2012 Review & 5 Trends for 2013

By Debra Tan 4 February, 2013

Water moved from the sidelines into the spotlight in 2012 and is expected to stay there in 2013

Water risk did rise in prominence in 2012 both in China and globally. It’s not just Chinese government policy, but the Water-Energy-Food Nexus was recognized as one of the top five risks in 2012. Water risk continues to stay in the top five global risks by Likelihood and Impact in the World Economic Forum’s Global Risks 2013 Report.
For those of you worried about financial markets, this 2013 report predicts that a water supply crisis is more likely to happen than systemic financial failure. It is also more likely to happen and have a greater impact than terrorism, failure of diplomatic conflict resolution and cyber-attacks. Of course, a water supply crisis, is linked to food shortages, energy shortages, extreme weather and a whole web of other risks from severe income disparity to major systemic financial failure as shown in the map below.

Water and water related risks test economic and environmental resilience and will continue to do so in 2013. We expect the complex web of water related risks to unfold and understanding of these inter-woven issues to continue to rise for governments, corporates and investors alike.
2012 Review …

So what does this mean for 2013?
China Water Risk’s Top 5 Trends for 2013 …

1. A pro-water government

We expect to see government continue to fine tune water policies along these lines in 2013.  And we are not disappointed. Already in January, the government has issued three new water guidelines, addressing water usage, quality, pricing and protection:

• 2 January 2013: Most Stringent Water Management System Methods (State Council)
• 14 January 2013: Water Resources Fee (National Development Resource Council (NDRC), Ministry of Finance (MoF) & Ministry of Water Resources)
• 24 January 2013: Guidance on the Development of Environmental Protection Services, a 12FYP Strategic Emerging Industry (Ministry of Environmental Protection)

“The per capita availability of water resources in China is quite small, so water conservation is the principal solution to the country’s water resources issue”

Xi Jinping, September 18, 2011

Controlling demand: Central government quotas are trickling down to provincial governments. The ‘Most Stringent Water Management System Methods’ intends to distribute the three targets of total water usage, water efficiency and water quality by province. As usual, some provinces have it tougher than others. Guangdong, Jiangsu, Shanghai, Xinjiang, Anhui all have to reduce their water usage in 2015 to below 2011 levels. We expect the government to turn their focus to provincial groundwater this year.
Water tariffs on the rise:To increase the supply of water, water price reform is a must. Desalination, fully-potable water recycling and other water treatment solutions can only be economically viable at the ‘right’ water price. We are glad to see government not only differentiating between water scarce regions but also between the type of water used – surface or groundwater.
Indications are abound that this will also translate to differentiating industrial water tariffs for industries which are highly polluting and those who are heavy water users. We also expect heavy water users to be penalized with progressive water tariffs. Finally, the fact that the Water Resources Fee was a joint standard by the Ministry of Water Resources with the NRDC and MoF will give the joint standard more teeth. Read our review on the impact of these new policies in Water Fees & Quotas  – Set for Economic Growth?

“There is a great urgency to strengthen protection. Biodiversity embodies high ecological value, which helps to retain water, adjust climate, purify air and maintain ecological balance.”

Li Keqiang, 6 Jun 2012

Protecting the environment with market-based solutions:With the latest announcement on the development of Environmental Protection Services, we are encouraged to see support for the formation of 50 environmental protection service companies with revenues in excess of RMB1 billion. Given the right water price, we expect to see the government move towards more market-based solutions and looking to foreign and private capital for sludge & sewage treatment and solid waste treatment.
All good news for the water industry – see Standard Chartered Report on 28 January 2013: Clear Policies Brighten Outlook here
Mismatched policy targets: However, whilst policies within water appear cohesive, there is a mismatch in targets set for the energy sector and water. It is unclear how China can achieve its aggressive power growth targets whilst implementing its water saving ambitions – see Wai-Shin Chan, HSBC’s Director of Climate Change’s opinion on this: Water resilience, disclosure and mismatch in China.
Nevertheless, the Water Resources Fee represents a good example of collaboration and we hope that this is the start of more coordinated efforts between government departments on water.
Lack of enforcement & disclosure could hamper policy effectiveness: Finally, there is a matter of enforcement and disclosure. The Handan incident earlier this year is a perfect example of failure by the government to disclose pollution incidents. The good news here is that the rise in social media, domestic NGOs and public awareness on pollution issues leaves provincial governments less wriggle room. Successful corrective action on pollution have been brought about by environmental protests and we expect this to rise until a formal mechanism for channeling complaints is in place. More on this here.

2. Multi-pronged approach in managing water for agriculture

Improve irrigation: Agriculture is the largest user of water in China accounting for 62% of total use. Management of water in agriculture is therefore critical. Water saved in irrigation can be used in industry and to feed the growing urban population. We therefore expect the government to be quite aggressive in achieving water efficiencies in agriculture.
Agri-tech: In addition, we expect the focus on agri-tech to grow. The 2012 No. 1 Document linked with water and food. We expect this trend to continue in 2013 as food security is still of paramount importance, tying in bio-tech and water. China may have no choice but to rely heavily on hybrids or GM seeds due to the following tri-factors:

• Top four farming provinces are water scarce;
• ~10% of China’s arable land is polluted with heavy metals primary cadmium and arsenic; and
• Increasingly extreme floods & droughts

Manage soil pollution: Agriculture is also the largest polluter with over use of fertilisers and pesticides. We expect the government to control this primarily via the consolidation of the fertiliser industry and we could see increased focus on mining to curtail soil contamination with untreated tailings from mines and illegal mining seeping into arable land. We hope to see more provincial targets finalized in 2013 for the new heavy metal pollution targets: lead, arsenic, mercury, chromium and cadmium.

