Issue deep-dive: Clean Water
Tuesday, May 18, 2021
Tuesday, May 18, 2021
A deep dive of sustainability topics with Ethic's lead data scientist
Issue deep-dive: Clean Water
Tuesdays with Travis is a collection of monthly interviews with our data science lead, Travis Korte, that explores the complexities of expressing values through data.

In this month’s Tuesdays with Travis we explore the topic of clean water and how we think about it through the lens of sustainable investing.

Emma:

So, first things first: Clean Water. Can you tell me a little bit more about it as a sustainability issue? What does it entail, and why should investors care about it?

Travis:

Definitely. Our Clean Water pillar takes into account a few different kinds of company behaviors, on the one hand ways that companies can affect the cleanliness of water sources and on the other how they can affect people’s access to water.

On the water quality or cleanliness side, we're looking at factors like hazardous waste, packaging waste, different kinds of air pollution, oil and chemical spills—things like that. And then on the access side, we're looking at a few different kinds of water usage and water discharge volume metrics. We're also looking at companies that are particularly vulnerable to water stress issues in their own operations, or in other words companies for whom water usage is a financially material risk factor of their business.

Emma:

So, clean water—or lack thereof—can present material financial risk to companies, but it also obviously affects people's lives. Can we talk a little bit more about that? And who, beyond corporations, is most affected by a lack of access to clean water?

Travis:

The first way that a lot of people think about it—and the most simplistic way—is that access to clean water is largely an issue in developing countries; richer countries have solved most of the problems associated with water infrastructure, potable water comes right out of the tap, that sort of thing. And there’s some truth to that; countries where water and sanitation infrastructure isn't as well developed are going to have more quality and access problems. But even within developing countries, culture around water and sanitation differs substantially by region. For example, in India and parts of Africa and Southeast Asia, open defecation is still a substantial sanitation issue, whereas other parts of Africa have reduced the practice but struggle with different issues, like access to handwashing facilities.

Ultimately, though, we feel it’s an oversimplification to think of clean water as solely a developing world concern—there are also some high-profile examples of developed country populations with water access and quality issues. Most notably in America, we might think of the case in Flint, Michigan and surrounding areas, where a series of government oversight failures has left the water infrastructure degraded to the point that residents can’t drink tap water without risk of lead contamination. And so, even though the majority of the people affected by water issues live in poorer countries, it can also be a concern in poorer parts of richer countries.

Emma:

How about other sustainability issues where clean water plays a role?

Travis:

One area where it’s relevant is migration: water scarcity in particular may constitute a cause, a precipitating event, of migration that might not have taken place otherwise. In countries with sustained droughts, and especially droughts projected to get worse with climate change, we may see population-scale changes that arise from increases in emigration. This is why we include water access as a component of our Immigration Justice Pillar, which may not otherwise be an obvious connection: we expect clean water access to exert, and increasingly exert, a causal influence on who is exposed to the costs associated with migration around the world.

There’s also a real but maybe not-so-obvious connection to gender. Particularly in some developing countries where water access issues are problematic, it's typically the women in the family that are going and collecting the water. And it can be extremely time consuming: UNICEF estimates that 200 million hours are spent by women gathering water each day globally. Through that lens, the implications of water access on women’s rights and gender equity should be clear: what else might those women do with all that time back? This is time that's not spent in the workforce. This is time that's not spent on education. This is time that’s not spent on childcare. So, while we don't have great data on the exact volume of those kinds of opportunity costs, it’s not all that hard to imagine that all that time spent fetching water could have negative impacts on life outcomes and larger societal outcomes.

Emma:

So, from what you’re telling me, it's quite evident that clean water intersects and overlaps with a lot of other sustainability issues that investors might care about.

Travis:

Yes, absolutely. It’s a prerequisite to living a healthy life, and a prerequisite to other kinds of human thriving. And we want to think about it not just in terms of the first order effects, like the number of deaths attributable globally to water scarcity or low water quality, but also in terms of the downstream impacts. For example, childhood growth stunting is something that happens with inadequate access to water. And growth stunting is associated with lower educational attainment, lower wages, lower lifetime earnings. So, there are also these kinds of societal downstream effects—it's hard to link water directly to educational outcomes, but it's certainly a contributor to a lot of societal, systemic kinds of issues. It's very foundational in that way.

Emma:

Going back to metrics: what do you typically look at when you're evaluating a company's role in, say, addressing or potentially exacerbating the water crisis?

Travis:

The most straightforward indicators are just the waste volumes. We have pretty good data around how much waste the company is producing, how much of that waste is considered hazardous, how much of that waste is packaging waste, plastics, things like that. And then also,  metrics around how much water the company is using—how much of that is freshwater? How much of that is released back into water sources like rivers untreated? Those kinds of “harder” metrics are where we start.

