Water Stewardship: A Step-by-step Process

Direct engagement can reduce water risks at companies and in portfolios, says Masaru Okubo, Senior Stewardship Officer at Sumitomo Mitsui Trust Asset Management.

Freshwater resources are under unprecedented strain, and climate risks are exacerbating these challenges – putting business operations, investment portfolios, and markets at risk.

Investors are increasingly looking to companies to reduce these risks: a 2023 survey of 2,800 individual investors across the US, Europe and Japan found that 79% said they were likely to consider how a company is reducing water use, pollution, and impacts to natural resources when making an investment.

In this article,  Kirsten James, Senior Program Director of Water with investor network Ceres, which supports investors working to improve corporate water management practices through the Valuing Water Finance Initiative, asks Masaru Okubo, Senior Stewardship Officer at Sumitomo Mitsui Trust Asset Management, how the firm is mitigating water-related risks in its portfolios, including engaging with companies in multiple industries. In particular, they discuss material financial risks posed by water challenges in high-tech supply chains.

James: From your vantage point, are there certain corporate water risk issues that are prevalent in regions of Asia or industries of particular concern?

Okubo: Although Japan has a lot of rainfall, its small territory and mountainous islands make the country prone to occasional water shortages and floods. However, major water-related risks for Japanese companies and industries exist in the supply chain and their network of suppliers that extend into Asia.

Industries that have water-intensive operations and supply chains in Asia include food, beverage, apparel, and electric components. Disruptions to one industry, such as electric components, can impact customers down the value chain. In 2011, massive floods that hit large areas of Thailand disrupted the manufacturing of electric components for extended periods of time. This impacted manufacturing downstream, including machinery and vehicle production.

In 2021, Taiwan experienced a significant rain shortfall. The resulting water shortage exposed vulnerabilities in semiconductor production. Today, there is higher recognition of the need for supply chain resiliency against risks posed by natural catastrophes and geopolitical tension between the US and China. This has brought more semiconductor production to Japan. While Japanese semiconductor companies have been addressing water issues, an expansion of regional clusters of facilities would heighten water-related issues – not only water scarcity but also relationships with local communities.

Threats to water quality, fresh water, and marine biodiversity, particularly from plastic waste, are also a material issue for us. Given this, we engage with the personal care, food, and beverage sectors, as well as chemical companies on reducing these impacts from their products.

James: Through your company engagements, where have you noted progress, and which areas still need considerable focus? 

Okubo: A key objective of our stewardship activity with companies in our portfolio is to play a responsible role in an investment chain which creates sustainable corporate value and profit growth through collaborations between different stakeholders based on shared values. Our approach consists of three elements:  direct engagement with companies as an opportunity to share best practices on specific issues; proxy voting that considers the result of engagements, as well as a minimum standard of progress relative to comparable peers; and investment decision-making that reflects these stewardship elements.

As part of our strategy for addressing water-related risks, we have selected focus companies in our global portfolio from the food, beverage, apparel, and electric components industries. We identify best practices and potential improvers by quantitatively evaluating selected companies based on results from the CDP Water Security Survey in categories including governance, risk assessment, and target setting. We have also integrated aspects of the Ceres Valuing Water Finance Initiative benchmark assessment into our scoring. Ceres’ benchmark also highlights leading practice case studies in different sectors. These tools have been valuable in our engagements with companies.

We share company assessments and the outcome of company dialogues within our global engagement team to inform our broader engagement strategy.

We have been pleased by some of the progress we have seen in the apparel industry, which has a history of managing water risks in both operations and supply chains. Leading practices in that sector include setting site-based and basin-specific contextual targets, disclosing lists of partner garment factories, and setting targets for procuring sustainable certified and recycled cotton. However, companies are still exploring how to effectively integrate site-specific targets and mitigation plans and disclose their efforts.

James: Do you have examples of how your engagements have resulted in or supported companies taking key actions to accelerate water stewardship?

Okubo: We have been engaging with Domino’s Pizza since 2020 through Ceres’ Global Meat Sourcing Engagement and the Valuing Water Finance Initiative. Our dialogues with the company began as it was starting its sustainability journey. Our engagements focused on both greenhouse gas emissions and water security, particularly the importance of incorporating major agricultural commodities in the supply chain into strategies, exploring how to address both water and climate risks simultaneously, and conducting water risk assessments.

We had constructive dialogues discussing water risk challenges in supply chains, reporting frameworks and initiatives, and the benefits of using regenerative agriculture in addressing both climate and water issues. The company has been committed to improving its stewardship activities. In 2024, it obtained the Forest Land and Agriculture (FLAG) Science-based Target through the Science Based Targets initiative (SBTi). The company also conducted a detailed water risk assessment and has been engaging with key commodity suppliers. We look forward to next steps and hope to support the company’s setting of water targets.

James: What advice would you give another investor who is new to engaging with companies on water risk?

Okubo: Water risks vary by sector and location, so identifying water-intensive sectors in portfolios is a good place to start. Analysing each company’s exposure to water stress in different regions can be challenging. However, the CDP Water Security Survey can provide information on the extent of material water risks to businesses, as well as details on governance and the type and location of water risks, including those in companies’ supply chains.

When assessing a company’s water risk, it is important to consider the impact of its operations on a watershed, as water is a shared resource with the local community and other economic actors. As a company seeks to mitigate its risk, it must think beyond reducing its water consumption. It must also find opportunities to collaborate with local communities, civil society, and local governments to maintain its social licence to operate and to ensure the health of the entire watershed. Community collaboration can create opportunities to advocate for policies at the local level to promote water restoration projects, watershed data gathering, clean water access, and the human right to water.

We find it effective to include companies leading on particular water issues in our engagements. Water management practices and disclosure are changing rapidly, so it is worth following how practices are evolving and how companies can apply shared knowledge to their own strategies.

James: What is the potential for direct engagement with companies to help drive corporate water stewardship and mitigate financial risks in portfolios?

Okubo: We believe active ownership creates value when its objective is aligned with long-term value creation. Companies do not change their behaviour unless both sides agree on issues and possible solutions. We should continue developing a deeper understanding of the current water situation companies face and use that information to think about solutions that support our shared values. This helps build relationships and trust.

Water stewardship is a step-by-step process which can sometimes take a long time. There are many issues to consider, including watershed challenges in addition to site-specific risks and disclosures. These insights require improved communication and disclosure. Agreeing on milestones and next steps allows for monitoring of a company’s progress. But this work is critical – reducing water risks at companies will reduce water risks in portfolios. Direct engagement is an effective way to achieve this.

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