Water-related risks and their impacts on businesses around the world are increasing dramatically, making a clear approach to managing these risks a necessary step in enhancing business sustainability and minimizing exposure to environmental shocks. Allianz Global Investors believes that the use of environmental governance tools and constructive communication with companies is an effective way to mitigate these rising risks.
The importance of water in global value chains
Water is one of the most important natural resources, and its availability and use directly affects economic activities across industry sectors and supply chains. As competition between industrial use and population demands increases, water security and human rights challenges are exacerbated. In some cases, water scarcity undermines or completely disrupts the sustainability of industrial operations, leaving physical assets vulnerable to disruption or forced abandonment.
At the same time, risks from extreme weather events, especially flooding, are increasing, hitting industrial facilities and infrastructure. Despite these challenges, water remains an under-managed and under-priced resource, as previous reports have emphasized.
Effective Corporate Engagement Methodology
Water risk management is a central pillar of Allianz's Biodiversity Portfolio Sharing program. Since 2024, the company has dedicated a special program to reach out to the 23 lowest performing companies in the sectors most exposed to water risk, based on potential financial impact assessments.
When some companies did not respond or failed to show tangible progress, Allianz resorted to escalating steps, including voting against certain board members or co-sponsoring shareholder resolutions to improve policies.
Case study: Water management in the McDonald's supply chain
Since 2024, Allianz has been pushing McDonald's to strengthen water management in its supply chain. Steps included jointly submitting a shareholder resolution and continuous communication, which led to a constructive dialog and the withdrawal of the resolution after the company responded to the demands.
Lessons learned and key trends
Most companies have general goals to reduce water consumption or increase water efficiency within their facilities, but they often do not take into account the different levels of risk between geographies. Addressing water risks across broader supply chains remains weak or neglected.
Allianz has identified three pathways that are most in need of improvement:
1. Conduct comprehensive water risk assessments
Investors expect companies to carefully analyze the risks to their facilities and supply chains, taking into account the different local environments. Many companies do not realize the magnitude of future risks, especially those associated with their suppliers.
2. Periodic risk monitoring
Even companies that currently face low risk are encouraged to reassess regularly, especially with climate change and shifting precipitation patterns and water resources.
3. Closing the data gap and developing reporting mechanisms
Collecting water data remains a significant challenge, but standardizing reporting methodologies and improving data quality enables companies to make more accurate assessments and better decisions. Allianz continues to follow market developments in the area of water disclosure standards to ensure that companies are effectively guided.
The Future of Water Risk Management
Experience shows that improved water management helps companies avoid disruptions caused by physical risks and realizes tangible financial savings. It also enables investors to reduce their risk exposure and contributes to the protection of this vital resource.
Allianz emphasizes that enhancing communication with businesses about water use and management has become a strategic imperative, not only to protect investments, but also to support global efforts to conserve natural resources and ensure sustainable economic development.
comments