In 2007, Beijing’s Institute of Public and Environmental Affairs (IPE) launched its online water database. Allowing public access to water quality and pollution data, including corporate regulatory breaches, the site was designed to facilitate transparency and encourage disclosure on an issue affecting millions of Chinese. Given the lack of consolidated corporate information, data and relevant metrics on China’s water crisis, ADMCF believed that considerable value could be gained from translating IPE’s data for a broader audience, specifically targeting both investors and companies.
Early in 2008, with ADMCF support, IPE began translating key water data on its site from Chinese to English. Building on this, in June of that year, a group of Hong Kong and China-based organisations came together with a common focus on China’s water crisis -how it affects investors and companies and what is needed to manage water-related risk more effectively.
It was determined that a useful next step would be to develop a comprehensive information portal that would consolidate and draw on existing resources, including IPE’s databases, commission new research where needed, and provide a platform from which to advance issues related to water in China.
By July 2009, this project concept became the pilot initiative, The Asia Water Project, with an initial focus on China, launched in 1Q2010. From there, China Water Risk was developed a year and launched later with a more targeted, sector-based approach to informing investors and business about water-related risk inherent in investing and operating in China.
China Water Risk is funded and managed by Hong Kong based ADM Capital Foundation and developed in collaboration in its pilot stage as The Asia Water Project, with Civic Exchange, the Association for Social and Responsible Investing in Asia (ASrIA), Business for Social Responsibility (BSR), the Institute of Public and Environmental Affairs (IPE), and Responsible Research.
Rationale: The Role for Investors and Business
Investors and the corporate community have the potential to accelerate sustainable water practices in China by addressing water-related risks in their portfolios and business operations.
Multinational companies have already played their part in helping labour and climate change considerations take root in China, encouraged largely by concerns around reputational risk. The hope is that they will be able to play a similar role around water once the needed information is available.
Informed investors, for example, might determine that a company not factoring water issues into its corporate strategy whilst operating in a water-stressed environment, or one that is flouting local law by polluting waterways might not be the solid financial investment it initially appeared because of the risks inherent in neglecting both. Consequently withholding or denying a company investment capital as well as shareholder activism can effect change in corporate policy.
However, water has yet to be factored into most corporate risk assessments, despite warnings highlighted by investment analysts. Managers working with well-known brands indicate that water as an issue is lower priority than climate change, exacerbated by limited data and information on water issues as well as less publicity in general around the topic.
At the global level, investors have responded to the threat of water scarcity by investing in specialist water funds. Yet with China projected to spend up to 1 trillion RMB by 2025 managing water scarcity, increasing attention is being paid to investment opportunities in water supply infrastructure, water treatment facilities and demand management technologies.
Many mainstream investors, however, remain cautious, citing low water tariffs and the gradual pace of privatization as constraints to investing in China’s water sector. Indeed, China may well choose a path that is different from some other countries and never fully privatize the supply of water. When it comes to water technologies however, investors are more bullish citing as an example desalination, wastewater treatment, etc. as good for recurring profits.
These trends coupled, with more Chinese companies seeking foreign investments, provide a unique opening to engage investors and the corporate community on water risks. However , lack of information about both risk and opportunity remains a barrier.
“risks are difficult for investors to assess due both to poor information about underlying supply conditions and to fragmentary or inadequate reporting by individual companies.”
JP Morgan, Watching Water: a guide to evaluating corporate risks in a thirsty world, 2008
The preponderance of global and regional water initiatives targeting companies and investors further indicate a growing world awareness of water risks. Globally, most notably through the UN CEO Water Mandate and through the World Economic Forum, business responsibilities related to water are being widely debated. A constant refrain in these gatherings, however, is the urgent need for more information. This lack of information was confirmed as a key constraint in addressing water issues by representatives from both the corporate and investor communities interviewed during the concept development stage of The Asia Water Project.
While some data on water is available, it is fragmented, and consolidation is needed to identify and fill the gaps.