Water Company Disclosure is Murky, Investors Must Press for Major Improvements
In Investor- and Publicly-Owned Utilities' Reporting

Rating of 12 Utilities’ ESG Disclosures Finds Public Utilities Doing a Better Job Than Investor-Owned Water Companies; U.S. Firms Trailing Counterparts in Philippines, UK and Spain.

NEW YORK CITY///July 22, 2009///More than 15 water-focused mutual funds and exchange traded funds (ETFs) have been created in recent months, but most investor-owned water utilities have a long way to go in order to provide adequate environmental, social and governance (ESG) disclosure to investors, according to a major new study from the Interfaith Center on Corporate Responsibility (ICCR),  a coalition of nearly 300 faith-based institutional investors representing over $100 billion in invested capital.
 
The new report, “Liquid Assets: Responsible Investment in Water Services,” scores 12 public and private utilities on 21 key disclosure issues, with a possible score ranging from a maximum of 63 to -63.  The two public utilities in the sample – Department of Water and Energy, New South Wales, Australia (score 55) and City of New York Department of Environmental Protection, US (score 50) -- did best.  The two lowest disclosure scores went to investor-owned utilities in the U.S. – Indiana American Water, a subsidiary of American Water (AWK), the largest investor-owned water company in the U.S. (score -45) and Veolia Water North America, a division of Veolia Environment, with 14 million customers in 600 U.S. communities (score -53).

The ESG score included such factors as planning for water scarcity and climate disruptions; governance and anti-corruption policies; equitable access; environmental fines; and quality of service. The report also highlights the critical data gaps in current reporting by water utilities and calls for creation of a “data commons” for drinking water and sanitation utilities, whether investor-owned or government-owned.

Replacement of aging water infrastructures in developed countries as well as the demand for new infrastructure in emerging markets and developing countries points to enormous profit potential for investors.  China alone plans to build 375 wastewater treatment facilities and, according to World Bank estimates, $400 billion to $600 billion in global water infrastructure investments will be needed in the coming years.  Increasingly stringent water quality standards and adaptation of water systems to meet changing climate and hydrological conditions will create opportunities in all segments of the water industry.

Laura Berry, executive director, ICCR, said:  “Responsible investors need consistent, comparable data on water utilities’ ESG performance in order to identify opportunities for investment in the water services sector that will support local and regional water capacity and advance the MDG.  At present, however, few water utilities, public or private, report on comprehensive quantitative and qualitative ESG indicators that would allow meaningful performance benchmarking, despite the fact that the protocols and Internet-based tools to facilitate this kind of reporting do exist. In the absence of mandated disclosure requirements, it falls to the [responsible investing] community to use its considerable financial power to raise reporting standards in the water services sector so that capital can be rationally allocated to those enterprises – whether public or private – most capable of meeting the extraordinary water challenges.”

Leslie Lowe, director, Energy and the Environment program, ICCR, said:  “Water, the world’s third largest industry after oil and electric power, is the most capital intensive of all utilities and the most essential.  As the dimensions of the water crisis and the vast need for capital in water services become apparent, private investment in the water industry has surged.  Growing freshwater scarcity and increasing demand are giving rise to investment strategies based on water as an increasingly scarce commodity not unlike oil, with the prospect of ‘peak water’ summoning visions of peak profits from what is already being called ‘blue gold.’  As per capita availability of water has declined globally,  water, which is both indispensable and irreplaceable, has moved to the forefront of the debate about sustainable development and the appropriate roles of the public and private sectors in delivery of essential services.”  

Patricia Jones, manager, Environmental Justice Program, Unitarian Universalist Service Committee (UUSC), said:  “The international community has recognized the human right to water since 2002 and U.N. defines it as ‘the right of everyone to sufficient, safe, acceptable, physically accessible, and affordable water for personal and domestic uses.’ International and national tribunals have inferred a human right to water, from constitutional and international treaty norms, even where such documents do not expressly articulate such a right.  Courts in South Africa and India have ruled that governments or private corporations that violate the human right to water can be held liable.  Civil society organizations and social movements are invoking obligations arising from the human right to water in challenges to private operators in national courts, as well as successfully challenging beverage companies on environmental grounds.  This area of human rights law is rapidly evolving, posing new risks not only for water service utilities but also for companies in other sectors.” 

Prior to joining the UUSC, Jones worked with the International Water Law Research Institute, University of Dundee.  She received her PhD from the University of Dundee Centre for Water Law, Policy and Science.

In developed countries the greatest water services challenge is to replace the aging infrastructure and adapt century old systems for the potential impacts of 21st Century climate change.  The U.S. Environmental Protection Agency estimates that $202.5 billion must be invested over the next 20 years in the nation’s wastewater facilities and an additional $122 billion will be needed to ensure safe drinking water supplies. Globally, $180 billion in water infrastructure investment is needed each year for the next twenty years to meet freshwater demand, according to the World Bank.   

In developing countries, the challenge of creating the infrastructure to serve the 1.1 billion people who lack access to an “improved source” for drinking water and the 2.6 billion people without basic sanitation – and to do so by 2015, as called for in the United Nations Millennium Development Goals (MDG) – is daunting.   Meeting these goals will require the provision of drinking water services to an additional 300,000 people a day, and improved sanitation services to more than 380,000 people a day, most of them living in sub-Saharan Africa and Asia. As of late 2008, it appeared that countries were on track to meet the drinking water goal by 2015.  The sanitation goal, however, is unlikely to be met, especially in the poorest countries in Africa.   
 
