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Integrating water into our investment decisions

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Research analyst at Alliance Trust Investments, Emma Lupton explores how water can be valued and integrated into investment decisions.

This article originally appeared on Alliance Trust Investments’ Sustainable Future Hub.

Access to usable water is one of the most critical aspects of both personal and corporate survival. This most basic need for humanity and the environment has increasingly become a critical input for a range of industrial activities. Yet, for such an important issue it has remained stubbornly difficult to value.

The difficulty in valuing water lies in both its pervasiveness, it impacts the whole supply chain, and its critical importance to people and the environment – industry must drink last.

So while investors are beginning to measure and value factors like carbon emissions or employee injury rates, water is different.

We argue that data on the volume of water withdrawn, or even consumed by a company is of little use to an investor without context. The issues are local. We need to know the degree of water stress in that location, the condition of the water pre and of course post consumption. A litre of harvested rainwater returned unaltered to the natural environment simply cannot be valued in the same way as a litre drawn away from a desperate community and returned in a toxic state.

So, why are we assessing water?
It is becoming clear that this plentiful and infinitely reusable resource is becoming increasingly scarce and constrained. Part of this is natural; 97% of the water on earth is salt water. Of the remaining, 68% is frozen and 30% is locked away underground, leaving less than 1% of our global supply economically accessible with current technologies.

Part of this is demographic. Water use has been growing at more than twice the rate of the population in the last century and as the global average income increases, the demand for protein rich diets increases in turn. This adds to the pressure as protein requires far more water in the production process. And part of this is just poor management; our simple economic systems will not properly price long-term constraints on what is seen as plentiful resources. As a result, we take water for granted.

McKinsey and the Water Resources Group estimate that if this ‘business as usual’ attitude is not altered within the next twenty years, the demand for water resources will be 40% greater than the availability, the World Economic Forum list a water-supply crisis as one of their top global risks within the next ten years. The era of abundance is over and as sustainable investors we want to know who will profit from doing the right thing in our water-constrained future.

From risk…
We do see grounds for hope as companies across a broad range of sectors begin to respond to this critical issue. Significant numbers of companies are now analysing how they use water and are evaluating the risks they face. 68% of respondents to the 2014 CDP Water Program questionnaire reported that water poses a substantive risk to their business. 22% reported that water related issues could limit the growth of their business and, of these, one-third expected that constraint to be felt in the next 12 months.

…To opportunity
This is an important start but we want to identify those companies that are seeing the opportunities in transitioning from being simply better takers of water to water managers. We are particularly interested in those looking to their suppliers or counterparts to exploit the opportunities in becoming water-stewards by working throughout their supply chains and at the basin level.

Being a clean fish in a dirty pond may look good on the company website, but it does little for people, planet or profit.

Identifying the winners
We want to analyse how companies are managing water and integrate this into our understanding of their financial growth prospects. To enable this, water management needs to be integrated into forecast cash flows and valued.

Our report used the apparel sector as a case study. Water use may be more straightforward in the food and beverage sector for example, but this would limit the applicability of conclusions drawn to wider sectors. The apparel supply chain is widely impacted by, and vulnerable to, water related issues at the manufacturing and agricultural levels. Pressure at any of these points can negatively impact upon retailers’ financial returns and conversely, there are financial opportunities for those who manage water issues throughout their supply chains.

Material impacts on financial performance
One of the key factors for the apparel sector is the Cost of Goods Sold (COGS) as a driver of gross margin. Raw material pricing and manufacturing production costs in the supply chain can both be impacted by water, which can therefore have a material impact on the financials of a company.

We assessed the falls in retailer profits and share prices as the drought influenced short-ness of supply and raised cotton prices in 2011. We believe extreme drought was one factor in that cotton price rise and in such a fiercely competitive industry that cost inflation could not be passed on. Share prices fell as the cotton price rose.

Today, with cotton prices relatively low and evidence that water could impact the supply of cotton and the cost of processing it, we assessed the potential impact on retailer profits. We want to avoid complacent companies in this environment and invest in those preparing for water constraints.

Our report assessed the retailers’ ability to diversify their supply chains away from water-constrained basins and select suppliers using water management processes such as new ‘dry’ technologies in production and dying. We have more confidence in the forecast revenues and margins of companies who have strong water management policies extending all the way through their supply chains.

