Managing the World’s Liquid Asset – Water

By Asit Biswas, Cecilia Tortajada, Giovanna Chandler 19 September, 2016

Biswas, Tortajada & Chandler on the importance of water for business, current sustainability reporting & challenges

Two key events took place in Singapore over the summer. First was the Water Leaders’ Summit within the context of the Singapore International Water Week, and the second was a CNBC discussion on Future of World’s Water: A Business Perspective. Both events explored in depth the role that business can play in managing global water resources. Senior officers from the world’s largest corporations and leading academic figures also discussed interlinkages between business and water.

“The global business community has faced substantial stress & challenges during the post-2000 period.
… These developments have heralded a new era for corporate sustainability reporting”

The global business community has faced substantial stress and challenges during the post-2000 period. Among these are investor demands for sustainable investments, resource scarcities, increasing scrutiny by media and social activists about malpractices, real or perceived, and continuing technological and management evolutions. These developments have heralded a new era for corporate sustainability reporting where businesses explain impacts of their operational practices on society, natural resources and environment.
While sustainability reporting has mostly been voluntary, increasing scrutiny and pressure from non-governmental organisations (NGOs), media and governments, have encouraged the companies to assess and often publicly divulge the impacts, both positive and negative, of their activities on profitability and on society, natural resources and environment.
In response to growing demand from investors, NGOs and media for broader and more comprehensive disclosure on environmental, social and governance (ESG) indicators for business operation, the Securities and Exchange Commission (SEC) of the United States issued a guidance for publicly listed companies on key ESG issues. This guidance requires companies to take into account climate-related risks and uncertainties, physical availability of water as well as their quality considerations that could contribute to “decreased agricultural production capacity in areas affected by droughts or other weather-related changes”.

California drought: US$2.7bn in revenue losses & counting …

The continuing California drought, and droughts in Australia, China and India, show that these events can directly affect the quality and levels of production, costs of doing business, and net profits. Under serious water scarcity conditions, a company’s licence to operate in an arid region may even be revoked, or significantly reduced. These are all material risks that investors should be aware of since they may affect the share prices of companies.

… the monsoon is “the real finance minister of India”

                                                  Indian President Pranab Mukherjee

Consider the current drought in California. This has cost the farmers and agricultural businesses some US$2.7 billion in revenue losses. Similarly, for a major developing country such as India, Indian President Pranab Mukherjee (and earlier finance minister) has aptly remarked that the monsoon is “the real finance minister of India” since it affects the economy in a myriad of ways. Availability of water thus has major economic impact on business and nations.
For water, corporations need to ask three fundamental questions:

• First, is there enough reliable supply available, both in terms of quantity and quality, for their existing operations and future growth?
• Second, since water is always a local issue, will local authorities permit water withdrawals during prolonged drought years given their own water management practices are invariably poor and thus unlikely to meet increasing water needs?
• Third, is there a reputational risk for businesses even when water is available and companies have necessary permits to extract water during drought years? Coca-Cola and Pepsi-Cola had to close plants in India in 2004, even when they had authorisations to extract water.

Every industry needs water to operate; those that need a lot are vulnernable

Savvy investors all over the world are now aware of the importance of water as a business risk, especially for food, beverage, clothing, textile, pulp, paper, energy and mining industries. Every industry needs water for operational purposes, but some industries need significant amounts of water, and are thus more vulnerable to water scarcity.
The first major investor group to demand water information is the Norges Bank Investment Management (NBIM). It now manages an US$862 billion portfolio of the Norwegian Government Pension Fund. It announced in August 2009 that it would start assessing the water risk management practices of 1,100 companies in which they held shares.
Sustainability reports have been around for decades in one form or another. While such reports have gained momentum in the 21st century, their usefulness to investors and general public has been rather limited for many reasons.

Sustainability reports usefulness to investors & general public has been rather limited for various reasons

Corporations in different industrial sectors use different production and manufacturing processes, and have different reasons for producing sustainability reports. In addition, large corporations often have operations in many countries across the world, and several facilities in each country. Thus, methodologically, it is difficult to determine their performance at a global level. Data used for one company, from one plant to another, may not be compatible. Equally, the data reliability often varies among locations.

No Agreed Global Standard

There is no agreed global standard and framework for sustainability reports. Three most prominent frameworks are Global Reporting Initiative (GRI), International Integrated Reporting Council (IIRC) and Sustainability Accounting Standards Board (SASB). Each has its own philosophy, approach and guidelines as to how sustainability should be defined, determined, assessed and reported.
Carbon Disclosure Project (CDP) started a new water risk disclosure assessment and reporting in 2009. CDP requests water-related information from companies. In its latest 2015 report, it noted only 38 per cent of companies responded to investors’ requests for disclosure on water-related data.

