NBIM Investor Expectations: Water Management

Transcription

1 NBIM Investor Expectations: Water Management 1

2 Norges Bank Investment Management (NBIM) is responsible for investing the assets of the Norwegian Government Pension Fund Global. The exercise of NBIM ownership rights shall safeguard the long-term returns of the fund and is based on the UN Global Compact and the OECD Guidelines for Corporate Governance and Multinational Corporations. The NBIM Investor Expectations: Water Management is based on available best practices and standards regarding water management. 1 As an investor and shareholder, NBIM will present our expectations to the Board of our investee companies. We expect the Board to ensure that necessary policies and activities are implemented throughout the company, and will hold the Board accountable accordingly. 1 Examples of references: International Covenant on Economic, Social and Cultural Rights (ICESCR) Right to water, UNESCO The World Water Assessment Programme (WWAP), UN Global Compact CEO Water Mandate, Ramsar Conventions on Wetlands, Water Footprint Network, Alliance for Water Stewardship, Stockholm International Water Institute (SIWI), Pacific Institute Water and Sustainability Program. ISBN NBIM Investor Expectations: Water Management (printed) ISBN NBIM Investor Expectations: Water Management (online) Print: 07 Lobo Media Design and illustration: Burson-Marsteller/Erik Sand Photo: 123RF, istockphoto 2

3 Purpose The NBIM Investor Expectations: Water Management specify investor expectations for corporate performance with regard to water management. The Expectations are directed to companies with operations or value chains in sectors and regions that are exposed to water scarcity, water pollution and other water-related risk. Water scarcity on a global scale represents a financial risk to the fund. Economic growth, industrialisation and population growth are driving the increasing demand for water, while factors such as climate change, pollution and regulation are affecting the supply and costs related to water. The NBIM Investor Expectations: Water Management will serve as a reference for long-term investors and can be used as an indicator of best business practices by corporations globally. The primary function of the Expectations is not to blacklist or rank companies, but to serve as a point of departure for constructive dialogue between investors and companies, and to set a clear standard which companies globally must be expected to live up to. 3

4 Why is water management an issue for investors? For a diversified investor with a long-term horizon and broadly invested in sectors exposed to water-related risk, responsible corporate water management is important. Water scarcity may affect business profitability negatively and also change the competitive landscape. Water as a resource is affected by factors such as drought, flooding, pollution, sanitation, infrastructure, and climate change. Managing the physical risk related to water and securing access to the quantity and quality of water needed for production may become more difficult and more costly in the future. Water shortage will probably lead to higher energy costs, to increased competition between various actors for access to water, to higher costs for waste water treatment and water search, higher water tariffs, introduction of various pricing mechanisms for water and to regulatory changes. Boards must as part of their fiduciary responsibility towards their shareholders, consider the financial impact of environmental issues, including water scarcity and other water-related risk. 4

5 Corporate behaviour that harms the societies and environments in which companies operate threatens the legitimacy of companies and markets. Measures to increase the long-term sustainability of the market system through general regulations as well as on company level are therefore important for global investors with long-term investments. This includes measures which are designed to improve the environmental and social impact of water usage in relation to business activities. Poor management of water risks may influence negatively a business license to operate. From an investor perspective, unwillingness to assume corporate responsibility in addressing the issue of water may be an indication of weak corporate management in dealing with externalities. 5

6 Expectations Companies must take a long-term approach to the issue of water and water management and should be expected to commit to sustainable water management. Several of the requirements below will be best met by cooperation with local, national, and international government bodies, or in cooperation with NGOs and civil society. Furthermore, several of our requirements listed below can be linked to broader social or environmental policies and programmes, and be integrated therein. The NBIM Expectations: Water Management are divided into three main categories and outline what we consider important elements in a corporate water management strategy. A. Clear Water Management Strategy The potential economic impact of water management must be integrated into the company s strategic business planning and decisionmaking. Investors should be able to assess how water scarcity could negatively affect a company s performance. This means understanding the full extent of water-related risks to a company and how these risks may result in higher costs of production and production/supply chain disruptions. Water as an input and output factor in the production process needs to be assessed and companies should conduct a water footprint analysis covering direct operations as well as supply chain and products and services. Companies also need to specify priorities for action regarding their water management and reducing water management related risks. 6