Alliance Trust Investments strategy
At Alliance Trust Investments, we will be furthering our engagement with companies over financially material water issues. We will be demanding a higher level of data disclosure throughout supply chains and are working to incorporate this into our investment process.

We recognise that water is an extremely complex and localised issue but we do believe that companies can deliver solutions to the benefit of all of their stakeholders, not least our clients.
Companies that can manage a resource that is so vital to local communities, the natural environment and gross margins are quite simply better investments.

Emma Lupton worked with the Sustainable Future team for three months highlighting the importance of integrating water further into the investment decision process. She holds an MSc in Environmental Technology, specialising in Water Management, from Imperial College London and has worked for industry experts Global Water Intelligence, managing their Corporate Water Stewardship programmes. Prior to her Masters, Emma worked in the investment management industry and holds the Investment Management Certificate.

Further reading:

Half of world could face extreme water scarcity by 2095

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Economy

How Going Green Can Save A Company Money

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going green can save company money
Shutterstock Licensed Photot - By GOLFX

What is going green?

Going green means to live life in a way that is environmentally friendly for an entire population. It is the conservation of energy, water, and air. Going green means using products and resources that will not contaminate or pollute the air. It means being educated and well informed about the surroundings, and how to best protect them. It means recycling products that may not be biodegradable. Companies, as well as people, that adhere to going green can help to ensure a safer life for humanity.

The first step in going green

There are actually no step by step instructions for going green. The only requirement needed is making the decision to become environmentally conscious. It takes a caring attitude, and a willingness to make the change. It has been found that companies have improved their profit margins by going green. They have saved money on many of the frivolous things they they thought were a necessity. Besides saving money, companies are operating more efficiently than before going green. Companies have become aware of their ecological responsibility by pursuing the knowledge needed to make decisions that would change lifestyles and help sustain the earth’s natural resources for present and future generations.

Making needed changes within the company

After making the decision to go green, there are several things that can be changed in the workplace. A good place to start would be conserving energy used by electrical appliances. First, turning off the computer will save over the long run. Just letting it sleep still uses energy overnight. Turn off all other appliances like coffee maker, or anything that plugs in. Pull the socket from the outlet to stop unnecessary energy loss. Appliances continue to use electricity although they are switched off, and not unplugged. Get in the habit of turning off the lights whenever you leave a room. Change to fluorescent light bulbs, and lighting throughout the building. Have any leaks sealed on the premises to avoid the escape of heat or air.

Reducing the common paper waste

paper waste

Shutterstock Licensed Photo – By Yury Zap

Modern technologies and state of the art equipment, and tools have almost eliminated the use of paper in the office. Instead of sending out newsletters, brochures, written memos and reminders, you can now do all of these and more by technology while saving on the use of paper. Send out digital documents and emails to communicate with staff and other employees. By using this virtual bookkeeping technique, you will save a bundle on paper. When it is necessary to use paper for printing purposes or other services, choose the already recycled paper. It is smartly labeled and easy to find in any office supply store. It is called the Post Consumer Waste paper, or PCW paper. This will show that your company is dedicated to the preservation of natural resources. By using PCW paper, everyone helps to save the trees which provides and emits many important nutrients into the atmosphere.

Make money by spreading the word

Companies realize that consumers like to buy, or invest in whatever the latest trend may be. They also cater to companies that are doing great things for the quality of life of all people. People want to know that the companies that they cater to are doing their part for the environment and ecology. By going green, you can tell consumers of your experiences with helping them and communities be eco-friendly. This is a sound public relations technique to bring revenue to your brand. Boost the impact that your company makes on the environment. Go green, save and make money while essentially preserving what is normally taken for granted. The benefits of having a green company are enormous for consumers as well as the companies that engage in the process.

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Energy

5 Easy Things You Can Do to Make Your Home More Sustainable

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sustainable homes
Shutterstock Licensed Photot - By Diyana Dimitrova

Increasing your home’s energy efficiency is one of the smartest moves you can make as a homeowner. It will lower your bills, increase the resale value of your property, and help minimize our planet’s fast-approaching climate crisis. While major home retrofits can seem daunting, there are plenty of quick and cost-effective ways to start reducing your carbon footprint today. Here are five easy projects to make your home more sustainable.

