This summer, I had the privilege of interning for Ceres, a nonprofit organization that works with companies and investors with the goal of achieving a sustainable economy. My position was on the water risk team, which engages with investors on issues of water risk in their portfolios, provides research and strategies to conduct water risk assessment, and helps institutional investors engage with companies on water related challenges. All of this is part of the growing area of sustainable, responsible, and impact investing (SRI). SRI is “an investment discipline that considers environmental, social, and corporate governance (ESG) criteria to generate long-term competitive financial returns.”[1] In 2018, the net total of SRI assets in the United States was $12 trillion.[2] This represents about 1 in 4 dollars of US assets under professional management.
One of my projects was researching and creating engagement questions for investors to address the UN Human Right to Water and Sanitation with companies. For background, in 2010 the United Nations recognized access to clean drinking water and sanitation as a basic human right.[3] This means that companies and investors have a responsibility to ensure that their operations do not negatively affect the ability of others (community members, local governments, and other stakeholders) to access clean and safe drinking water.[4] Ceres is beginning to think about how investors can engage with companies over this issue: what questions to ask of companies, and how to conduct due diligence to make sure the companies in their portfolios are mitigating risk by including human right to water considerations in their business decisions.
In general, investors are becoming active shareholders in the companies they own. Shareholder engagement on human rights for example (which the UN Human Right to Water falls under) is on the rise. Shareholder resolutions on human rights rose 33% between 2016 and 2019, with 92 resolutions submitted this year to date.[5] Additionally, there has been an increase in the number of human rights resolutions filed that call specifically for risk assessment and board oversight of human rights.
My summer research on the intersection of human rights and environmental stewardship got me thinking about our own multiple benefits project, and the indirect benefits of water that communities enjoy. Should benefits from green infrastructure, such as lower potable water demands, lower energy bills, and lower urban heat island, all of which increase neighborhood livability, also be a human right? While they are not necessities for survival like basic sanitation and clean drinking water, investments in projects such as the Waller-3 test case are increasing. As they do, perhaps the question- rather than do people have a right to these benefits- should be who has a right to these benefits?
As mentioned above, rather than only focusing on exclusionary guidelines (for example avoiding investments in oil and gas companies) as traditional ESG investments have done, SRI has a strong focus on solutions, and the positive impact an investment creates. While shareholder resolutions remain the main way for owners of common stock to create change, solutions investing is becoming more mainstream. This is increasingly being done through real assets, alternative investment funds and community investments, the some of the fastest growing areas of SRI. In 2018, $457 billion was invested in alternative assets such as community investment vehicles, private equity, and community development venture capital funds.[6]
ESG investments are not only valuable for the amount of positive impact they have, but also who is experiencing that impact. Investments in sustainable water solutions like the Waller-3 projects will have calculable benefits, in this case in the form of lower energy bills, reduced urban heat island effect and reduced stormwater runoff and pollution, but these benefits should be considered with the intended beneficiary in mind. Positive impacts resulting from investments in sustainable infrastructure are meaningless if they don’t have positive impacts for the community in which they occur. Much of the benefit to the investor might be through increased property values as the area becomes more valuable due to these improvements, the benefits to the local government might be lower cost of water treatment or stormwater costs. However, in lower income areas where community members primarily rent (the city of Austin now has more homeowners than renters) the effect of increased property values will be a negative one on the existing community, and lower stormwater costs don’t matter unless they are passed on to the customer. Most US cities have experienced the effects of gentrification. Cities like San Francisco and New York, where market forces have historically determined the cost of living, are practically unlivable on even a middle class salary. In 2018 an income of $148,000 and $124,00 were needed to support a family of four in San Francisco and New York, respectively.[7] Most of this extra expense is the high cost of housing.
Can the problem of gentrification resulting from sustainable infrastructure projects be solved by investors?
The goal of the equity portion of our project is to provide the City of Austin with recommendations for the most equitable distribution of benefits from the Waller-3 test case, as well as recommendations for the best neighborhoods to implement projects in next. The next question to address will be how to ensure existing communities are the ones who get these benefits. Our project will probably end before we can answer this, but one of the purposes of the multiple benefits framework is to bring together diverse stakeholders to invest in water projects, and so the best place to answer these questions may be during the investment process. The trends in impact and community investing suggest that there is plenty of funding available for projects that solve both problems at once, and unlike a common stock investment, a community development VC fund or private equity deal is much more customizable. Investors are becoming more cognizant of where their money goes, and increasingly seek investment returns that are aligned with environmental and social returns. Investment contracts could require certain social benefits, such as affordable housing or cheap public transit options, which will in turn bring together more diverse stakeholders. Many stakeholders stand to benefit from projects that provide more than one solution. And everyone stands to benefit from sustainable, affordable neighborhoods.
[3] United Nations, The Human Right to Water and Sanitation
[5]Ceres, Shareholder resolutions- trends in the S of ESG
[6] Ibid
[7] Economic Policy Institute, Family Budget Calculator
