The Case for Company & Community Cooperation

By Loïc Dujardin 10 September, 2013

Sustainalytics' Dujardin says it's time for companies cooperate with communities on water

In 2004, the local government of Kerala shut down a USD 16 million Coca Cola bottling plant.¹ The company was blamed for a sharp decline in the amount of groundwater available to local farmers and villagers. In 2009, the Canadian mining company Pacific Rim was denied the final permit for a large gold mine project on the Lempa River in El Salvador.² This was the result of farmers complaining that the mine operations would drain local water streams. These events highlight the material impact a lack of cooperation on water management may have on a company’s bottom line.

“cooperation is essential to strike a balance between the different needs and priorities and share this precious resource equitably…”

Source: UN General Assembly

In 2010 the United Nations’ General Assembly designated 2013 as the UN International Year of Water Cooperation. By doing so, the General Assembly emphasized that “cooperation is essential to strike a balance between the different needs and priorities and share this precious resource equitably…”³
Water is an essential resource for companies and their neighbouring communities. Food and beverage companies use water as direct input for their products; mining companies use large amounts of water to process the ore while power generation needs water for cooling purposes. Water is also vital for the communities in which these companies operate. Communities rely on water for domestic and recreational uses. The International Fund for Agricultural Development estimates that 500 million smallholder farms, supporting almost two billion people, also rely on water for irrigation to grow food.⁴
Water-related events may impact both companies and local communities. Drought may disrupt companies’ production and affect local communities’ basic water needs. In 2012, a nuclear power plant in the state of Connecticut shut down one of its reactors because the temperature of the intake cooling water from the river was too high. The shutdown resulted in the loss of 255,000 megawatt-hours and several million dollars. In the U.S. Midwest, a drought lowered the level of the Mississippi River and disrupted the transportation of commodities.⁵ Drought may also have a direct impact on peoples’ lives. In 2011 and 2012, the drought in the East Africa region threatened the livelihoods of 9.5 million people. Floods, like droughts, may impact companies’ direct operations and supply chains as well as destroy homes and businesses. Massive floods in Europe, India and Canada in June 2013 resulted in USD 27 billion in losses.⁶
The growing number of climate change-induced floods and droughts provide opportunities for cooperation among companies and local communities. Companies have the investment capacity and technological know-how to use water efficiently. Companies with water-intensive production process have improved their water efficiency by recycling and reusing produced water on a large scale. These efficiency gains may then be shared with surrounding communities. Local communities, on the other hand, can join participatory groundwater management (PGM) initiatives. These initiatives, which also involve the private sector and local governments, enable communities to participate effectively in the control of groundwater usage. Since water is a local issue, communities may also share knowledge of the regional factors that influence the water ecosystem. This in turn helps companies to secure long-term water supplies.
If companies want to avoid significant losses such as the ones experienced by Pacific Rim and Coca-Cola in recent years, they need to cooperate with communities. Companies have to secure local support by addressing communities’ water security concerns. Cooperation is essential for companies to reduce reputational and regulatory risks and protect their license to operate. As the UN International Year of Water Cooperation, 2013 provides the momentum for investors to support companies that display strong community water cooperation strategies.
This article has been republished with the kind permission of Sustainalytics.

^1. Steve Stecklow, “How a Global Web of Activists Gives Coke Problems in India,” The Wall Street Journal, June 7, 2005

^2. Brooke Barton et al., The Ceres Aqua Gauge: A Framework for 21^st Century Water Risk Management, October 2011

^3. UN Water, World Water Day 2013: International Year of Water, https://www.unwater.org/water-cooperation-2013/water-cooperation/en/

^4. IFAD, “Food prices: smallholder farmers can be part of the solution,” https://www.ifad.org/operations/food/farmer.htm

^5. U.S. Department of Energy, U.S. Energy Sector Vulnerabilities to Climate Change and Extreme Weather, July 2013, https://energy.gov/downloads/us-energy-sector-vulnerabilities-climate-change-and-extreme-weather

^6. Megan Hickey, “Floods Costing $27 Billion in June Top Six-Month Average,” Bloomberg, July 10, 2013

Further Reading

• Bloomberg’s Views on Water – A Huge Financial Risk, in Need of Measurement and Disclosure – Bloomberg’s Liu & Bullard, discuss the importance of ESG analytics and why water use & efficiency data is crucial in the face of an increasingly water-insecure future in identifying portfolio risk
• Water Water Everywhere; Only If You Share – Water is a shared, “must-have” resource with no substitute. Stand alone action is not enough to address a looming liquidity crisis. Find out how sharing is caring from CEOs to grassroots action
• 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
• Groundwater Crackdown – Hope Springs -The economy slows down but the Chinese government speeds up groundwater crackdown with increased transparency, blacklists at both central and provincial levels