ensure that it doesn't happen again. So it's actually, uh, uh, the follow on is a benefit to that company's future, um, environmental policies, those combined together measure what we call the water risk of a company. And each company in our index is put into a quartile based upon high, medium, medium low, and low water risk.
Speaker 2 00:11:46 Companies with the highest water risk have the lowest weight. Companies with the lowest water risk, have the highest weight in the index. When you build the index thusly and then measure the water footprint of the index, it comes out at about 62% to 67% lower than the overall US or European markets. So we're able to jet to create an index that has a 60 plus percent lower water footprint while still generating sizable equity market returns. And that's, that's the approach that we've taken to, to building the index. We're not aware of anyone anywhere that has even come close to being able to, to, to crack this code, if you will, uh, of mo well, not monetizing, but creating a risk measure from simply looking at the water, uh, data that we're getting from Refinitiv.
Speaker 0 00:12:39 And I'm sure those, the, the assessment framework will probably sound, um, very familiar and, and ring a bell to many of those in the asset management space in terms of how companies are assessed. So thank you for that. And I'm wondering too, um, Marcus, it sounds like that water, just like other areas, can definitely be something that society consumers can really look at as, as something that's really important. So what you're doing here, it's really, it sounds like it's driven by investors and how investors are placing the e s G lens on their investments, but it sounds as if it could also be driven by, you know, consumers or the retail investor. So outside the institutional investor who's really driving, who are some of the top drivers of what you're seeing and what you're doing in the water space right now?
Speaker 2 00:13:30 I, I think the answer to that question is, it's coming from both sides. The, the, the big important difference between E s G investing of a few years ago and even today, which is greenwashing, which is simply, oh, we're just gonna exclude any bad companies and whatever's left is gonna be fine. Our approach is, is not an exclusionary approach. Our approach is inclusionary. We want to include as many companies as possible in the index because by excluding them, you eliminate the ability to engage with their managements over why they're not doing, you know, not better rated in the index. Um, and water risk is something that I think hits home a lot closer to retail investors because it's something they read about when they read about, you know, instances where there are water shortages or floods or they read about fracking, where they're using tremendous amounts of water to, to extract very small amounts of shale oil.
Speaker 2 00:14:33 I think these things seem to impact the retail investor more. The institutional investors started out years ago by applying E S G to their investments as a box ticking exercise so they could simply state we are E S G compliant. We've watched the evolution of that, um, leaning away from the greenwashing, purely exclusionary approach to more of an engagement approach. So I'd say there's interest from both the institutions and from the retail investors. Of course, the institutions have the sizable capital to directly impact water risk and, and the attention paid to it much faster and in larger quantity than the retail investor who's by definition going to be much smaller investment amounts.
Speaker 0 00:15:19 Hmm. And when you talk about the retail investor and con and the, the institutional investor, one thing that I think about when I think about the retail investor specifically, is some of the issues that are very relevant to our society right now. And we spoke about that a bit earlier in terms of water risk. Um, you know, let's look at a situation that in the US was something that we've had a lot of discussions about, and that was the water contamination in Flint, Michigan. And just if situations like that in the US and globally will continue to develop, we'll continue to hear more about that. What does that say about how we should look at water risk now moving forward, if that is the case, and I'd love to hear from you on that.
Speaker 1 00:16:04 Yes, I can quickly chime in. So, so there's, there's one, there's one important factor you need to look at when you talk at water. Obviously water is global, it's a global issue, uh, but water needs to always be looked at, uh, uh, locally. And, uh, that's what we have in Flint, Michigan, um, to that, to that tune. Um, you also cannot transport water as, uh, like oil water is extremely heavy, so water needs to be looked at always at, at, at the local level. And that again, you know, kind of like underscore uh, possibly, um, your, your attribution to retail investors. Um, um, it's very important to look at at, at, at local issues, be it, uh, in South Africa recently, be it now in east ul, be it in Flint, Michigan. And that's, that's where the, the action needs to happen in terms of, you know, regulators, policy makers and investors, and obviously large pension funds such as, uh, for example, CALS and Cals, uh, in the us their, their focus is most, most best directed towards, uh, local, local water issues. Uh, and that also needs to be factored in, in terms of their portfolio allocations. It's obviously a big challenge, but, um, uh, that is something where you create most of the social, environmental and financial impact, uh, in terms of water risk.
Speaker 0 00:17:18 Great. So I'm truly a global issue. They're totally agreed. Just would love to know from both of you, Marcus and, and Thomas, what guidelines would you provide to investors when it comes to integrating water risk? I know that you spoke about how you assess companies, but are there other guidelines that you would have as a top three so to speak, that they should really be thinking about now that could bode well for their future decision making?
Speaker 2 00:17:45 I, I think, um, let me jump on this and then let Thomas add to it. I think the most important aspect for an investor to be thinking about is, am I investing in companies that have a greater potential for downward pressure on their earnings as a result of their higher water risk? To me, you know, the purpose of an investment is to provide capital with the idea that you want that capital to grow, whether it be for retirement or for endowment purposes. That's why we invest. We invest because we want to grow our, our assets. Companies that have the highest or the greater risk of having negative impact to their earnings because their water costs go up. These are companies that you want to be underweight, that you want to try to avoid having a market weight in, in your portfolio. At the same time, you wanna be overweighting and effectively rewarding with greater investment capital, those companies that show better water stewardship and, and have a lower water footprint.
Speaker 0 00:18:46 Great. Thank
Speaker 1 00:18:47 Youa. I kesa, I would like to, I would like to, uh, close on a maybe more Phil philosophical note. Um, uh, my call to action would be anticipate today the risk of tomorrow. And, uh, I would like to, um, to um, to, to end and, and, and my, my part in the podcast with when the well runs dry, we know the value of water. There was Benjamin Franklin, one of the founding fathers, and he stated that in the Poor Richards Almanac in 1746. So again, when the well runs dry, we know the value of water and I think that should, uh, that uh, should hopefully inspire investors to take action now to be safe in the future.
Speaker 0 00:19:27 This was so very inspiring and so much new good, good information here. First of all, really describing what the water footprint, what it is, basically usage and discharging of water during the manufacturing process and really putting that into context. The beverage, um, industry, mining industry usually have, they have larger water footprints, whereas a retail distributor would have a lower footprint. So that really helped us to contextualize there. And also the three metrics of how that's being measured. Total water discharged, total fresh water used, and then total water used. And then finally the impact on climate. And you mentioned that climate is water, which is really a huge point and a huge takeaway here. Um, getting insight from you, Marcus, on how companies are assessed, really understanding where the company is now, where the company is headed, and looking at recent controversies to ensure that we understand what companies are doing to course correct, if you will.
Speaker 0 00:20:26 And having that matrix showing water risk in terms of high, medium and lows. And then recognizing Thomas from your perspective that water is a global issue, but should be looked at locally, issues from Istanbul to South Africa to even Flint, Michigan. And then finally really looking at how we reward companies with greater investment capital into those companies that have a lower footprint. Um, all very good, timely information. Thank you so much. And I'm excited about having you all again soon because this is something that we definitely want to continue to dig into. So thank you Marcus and Thomas.
Speaker 1 00:20:59 Thank you so much. Really appreciate it. Thanks Ke. Thanks
Speaker 2 00:21:02 Very much. Appreciate it.
Speaker 3 00:21:05 We
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