Impact Blog
Calvert's response to heightened water risk

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Calvert disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Calvert are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Calvert fund. References to individual companies for Engagement or Research purposes are provided for illustrative purposes only and may not be representative of the results of all of Calvert’s engagement efforts. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results.

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      By Emma Doner, ESG Research Analyst, Calvert Research and Management and Yijia Chen, ESG Quantitative Research Analyst, Calvert Research and Management

      Washington - Water is the cornerstone of human health, ecosystems and the economy. Effective water management is central to resilience of nearly every business, with the largest users consolidated within the agriculture, energy and industrial sectors.

      Despite this, water usage is not currently managed for long-term sustainability. The U.S. government's Fourth National Climate Assessment details the domestic challenges posed by the lack of a centralized system to monitor and manage water quantity and quality. In many parts of the country, competing demands for water create stress on local and regional watersheds. Continuing current usage trends would likely exacerbate water stress, and lead to strong competition and trade-offs between freshwater needed for drinking, biodiversity preservation, agriculture, energy generation and industry.

      Companies operating in an environment of water stress and scarcity are exposed to higher costs and risks due to operating disruptions, supply chain disruptions, growth constraints, and reputational damage or loss of local license to operate.

      Domestic water security

      The future of water security in the U.S. is unclear. From Calvert's perspective, two significant water-related threats stem from (1) overuse and mismanagement, and (2) extreme weather events exacerbated by climate change.

      Water systems are at risk due to overuse of groundwater and surface water historically, especially in western states such as California, Nevada and Arizona. Climate change is an additional driver of water-related risk - notably due to changing frequency, duration and geographic distribution of severe storms, floods, droughts and snowpack. Such events may occur with higher frequency and more severity, and lead to tremendous economic losses.

      For example, increasing frequency and severity of droughts may cause higher chances of wildfires on the West Coast of United States, affecting water quality. During active burning, ash can settle on lakes and reservoirs used for freshwater supplies, including drinking water. Storms following wildfires may continue to damage freshwater sources, as burn areas are prone to greater rates of erosion, increasing the downstream accumulation of sediment in streams, rivers and reservoirs.1

      Hurricanes are another example of water-related risk intensified by climate change. According to the National Oceanic and Atmospheric Administration (NOAA) , more than 90 percent of the warming on Earth over the past 50 years has gone into the seas, which creates an energy imbalance between the surface ocean and other parts.2 Increasing sea surface temperatures fuel atmospheric moisture, which then may cause more intense and longer-lasting storms and floods. To put that in perspective, what used to be termed the "1,000-year flood" now occurs with much higher frequency - such as those that occurred in Hurricane Harvey in 2017 and Hurricane Florence in 2018.

      These events come with substantial costs for business. Regarding the costs of hurricanes, Hurricane Harvey is the second-costliest U.S. hurricane on record, at $125 billion, following Hurricane Katrina in 2005 at $161 billion.3 Wind strength is not the only factor that determines how damaging a storm will be. Location and duration are also critical. Hurricane Florence, classified as Category 1 by wind strength, cost much more damage (around $38-$50 billion based on Moody's estimates) because it lingered longer in the Carolinas and caused devastating flooding.4

      Increasing water-use efficiency

      Not all the news is bad. Freshwater use in the U.S. has moderately declined in the past 10 years, despite a growing population. The chart below shows U.S. population growth between 1950 and 2015, and total water withdrawals, separated by surface water and ground water. The primary drivers of the decrease in total withdrawal are advances in technology and water-use efficiency.

      Impact Blog 1-11-19b

      In addition, companies across many different sectors act as good stewards of water. For example, within the semiconductor industry, which requires vast amounts of high-quality freshwater, companies have found ways to reuse up to 90% of water, cutting up to 25% of total consumption.

      Calvert's role fostering positive change

      Calvert encourages this positive change by engaging companies where improved policy around material water usage could positively impact business operations and the environment. When applicable, we ask companies to consider their water usage and water risk for both their own operations and those among their supply chains.

      Calvert's Global Water Research Index invests in companies with innovative responses to global water challenges, like those detailed in UN Sustainable Development Goal 6, "Ensure availability and sustainable management of water and sanitation for all." These include, but are not limited to:

      • Protecting and restoring water-related ecosystems.
      • Supporting and strengthening the participation of local communities in improving water and sanitation management.
      • Developing technologies that improve water efficiency, harvesting, recycling, reuse and treatment.

      Bottom line: Calvert believes that driving capital to responsible companies in the water sector will drive more investment in solutions to global water challenges.