“CDP included eight companies in its “Water A List”. Based on our analysis, at least one of the companies in this list do not deserve to be there, and two of the world’s best companies in terms of managing water risk are not included.”

While producing excellent reports, CDP faces some fundamental problems. Companies provide information, which is then analysed. In the current era where major companies deliberately provided erroneous information, there has to be ways to double check the veracity of information received. In addition, companies are interpreting identical questions differently. Finally, reporting activities of companies are often conducted by junior staff, sometimes even by interns, who lack overall understanding of the situations and exercise.
CDP included eight companies in its “Water A List”. Based on our analysis, at least one of the companies in this list do not deserve to be there, and two of the world’s best companies in terms of managing water risk are not included.
 

The Importance of Water for Business

Even before preparation of sustainability reports became mainstream, many corporations realised that reliable availability of water is a major risk. Take Nestle. It has taken active steps since the late 1990s to significantly improve its water use efficiencies and wastewater management practices. Between 2005 and 2013, it reduced direct water withdrawal for every product category by one-third. This also meant reduction of total water discharges from 145 to 91 million cubic metres, even though total production increased significantly. It is assisting farmers to produce products in an increasingly water-efficient manner.

“There is no question that the boardrooms of many major companies now realise that if they want to survive and thrive, they must change their corporate culture and mindset about the use of water.”

Procter & Gamble decided to reduce its water consumption by 20 per cent during 2010-2020. They achieved this target by 2015. Some 70 per cent of P&G products require water during their use. Through technological innovations, these products have become more water efficient and less polluting. For example, Downy fabric softeners enable consumers to rinse only once, instead of 3-4 times, saving 30-50 water in each washing. The company has now completely phased out phosphates globally from detergents, thus reducing the eutrophication potential of receiving water bodies. Coca-Cola has improved its water use efficiency by 25 per cent since 2005. It also has replenished 94 per cent of water used in finished beverages (153.6 billion litres) through 209 community projects in 61 countries
There is no question that the boardrooms of many major companies now realise that if they want to survive and thrive, they must change their corporate culture and mindset about the use of water. MNCs such as Nestle, Unilever, P&G and Coca-Cola have made remarkable advances since 2000 to significantly reduce their water footprints through new operational policies, process changes and making all their staff more water-sensitive.
While the private sector is making rapid changes to improve their water management practices, corresponding advances by the public sector are conspicuous by their absence. If and when the public sector makes corresponding advances, the world’s water problems are likely to be significantly diminished.
This article was first published in the Business Times on 13 July 2016.

Further Reading

• Water Risk Valuation – What Investors Say – See what 70+ investors have to say on different valuation approaches we applied to 10 energy stocks listed across 4 exchanges. Is there consensus? What are they most worried about?
• Banking in the Age of Water Risk – Are water risks and their potential impacts factored in by banks? Or is ‘water exposure’ just the water used in their office buildings & branches? Tan says prudence dictates we must start to waterproof portfolios
• 2016 World Water Week: Key Takeaways – Business, risk assessment & linkages with SDG 6 were key issues at World Water Week 2016, fitting given the theme “Water for Sustainable Growth”. China Water Risk’s Dawn McGregor on our three key takeaways from Stockholm
• Corporate Leadership For Depleting Aquifers – Earth Security Group’s CEO brief warns that depletion of aquifers is creating systemic business risks and geopolitical challenges. See why authors Litovsky & Hill Clarvis think these are risks so great that countries & MNCs must come together to collaborate on solutions
• Yangtze Headwaters Under Threat – By the end of the century, 67% of China’s ice may be gone. Can the Yangtze survive? As temperatures rise, the glaciers which sustain Asia’s longest river are reaching the tipping point. Sam Inglis explores the headwaters, as we march towards an ice-free Yangtze

• Water Stewardship: Actions Must Match Risk – Despite acknowledgement of water risks, 58% of companies in CDP’s 2014 Global Water report do not have a public commitment to water. We expand on actions needed in China & globally to match the risk
• Water: Can’t Always Buy What You Need -With competition for water intensifying, paying more for water may not get you what you need. Deloitte Consulting’s Will Sarni on strategies that can help corporates secure water for growth
• Corporate Water Reporting in China – CDP’s report shows potentially inadequate water risk assessment by Chinese companies & those with HQ’s in China. CDP’s Gillespy on their latest report and why it’s time to report on water risk
• Corporate Conscience: Beyond Charity – Why are so few companies effectively mitigating water risk? Is it time for the conscientious corporate to transition water from purely charity and compliance to a core business activity?
• Business & Society: Building Trust – Given pressing societal issues, companies are now expected to lead the change across their business value chain. Edelman’s Ashley Hegland on why businesses need to reprioritize value to include such societal benefits to build & maintain trust or face reputational brand damage