Does “do no harm” do much good?

In the world

🇺🇸 The Net-Zero Insurance Alliance (NZIA) just lost almost half of its members to the anti-ESG campaign playing out in the US, after Republican attorneys-general accused the climate coalition of violating antitrust law. They argue the “activist climate agenda” has exacerbated insurance and fuel costs, catalysing “record-breaking inflation and financial hardship” for state residents. Besides thinly veiled legal threats, another effective way to reduce insurance costs is to eliminate coverage entirely — which is, according to the New York Times, the new reality for swathes of the US now rendered “uninsurable” by climate change.

🇪🇺 The EU has passed its landmark corporate sustainability directive, which imposes mandatory human rights and environmental due diligence requirements on companies in the bloc. The green light comes two days after the EU agreed to establish a digital European Single Access Point (ESAP) for sustainability-related business information, facilitating greater cross-border investment. The SEC (which is still determining its disclosure rules) may follow suit, but don’t expect a global database anytime soon. The ESAP is at least four years off, while commissioner Mairead McGuinness has warned that a single standard for reporting is the stuff of “fairy tales.” 

🗺️ Biodiversity is catching up with climate as a public and private sector priority, and — as they did for the climate crisis — developing nations face pressure to compensate the Global South for “loss and damage” (this time, caused by economically destructive mining, agriculture, and deforestation activities). Though governments are unlikely to cough up, the Financial Times reports that biodiversity targets have garnered “unprecedented” levels of engagement among companies. Answering their call is the TNFD and the Science Based Targets Network, the latter of which recently released guidelines for businesses seeking to set water and land targets. 

In the headlines: Does “do no harm” do much good?

In what may now feel like an age-old debate, divestment has long been criticised by proponents of engagement. The argument was rehashed again this week, after Exxon and Chevron were able to shut down climate-related proposals with the benefit of overwhelming shareholder support. One resolution in particular, which would have required Exxon to set medium-term Scope 3 targets, was backed by a meagre 11% of votes. Had there been more environmentally minded and meddling investors participating in its AGM, would Exxon have been forced to concede ground?

While we can’t say for sure whether engagement or divestment produces better stakeholder outcomes, we do know that screening out companies doesn’t always serve the best interests of investors. Divestment is a fast-track to a narrower investment universe. It may be an effective way to “do no significant harm,” but — in the absence of any other strategic edits — it doesn’t translate into much significant good, either. To make that happen, investors need more ambitious impact-based objectives and wider investment parameters. 

Easier said than done.

Speaking with the FT’s Simon Mundy recently, EU commissioner Mairead McGuinness observed that the industry had taken the wrong approach to SFDR. McGuinness is pragmatic about the sweeping self-corrections from Article 9 to 8, noting that SFDR serves a more important purpose than the labelling exercise to which it might be reduced. The objective, she says, is to channel private money, “in great quantities,” to sustainable outcomes. 

The trouble is, how do you do that in a repeatable and scalable fashion when so many of the relationships between economic activities and sustainable outcomes are invisible to the human eye? Without deep data insights, the scope of investment opportunities appears pretty narrow.

Case in point…  

Take the increasingly popular theme of the day, SDG 6: Clean Water and Sanitation. Over two billion people lack access to clean drinking water. Over four billion are deprived of sanitation. By 2025, 50% of the world’s population will live in water-stressed areas. The scale of the crisis is staggering; by extension, so is the scale of the opportunity for alleviative solutions. Remarkably, however (and notwithstanding early-stage developments in private markets), there seems to be a relative drought of water technology, innovation, and efficiency available to public-market investors.

Bloomberg, for instance, recently reported that demand for water assets is stripping supply: It quotes fund managers at Federated Hermes, who warn that the investment opportunities tied to water preservation are as scarce as the asset they represent. That is a problem. In addition to the obvious social and environmental risks, water shortages lead to oversubscribed investment strategies and distorted corporate valuations. This isn’t the first time that sustainable funds have fallen foul of concentration and liquidity risk: Back in 2021 — and also in Bloomberg — our CEO Patrick Wood Uribe warned that clean-energy ETFs were overwhelmed.

It doesn’t need to be this way.

On the Util Portal, we can screen not just negatively but also positively for issuers that align with our sustainability objectives. To test the scale of the water opportunity, we passed the c.50,000 companies in our database through an SDG 6 screen. Having set as our baseline any company with a positive revenue contribution of 70%, our models yielded just 10 companies that pass the threshold (outlined below). 

• Société de Distribution d'Eau de Côte d'Ivoire
• Union Diagnostic & Clinical Services Plc
• NEPC India Ltd.
• XL Energy Ltd.
• Novus Green Energy Systems
• POM Hydro Energy Ltd.
• Bhadra Paper Mills Ltd.
• Nestlé Côte d'Ivoire SA
• Phnom Penh Water Supply Authority
• Seven-Up Bottling Co. Plc

Given 70% is an extraordinarily high positive contribution, however, that isn’t unexpected. If we adjust the revenue contribution to 60%, there are 93; at 50%, there are 340; and if we look for any company with a “positive contribution,” period, there are 5,606 securities from which to choose. Critically, most are not obvious contenders for ‘water assets’.

Investors are currently waiting for biodiversity standards to guide their asset allocation decisions. They could be waiting a while, and — relative to its climate counterpart — biodiversity is a broad and hard-to-define outcome. For those unwilling to wait indefinitely, guess haphazardly, or limit their investment universe unnecessarily, using quantitative tools to screen positively is one way to get ahead of the next big trend in fund management.