Investors must consider the interaction between water, energy and food - known as the ‘WEF Nexus’ – as part of their securities selection process, according to fund manager T. Rowe Price.
The firm warned that if one of the components forming the WEF Nexus were to suffer, the effects would also play out on the two remaining nexus components and have an impact on the companies that operate within them.
Understanding WEF Nexus interaction gives investors a valuable lens to better understand the impact of environmental dynamics on company performance, according to the firm.
Water impacts food and power supplies, so the impact of poor management of this finite resource is hard to reverse. At present, 1.6 billion people are exposed to water scarcity and that figure is estimated to double by 2040, putting pressure on the nexus.
In a paper on the topic, Maria Elena Drew, director of research for responsible investing at T. Rowe Price, said: “Among countries managing WEF Nexus challenges, China represents a powerful example of how a WEF Nexus imbalance works to drive environmental reform.
“Environmental regulation in China has tightened substantially as the government encourages restructuring of the country’s industrial sector, in its efforts to mitigate global climate change.
“At the heart of its local environmental reforms is a shift toward a circular economy, which is de‑emphasising any industry that overextends China’s natural resource balance without a commensurate social gain.”
For any industry facing a ‘go‑circular’ mandate, Drew said investors should consider how a company is working to align its business to meet government aims, the confluence of resulting supply chain issues, and how companies are readjusting business models to solve them.
Drew pointed to the apparel and textile sector where considering factory locations and modernisation, access to water permits, and other environmental factors have been important factors in making investment decisions.
T. Rowe Price said it had $1.08 trillion in assets under management as of March 31, 2019.
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