WATER UTILITIES SCORES

•  Department of Water and Energy, New South Wales, Australia, score 55 of 63.
• City of New York Department of Environmental Protection, US, score 50.
• Manila Water Company, Philippines, score 49.
• Thames Water, UK, score 63.
• Southern Water, UK, score 35.
• Agbar Group, Spain, Chile, Columbia, Cuba, Mexico, China and the UK, score -2.
• Veolia Environment (NYSE: VE), 60 countries, world’s largest water and wastewater treatment company with 131 million customers in 60 countries, score -3.
• Suez Environment S.A. (NYSE: SEV), Middle East, Asia, Pacific Region and North America, score -3.
• American Water (NYSE:  AWK), largest investor-owned water company in the U.S., score 19.
• United Water, subsidiary of Suez Environment, 26 states in U.S., score -24.
•  Indiana American Water, a subsidiary of American Water, score -45.
• Veolia Water North America, division of Veolia Environment, with 14 million customers in 600 U.S. communities, score -53.

The water industry worldwide comprises many thousands of public water utilities and approximately 300 to 400 publicly traded companies. Provision of water and wastewater services constitutes only one segment of the industry, which includes: bulk water supply; Infrastructure construction (dams, reservoirs, treatment plants); equipment and materials (pipes, pumps, meters); and water utility services (drinking water extraction, treatment and distribution; wastewater collection, treatment and discharge).     

BACKGROUND:  THE RISE OF WATER INVESTING

• Bonds.  90 per cent of the water utilities worldwide are publicly owned and governments finance most of the capital investment in drinking water and sanitation, usually through issuance of long-term debt backed either by tax levy funds (general obligation bonds) or by user fees (revenue bonds).  The bonds may be issued by the local governmental owner or by a special entity created for the purpose of financing the water utility, such as the New York City Municipal Water Finance Authority. Municipal bond financing is used extensively in the United States  and other countries where credit markets are well established.  International financial institutions, aid agencies and donor governments have promoted efforts to create and strengthen credit markets for sub-national debt in developing and emerging market countries with notable success in some 
  
  
• Mutual funds.  As the dimensions of the water crisis and the vast need for capital have become apparent, private investment in the water industry has surged.  Eleven new water funds were launched in the first half of 2007; Promethean Investments, a UK private equity firm, and the Dutch firm Maxx Water Management both announced plans for new water funds in 2008; Calvert launched its Global Water Fund in September 2008.  Water funds, such as SAM Sustainable Water Fund, KBC Eco Fund Water Strategy and, most recently, the Calvert Global Water Fund do employ ESG screens.  The Calvert water fund, an actively managed SRI mutual fund, includes among its screening criteria: equitable access to water as a fundamental human right, and commitment to environmental protection and good governance.

• ETFs.  In addition to stocks and bonds of investor-owned water utilities, a variety of investment vehicles are now poised to take advantage of the perceived opportunities in the sector, including water indexes and exchange traded funds (ETFs). Water index funds and ETFs offer diversification within the sector, with ETFs providing the added ability to buy on margin and sell short. Recent changes in the U.S. now allow for actively managed ETFs.  Most water ETFs track the performance of an index – e.g., PowerShares Water Resources Fund (PHO) and PowerShares Global Water Portfolio which track the Palisades water index, Claymore S&P Global Water (CGW) which tracks the S&P global water index, and First Trust ISE Water (FIW) which tracks the ISE water index. 

• Private equity. The Australian investment bank, Macquarie Group, led the way in creating private equity utility funds when it began to purchase infrastructure assets being sold off by the Australian government in the 1990s.  Macquarie leveraged the cash flow from the utilities for the acquisitions, then repackaged these assets as listed infrastructure funds and sold them to Australian pension plans. The steady cash flow from water utilities has attracted direct investment from Australian, European, and Canadian pension funds. This strategy prompted creation of infrastructure funds by other investment banks, including: Goldman Sachs ($3 billion), Morgan Stanley ($1 billion) and Credit Suisse ($1 billion).  Private equity interest in water continued to grow throughout 2007.

METHODOLOGY

To determine whether investors and other stakeholders have sufficient information to assess ESG performance in the water services sector, ICCR undertook a survey of the information made available on the Internet by 12 utilities.  The review looked at two government-owned and operated water utilities (in New South Wales, Australia, and New York City); and 10 investor-owned water services companies.  Three of the 10 investor-owned utilities covered in the review operate water and/or sanitation systems in a single city or region: Manila Water (Philippines); Southern Water and Thames Water (UK).  The other seven are utility holding companies that own or control many local water services companies: American Water and Indiana American Water (USA); Suez Environment and two companies under its control, Agbar (Spain) and United Water (USA); Veolia Environment and Veolia Water North America.

Twenty-one indicators related to the material ESG challenges discussed in this report were used to assess: (1) management’s perception of and response to non-financial risks; (2) evidence that effective management systems for data collection are used to monitor and benchmark local utility performance; (3) whether the performance data disclosed were comprehensive, consistent and comparable; and (4) whether the information was clearly presented and easily accessible.  The indicators were divided into two groups: five governance indicators regarding corporate level policies that demonstrate management’s perception of and response to material non-financial risks; and 16 performance indicators regarding environmental and social challenges faced by local utilities owned, operated or regulated by the reporting entity.  For each indicator a numerical score was given based on whether the supporting data were consistent, comparable and comprehensive.
 
ABOUT ICCR

The Interfaith Center on Corporate Responsibility is a coalition of nearly 300 faith-based institutional investors representing over $100 billion in invested capital. ICCR members bridge the divide between morality and markets by envisioning a civic economy that integrates ethical, environmental and social values. Inspired by faith, committed to action, ICCR members work to build a just and sustainable global community.

CONTACT: 
Patrick Mitchell, (703) 276-3266 or pmitchell@hastingsgroup.com.

EDITOR’S NOTE:  A streaming audio replay of the news event will be available here as of 6 p.m. ET/11 p.m. GMT on July 22, 2009.