We're also looking at a few different kinds of topics that I think are maybe less obviously linked to clean water access, but that we've found are relevant from our research. One area we refer to as “controversial weapons.” These are chemical, biological, nuclear, and depleted uranium weapons, among others, which are controlled or forbidden by various international conventions. One of the reasons that we're screening for those kinds of business activities is that a lot of those different kinds of weapons can have pretty substantial negative environmental footprints. We have pretty good evidence, particularly around nuclear and depleted uranium weapons, being detectable in water sources much later—long after the weapons have been used there.

As we continually develop our sustainability model, we're constantly doing research to try to surface new connections between company behaviors and our pillars. One interesting thing that came up recently during the research process on our Clean Water pillar (that isn't yet incorporated, but that may be in the future) is, there's a pretty substantial impact of really any naval activity on marine life. So, if you think of naval activity, intuitively you can imagine lots of vehicles depositing fuel and oil and various chemicals. You can also think of the ways that certain kinds of coastal military installations might degrade ecosystems in those areas, depending on what they're constructing. And all that is aside from the direct usage of the weapons, which we’ve already talked about. So naval activity is something that I think we are going to be looking at in the future increasingly.

Emma:

Beyond military contracting, are there any other industries that stand out as particularly egregious when it comes to their effect on water resources?

Travis:

Yes, we're looking at companies in the mining industry in general and coal mining specifically. There's a phenomenon that happens in mining, which can be really bad for water resources, called acid mine drainage. The way it works is, mines expose soils or sediments that have been buried for a long time, and expose them to air and water for the first time. If those sediments contain certain chemicals like iron sulfide, chemical reactions with the newly available air and water can create this highly acidic runoff that may have serious downstream impact on different kinds of ecosystems. It can harm river-dwelling life and contaminate water sources used by humans; there are all sorts of negative effects from that acid mine drainage. Coal in particular is an interesting one: there’s a recent study where they looked at most of the coal-fired power plants in the United States and nine in 10 of them had contaminated their local water source.

Emma:

Are companies typically quite forthcoming with the data that you need to determine their impact on the water ecosystem?

Travis:

It depends, it's less consistent than we would like. Of course there are different reporting regimes in different countries and different things are required in different places, but by and large, we're relatively happy with our data in terms of waste volumes and water usage and things like that. There's going to be some variation here and there, but it’s pretty close.

One area that we find to be a little more problematic is oil and chemical spills. There's an interesting phenomenon there, where there's no third-party government agency—where the EPA or NOAA aren’t going around and independently verifying the volume of oil spilled by companies. It's very difficult to measure things like that externally. So in those instances, these government organizations are relying on companies to self-report. And there’s pretty good research suggesting that those spill volume numbers are systemically under-reported, to the point where we've actually recently made an adjustment to our sustainability model to be stricter around measured oil spill volumes. So that's an area where reporting is a little tougher.

Emma:

Okay. But the model accounts for that trend?

Travis:

Yes. Absolutely.

Emma:

Interesting. So, looking back to what you were saying earlier about varying standards surrounding sanitation in different countries, are there particular geographic regions that stand out when it comes to their impact on clean water—and how do you account for that in the Ethic model?

Travis:

Yes, absolutely. So it's, like I said, the most dramatic benefits of cleaner water resources would be felt in South and Southeast Asia, as well as Sub-Saharan Africa, while water access issues prevail in Northern Africa as well as parts of Latin America. We're not specifically screening companies from certain geographies, but what we are doing is looking at companies with global footprints, and so if there are companies with very high water usage, for example, that are operating in these kinds of sensitive areas, we're going to be looking at that. We're going to be scrutinizing various different kinds of behaviors from multinational corporations that may particularly affect health outcomes or water outcomes for people in these regions.

Emma:

Got it. We’ve talked about the kind of companies and regions that are not doing well when it comes to this issue. Are there any that you feel are taking strides to reduce water intensity or just improve water efficiency overall?

Travis:

We recently got some data on companies that get some of their revenues from various different kinds of sustainable water practices. So whether this is sustainable water treatment and water management, whether this is water infrastructure, things like that, different proactive measures that companies can implement to actually help the problem, rather than just using less water. And we do want to, in the near future, incorporate that into our model: to identify and essentially to reward those companies that are taking a proactive stand around water issues in the same way that, for our Climate Change pillar, we want to pay special attention to those companies that have substantial investments in clean technology or that are generating renewable energy. So, stay tuned for more on that.

Contributors

Travis Korte is the Data Science Lead at Ethic. Previously, Travis organized civic-minded technologists at Hack for LA and advised a wide range of clients on data science, data policy, and quantitative methods. You can follow him on Twitter at @traviskorte.

Emma Smith, a native of the UK, creates content at Ethic. Throughout her career to date, she has managed the communications initiatives of major financial services clients at various NYC-based public relations agencies.