Investors may view population growth and consumption increases in broadly favourable terms, but when it comes to water scarcity, these factors are anything but.
As the climate changes, so does the availability of water, and we waste a staggering amount. In the UK alone, we waste three billion litres of water every day. That's enough water to hydrate the continent of Africa.
According to the World Resources Institute (WRI), 25% of the world’s population currently lives in countries facing extremely high water stress – and that includes London and the South East of the UK. Demand for water is projected to grow 30% by 2050, and overall demand is expected to exceed current supply by 40% in under a decade. It's worrying.
However, according to not-for-profit environmental impact charity CDP, allocating a mere 1% of global gross domestic product to this problem could provide safe and secure water for all by 2030. Failure to do so could result in a loss of regional GDP of 2% to 10% by 2050, depending on the location. Thankfully though, many companies are recognising the issue and taking action. About two-thirds of CDP respondents have committed to maintaining or reducing their water withdrawals, while corporate disclosure increased by 20% in 2020.
Wake up to Water
According to Thomas Insights, the top five industries for water usage are (in order from highest to lowest) fruit and vegetable farming, textiles, meat, beverages, and automotive manufacturing. At Evenlode, our core investing philosophy is built on quality, asset-light, cash-generative businesses. This inherently excludes direct exposure to many of the relatively asset-heavy industries on the list.
We do, however, have direct exposure to some of the world’s largest beverage producers. It's here we can focus on what we and the industry are trying to do to mitigate the problem. For context, from a recent BBC article, including associated agriculture, it takes 75 litres of water to make a glass of beer, 120 litres of water to make a glass of wine, 140 litres of water to make a cup of coffee and 170 litres of water to make a glass of orange juice.
Based on revenue, of the top ten Statista-listed leading beverage companies worldwide in 2021, five are either in, or have recently been in, our combined portfolios. These include Anheuser-Busch InBev (first place on the Statista list), Nestlé (second) PepsiCo (fourth) Heineken (sixth), and Diageo (seventh).
AB InBev has achieved a 14% improvement in water efficiency since 2017 and is targeting 100% of its communities in high-stress areas to have measurably improved water availability and quality by 2025. Additionally, Nestlé has achieved 32% reduction in direct water withdrawal per tonne of product since 2010 in manufacturing operations, monitors 100% of discharged water for quality, and aims to have zero environmental impact by 2030, including water sustainability and efficiency across all operations.
Turning The Tide
After companies publish their ESG targets, we assess them as part of an inclusive approach to determine if they are doing enough to justify their place in our universe.
In the case of AB InBev, we downgraded its ESG score in 2021 for various reasons, one of which was their reporting on water stewardship. While we were generally happy with its water stewardship performance to-date, its lack of long-term planning for the future informed part of our decision-making process.
A downgrade of this nature presents our ESG team with an opportunity to engage with companies, which we did in this case in both 2021 and 2022. Ultimately, the downgrade and engagement outcomes fed into a wider investment decision leading to a full exit of our combined holding in AB InBev across 2021/22.
With Nestlé, we engaged twice in 2021, and three times in 2022. All occasions allowed us to interrogate their plans around climate change and water stewardship. At the other end of the scale, considering new ideas, the investment team recently analysed and swiftly excluded a large US beer producer from our investable universe. One major reason was its ESG reporting was practically non-existent and presented a huge weakness compared to peers.
Today, we continue to deepen our ESG analysis and escalate our engagement efforts on behalf of our clients to ensure our investee companies are responsible. Company decisions and action around disclosure, engagement and measurable action on their water stewardship policies will contribute to our holistic ESG decision-making.
Ben Armitage is a trainee investment analyst at Evenlode Investment
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