7 Requirements Companies must be expected to have a clear strategy regarding water management. Continuous risk analysis: Does the water footprint analysis account for both direct and indirect water use and discharge, and encompass quantity, quality as well as the impact on local communities and ecosystems? Has the company conducted water risk analysis related to its direct operations and/or supply chain, products and services, and/or business partners? Does the analysis take into consideration that water scarcity is region-specific and include local hydrological, social, economic and regulatory factors? Water risk analysis must be transparent. Companies should use broadly and internationally accepted measurement systems and water reporting indicators. 2 2 Such as the Global Reporting Initiative (GRI) G3 Guidelines. 7

8 B. Sustainable Water Management This expectation is based on the assumption that companies in high risk sectors and/or regions that have the best systems and technologies to deal with water challenges are better positioned to mitigate water-related risk, identify new market opportunities and create shareholder value. Companies must be expected to participate in relevant research, and explore and exploit opportunities to develop production processes, products and services that improve water resource management. Sustainable water management also means including the social and environmental impact on and needs of the surrounding communities of the companies direct operations, supply chain and products and services. 8

9 Requirements Preventive and corrective action plan for identified risks. What measures have been taken to respond to, or prevent that business operations will be negatively affected by changes in any relevant water regime, changes in regulation, in water supply, quality, and price increases? Does the company disclose clear targets and key performance indicators for water conservation, for improved quality in water and waste-water treatment and for efficient water management in direct operations as well as supply chain and products and services? Have appropriate investments in water efficiency been undertaken at company level and/or supply chain? Supply chain management systems. Has the company implemented adequate management systems to monitor and mitigate risks in the supply chain? How does the company promote sustainable water management in the supply chain? Monitoring systems for environmental and social impacts of activities with regard to water, including sustainable water measures, must be in place. Does the company have on-the ground programmes in place to ensure that local populations retain necessary access to water? Consultation and/or collaboration with stakeholders. Does the company consult and/or collaborate with communities, NGOs and other relevant organizations for procuring the necessary information and research, and in building on-the ground programmes? 9

10 C. Governance structure In order to implement these Investor Expectations, companies must have a corporate governance structure that facilitates realistic strategies and responses to the issues raised herein. As an investor, it is not our role to suggest in detail how companies organize their board and management structures. We do expect, however, that this governance structure will include board-level input and discussions. There are also other elements to consider: board committee structures, management responsibilities, risk management and internal control processes, reporting lines, timelines and internal sanctions. We have formulated our overall requirements so as to reflect the different ways in which this can be put into practice within each company. 10

11 Requirements: A clear water management policy must be in place and disclosed. There must be a transparent and well functioning governance structure for implementing and overseeing water management policies and programmes. Reporting must be transparent, and must reflect not only short-term investor concerns, but also the concerns of long-term, diversified investors. 11

12 NBIM Investor Expectations: Water Management The NBIM Investor Expectations: Water Management specify investor expectations for corporate performance with regard to responsible water management. NBIM will present our expectations to the Board of our investee companies, and expect the Board to ensure that necessary policies and activities are implemented throughout the company. The NBIM Investor Expectations: Water Management are divided into three main categories and outline what we consider important elements in a corporate water management strategy. Expectations A. Clear Water Management Strategy Investors should be able to assess how water scarcity could affect companies operations/ profit. Water as an input and output factor in the production process needs to be assessed and companies should conduct a water footprint analysis covering direct operations, supply chain and products and services. Understanding the full extent of water-related risks to a company involves assessing factors outside the company s immediate operations. B. Sustainable Water Management Companies in high risk sectors and/or regions that have the best systems and technologies to deal with water challenges are better positioned to mitigate water-related risk, identify new market opportunities and create shareholder value. Sustainable water management means including the social and environmental impact on the surrounding communities of the companies direct operations and supply chain. C. Governance structure Corporations must have a corporate governance structure that facilitates realistic strategies and responses to water management. The following elements should be considered: board-level involvement, board committee structures, management responsibilities, risk management and internal control processes, reporting lines, timelines and clear targets. Requirements: Clear strategy regarding water management Water footprint and risk analysis Preventive and corrective action plan for identified risk Supply chain management systems Monitoring systems for environmental and social impacts of activities with regards to water, including sustainable water measures Consultation and/or collaboration with stakeholders Clear policy on water management Transparent and well functioning governance structure Transparent performance reporting