1. Weather stripping

If you’re looking to make your home more energy efficient, an energy audit is a highly recommended first step. This will reveal where your home is lacking in regards to sustainability suggests the best plan of attack.

Some form of weather stripping is nearly always advised because it is so easy and inexpensive yet can yield such transformative results. The audit will provide information about air leaks which you can couple with your own knowledge of your home’s ventilation needs to develop a strategic plan.

Make sure you choose the appropriate type of weather stripping for each location in your home. Areas that receive a lot of wear and tear, like popular doorways, are best served by slightly more expensive vinyl or metal options. Immobile cracks or infrequently opened windows can be treated with inexpensive foams or caulking. Depending on the age and quality of your home, the resulting energy savings can be as much as 20 percent.

2. Programmable thermostats

Programmable thermostats

Shutterstock Licensed Photo – By Olivier Le Moal

Programmable thermostats have tremendous potential to save money and minimize unnecessary energy usage. About 45 percent of a home’s energy is earmarked for heating and cooling needs with a large fraction of that wasted on unoccupied spaces. Programmable thermostats can automatically lower the heat overnight or shut off the air conditioning when you go to work.

Every degree Fahrenheit you lower the thermostat equates to 1 percent less energy use, which amounts to considerable savings over the course of a year. When used correctly, programmable thermostats reduce heating and cooling bills by 10 to 30 percent. Of course, the same result can be achieved by manually adjusting your thermostats to coincide with your activities, just make sure you remember to do it!

3. Low-flow water hardware

With the current focus on carbon emissions and climate change, we typically equate environmental stability to lower energy use, but fresh water shortage is an equal threat. Installing low-flow hardware for toilets and showers, particularly in drought prone areas, is an inexpensive and easy way to cut water consumption by 50 percent and save as much as $145 per year.

Older toilets use up to 6 gallons of water per flush, the equivalent of an astounding 20.1 gallons per person each day. This makes them the biggest consumer of indoor water. New low-flow toilets are standardized at 1.6 gallons per flush and can save more than 20,000 gallons a year in a 4-member household.

Similarly, low-flow shower heads can decrease water consumption by 40 percent or more while also lowering water heating bills and reducing CO2 emissions. Unlike early versions, new low-flow models are equipped with excellent pressure technology so your shower will be no less satisfying.

4. Energy efficient light bulbs

An average household dedicates about 5 percent of its energy use to lighting, but this value is dropping thanks to new lighting technology. Incandescent bulbs are quickly becoming a thing of the past. These inefficient light sources give off 90 percent of their energy as heat which is not only impractical from a lighting standpoint, but also raises energy bills even further during hot weather.

New LED and compact fluorescent options are far more efficient and longer lasting. Though the upfront costs are higher, the long term environmental and financial benefits are well worth it. Energy efficient light bulbs use as much as 80 percent less energy than traditional incandescent and last 3 to 25 times longer producing savings of about $6 per year per bulb.

5. Installing solar panels

Adding solar panels may not be the easiest, or least expensive, sustainability upgrade for your home, but it will certainly have the greatest impact on both your energy bills and your environmental footprint. Installing solar panels can run about $15,000 – $20,000 upfront, though a number of government incentives are bringing these numbers down. Alternatively, panels can also be leased for a much lower initial investment.

Once operational, a solar system saves about $600 per year over the course of its 25 to 30-year lifespan, and this figure will grow as energy prices rise. Solar installations require little to no maintenance and increase the value of your home.

From an environmental standpoint, the average five-kilowatt residential system can reduce household CO2 emissions by 15,000 pounds every year. Using your solar system to power an electric vehicle is the ultimate sustainable solution serving to reduce total CO2 emissions by as much as 70%!

These days, being environmentally responsible is the hallmark of a good global citizen and it need not require major sacrifices in regards to your lifestyle or your wallet. In fact, increasing your home’s sustainability is apt to make your residence more livable and save you money in the long run. The five projects listed here are just a few of the easy ways to reduce both your environmental footprint and your energy bills. So, give one or more of them a try; with a small budget and a little know-how, there is no reason you can’t start today.

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