As ESG adoption continues to grow, water issues are becoming increasingly important factors for the investment community to consider. Whether you are an investment advisor just getting interested in ESG issues, or a large institutional investor with an established ESG policy, water risk should be viewed as not only an environmental concern, but also as a financial imperative.
Institutional Investor Bottom Line
For the past several years, the World Economic Forum (WEF) has ranked water as a top global risk due to competition for dwindling resources, poor drinking water quality and weak governance. Furthermore, climate change is exacerbating many water-related challenges. In the western U.S., where the availability of water supply varies widely and dramatically, “precipitation whiplash” creates infrastructure planning challenges and will become increasingly common over the next few decades as climate change’s effects intensify. Precipitation whiplash is characterized by cycles of severe drought followed by periods of intense precipitation that can strain dams, bridges and transportation networks.
Another area of concern is the overuse of water to meet agricultural demand. In certain regions, such as the Central Valley of California, farmers pump water from aquifers to irrigate crops. A substantial decline in water stored in an aquifer can lead to land subsidence, during which the ground surface gradually sinks - in some cases by multiple feet. Subsidence can reduce property values and is harmful to economic growth, creating credit pressures for both corporate and local government borrowers. Furthermore, public infrastructure such as roads and aqueducts damaged by subsidence must be rebuilt, requiring substantial allocations of taxpayer dollars that could otherwise be invested in climate adaptation projects or essential public services such as schools or health care.
How Breckinridge Approaches ESG Investing
Breckinridge Capital Advisors incorporates environmental, social and governance (ESG) factors into investment decisions and the research process to discover potential risks that may not be obvious from bond issuer financial statements. We believe this approach to ESG investing is more comprehensive than traditional financial analysis and put additional rigor in our credit assessments. Learn more by downloading the report.