Corporate Conscience: Beyond Charity

By Mark Harper 9 December, 2013

Why a change in corporate conscience is needed if companies are to effectively mitigate growing water risk, Why a change in corporate conscience is needed if companies are to effectively mitigate growing water risk, Why a change in corporate conscience is needed if companies are to effectively mitigate growing water risk

There is increasing global pressure for corporations to develop a ‘conscience’, to take the lead in addressing the growing water crisis and escalating costs to both companies and society. However, many corporations equate having a conscience with unnecessary expenditure and limit their Corporate Social Responsibility (CSR) activities to basic legal compliance for direct operations and some sort of community engagement. But when it comes to water, should companies be looking beyond CSR, particularly as water is widely acknowledged as a ‘material’ risk to business?

Indeed the recently released 2013 CDP Water Report showed companies are increasingly recognising water as a business risk, as concerns related to water become more prominent and more immediate:

• 70% of respondents identified water as a substantive business risk, with anticipated financial impacts as high as US$1 billion.
• 64% of these reported risks were expected to hit now or within the immediate future, an increase of 16% from last year’s report (see here)

“If water is such a substantial risk, then is it not the CEOs fiduciary duty to mitigate these risks?”

If water is such a substantial risk, then is it not the CEOs fiduciary duty to mitigate these risks? Is it therefore time for companies to move beyond basic compliance and simple community engagement?

Yet, despite the rising acknowledgement of water-related risks, companies are nowhere near where they should be with regards to management of these risks.

A disconnect between risk and corporate action on water

Of the respondents to the CDP 2013 Water Questionnaire, only 63% had set concrete water reduction targets for their direct operations, and only 58% of responding companies had board-level oversight for water issues. This engagement remained unchanged since last year. Whilst targeting water usage is an important first step, the narrow focus will invariably lead to companies missing opportunities and overlooking serious risks.

What is more, very few have gone ‘beyond the fence line’ i.e. looked beyond their own direct operations,  in setting targets and goals for community engagement, supply chain, watershed management and public policy on water:

• 4% have set concrete targets or goals for their supply chain
• 6% have set concrete targets or goals for community engagement
• 3% have set concrete targets or goals for watershed management
• None set concrete targets or goals related to public policy
• Only, 37% require suppliers to report on water

“33% of respondents (CEOs) believe business is doing enough to meet these challenges”

Source: “The UN Global Compact-Accenture CEO Study on Sustainability 2013.

This inadequate response to such a material risk, is even more worrying when you consider that the CEO sustainability study by the UN Global Compact found 76% of responding CEOs were satisfied with the speed and effectiveness of their company’s sustainability strategy. This is despite the fact that only 33% of respondents believe business is doing enough to meet these challenges. Maybe they still don’t understand the purpose of mitigating risk?

So, why are companies still failing to manage water risk?

This “within the fence line” focus can be boiled down to a number of different factors:

• A tendency for applying carbon mitigation strategies to water

Carbon, unlike water, is fungible. Water, because of its spatial and temporal nature, differs from one basin to the next, so as CDP points out “applying a blanket strategy that focuses on reducing water use, similar to a carbon strategy, will be insufficient to mitigate the underlying risks”. Water targets should be set at a local level, taking into account that water is a shared resource with the other users in the watershed. Companies should be good community partners.

•  Not enough pressure/guidance from governments and investors

The UN Global Compact study also found CEOs were still struggling to make the business case for investment in sustainability programmes, as key stakeholders (e.g. consumers, governments and investors) were failing to provide sufficient incentives. In fact the lack of incentives was identified by responders as the fastest rising barrier to change; 37% (up from 18% in 2007) were unable to see a link between sustainability and business value. But surely if water risk is as material as the companies responding to the CDP questionnaire have said, then the business case for developing a comprehensive water management policy and strategy has already been made?

• A general misunderstanding of the true nature of CSR

What is worrying in the face of the intensification of global challenges, is that only 45% of CEOs believe that sustainability will be ‘very important’ to their business, a drop from 54% in 2010. This is likely the result of a lack of understanding of the water crisis and the true nature of CSR, confusing them with philanthropy. It also points to CEOs thinking of water and CSR through a ‘Friedman-esque’ lens. Milton Friedman said that the responsibility of a corporate executive “is to conduct the business in accordance with their desires (shareholders), which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom”.However, when we look at water, the world is changing and increasing physical risks are bringing change to the rules and ethics of society, and therefore what is expected of companies.

Companies should de-couple water from CSR and  transition from philanthropy to a fully integrated corporate strategy

Perhaps trying to create a paradigm shift for how companies view CSR may be too ambitious. A more prudent approach would be to get companies to de-couple water from CSR and make the transition from a philanthropic concept towards a fully integrated corporate and business strategy.

Water scarcity driving changes in the corporate risk landscape

In addition to basic operational risk, water scarcity is also driving changes in the regulatory landscape and an increase in reputational pressure on companies, from a growing and emboldened NGO sector.

We have discussed previously at length the rise in water regulation in China and the development of civil society with increasing NGO activism. In Toxic Waste to Toxic Assets we saw how unmanaged water management issues by Tianneng Power and Pangang Group led to massive losses in market value and suspension of share-sales.

In an interesting example of a social issue that is affecting the CSR landscape of an entire industry, a severe AIDS epidemic is threatening mine production in South Africa where around 1/3 of workers are infected. There an untreated employee may cost his company over three times as much as his annual salary. The overall costs of HIV/AIDS for Anglo American alone, represents 3.4% of Anglo’s SA total costs.

Returning to China, according to the World Health Organisation, 75% of diseases in China and 100,000 deaths per year are caused by water pollution. With water quality in 38% of key lakes and reservoirs and 57% of groundwater too toxic for human touch (more information on this here), and a rising number of so called “cancer villages”. How long before companies in China start feeling the impact?

It is clear that undisclosed and unmanaged water risks can have a major impact on companies.

The nature of the risks are changing and so must corporate views on water risk

“Companies have two choices: sit back and wait for the risks to hit them or think long-term, developing a framework to deal with these”

Due to the rapidly changing landscape of water risk companies clearly have two choices: sit back and wait for the risks to hit them or think long-term, developing a framework to deal with these.

A number of leading companies already have taken this step, adopting a water stewardship approach that recognises the temporal and spatial nature of water, and that water security depends on the behaviour of others within the watershed (interested in reading more on this see here and here).

“In water scarce countries such as China the conscientious corporation, needs to do more than basic compliance and philanthropy”

In water scarce countries such as China the conscientious corporation, needs to do more than basic compliance and philanthropy, it must look at water as a legitimate business risk and adopt every tool in the CSR toolbox if it is to create economic value that also addresses the world’s rising water crisis. With increasing pressure from regulatory bodies and civil society this is to be the new normal, and the lens through which all future corporate activity will be viewed.

Further Reading

• Fashion Update! Brand Winners & Sinners – With the new Phase III Textiles Investigative Report released by 7 China NGOs, we look at who has managed to stay on top since April 2012
• Technology at a Price – This Christmas have you considered the environmental pollution caused by your new smart phone? An investigation by the Green Choice Alliance, found many IT company suppliers guilty of polluting China’s third largest freshwater lake
• Sink or Swim – As water risks rises in prominence we review whether more investors and corporates are taking action to mitigate risk and seek out opportunities 
• Water Stewardship: A Stake in the Ground – There is no universally agreed definition of water stewardship, leaving companies unsure of what it is and what to do. Stuart Orr walks us through WWF’s latest report, A Stake in the Ground, an introductory guide for companies on managing multi-faceted water risks
• H&M: Water Stewardship in Fashion – Claire Hau tells us why water is important to H&M and how it is pioneering water stewardship in fashion from its work with BSR & IPE, partnership with WWF, to its commitment to ban hazardous chemicals by 2020