Importing Virtual Water: Given the above and food contamination (read horror stories documented here), we have been saying that we are bullish on food imports (more on this here).  We believe that trade is a less obvious way to save water. We have been discussing the saving water used in agriculture through importing water through food in 2011 and again in 2012 (here and here respectively). Following the UK and importing virtual water would certainly free up China’s water resources and shift agriculture water to industrial water to drive economic growth. Read more on this in Follow the UK: Import Water.

3. Energy security – no choice but to plow ahead with hydropower & fracking but tech could save us

We expect water to also shape China’s energy choices and we wrote about that here.
Hydro: With hydropower, we expect the debate to centre around the size of dams rather than whether the rivers will be dammed. Going forward, we expect China has no choice but to dam the tributaries of the Salween and Mekong leading to increased geopolitical tensions. This latter is echoed by HSBC in their No Water No Power Report.
Coal: We also believe that coal will come under scrutiny this year with around 50% of coal reserves sitting in water scarce regions. Moreover, large amounts of water used are in the extraction and production of thermal and coking coal (read more here) and pollution from untreated mine tailings could contaminate groundwater. NGOs have already turned their focus to this area with Greenpeace publishing their Thirsty Coal report in July 2012 and UNEPFI’s Chief Liquidity Series III on the Extractives Industry in October 2012. We expect more pressure on miners going forward.
Gas: Since gas-fired power plants use less water than coal-fired plants, switching to gas will be high on the agenda. Although large-scale tapping of shale gas in China with a host of obstacles is a distance away, interest in fracking will continue to throw out questions on whether there is enough water for fracking in China (read more in Is Fracking the Answer for Water Scarce China?).
Nuclear: From a water perspective, we expect China’s nuclear power build out to be largely coastal due to unreliability of water levels and quality in major rivers.
Technology is key: We believe that technology will take us out of this energy rut. Perhaps the solutions here are less obvious and less to do with the supply and demand of water but replacing it such as waterless fracking or more out-of-the-box platforms like award-winning ENBALA Power Networks which works within the water-energy nexus, using water to balance the grid.
With rising power from renewables in China, cutting-edge technology like ENBALA’s  can help integrate intermittent renewable power by balancing the grid using water and wastewater treatment plants, instead of generating more power. Although this is some way away for China (given that water and electricity tariff reform will be required), the company is amongst the water industry’s Top 5 innovations that will matter for the future and could be a way forward for China in managing its water-energy nexus. CEO Ron Dizy tells China Water Risk how they do this here.

4. Supply chains continue to be under fire

Supply chains in China continued to operate under sustained fire during the year and into the beginning of 2013. In late January, Ma Jun’s Institute of Public and Environmental Affairs and several other NGOs released a sixth report on the top brands in the IT sector, Apple Opens Up. This report notes that, under diverse pressure, more than 20 IT brands, including Apple, are now working to strengthen the environmental management of their supply chains.
After a long series of exchanges, in April last year Apple committed to trial third-party audits overseen by the NGOs to push suppliers to correct environmental violation problems. Within the IT sector, the most polluting, energy and water-intensive processers are in materials production and more specifically the PCB sector. So far, Apple has pushed three major global PCB suppliers to undergo third-party audits and will also highlight best practice in wastewater management, hazardous waste management and water use efficiency. The NGO’s report, however, keeps the pressure on Apple and, indeed, the entire IT sector, listing areas where improvement is needed.
This report and the five others follow another two targeting the textile sector that have been released by IPE and its NGO coalition over the last couple of years.  The reality for brands in 2013 is that bloggers, NGOs, and social media have been unrelenting in their push to get brands to clean up their supply chains and the factories themselves to improve environmental performance.
Protests continued apace throughout China as citizens angered by local pollution incidents or even the possibility of violations demonstrated against local facilities and factory owners’ collusion with local officials. As an example of how effective the protests can be, July demonstrations against a proposed wastewater treatment plant connected to a Japanese company led to the scrapping of that project. There is growing sentiment that even though China has seen sizeable growth for two decades, this has not translated into equity. At the same time, despite many incidents of worsening pollution, there has on the whole been a lack of responsiveness to public concern from local officials. Incidentally, Dr. Guo Pei Yuan of Syntao also shares our views – read about that here
In China, the reality is that given the absence of elections or other means of redress, protests have become a means of expression and this is something we have written about here. Consequently, brands or companies even peripherally associated with a local polluter risk reputational and even potentially material risk.

5. More Corporate Action and Financial Institutions incorporating water risks into valuations

If you don’t know how much water you use, you are not going to know how exposed you are to water risks. This appears obvious but the number of corporates that are in the ‘don’t-know-what-you-don’t-know’ stage is high as evidenced by the CDP Water Disclosure Report.
The good news here is that water risks are rising in prominence and some industry leaders have already looked beyond their own factory walls and into the supply chain. Others have looked at water risk driving new trends, therefore providing opportunities for new business streams. Investment in the water space has also heated up (see Big Spender: Buying Up Water)
We find it encouraging that banks have also started looking at how water impacts a specific sector (HSBC No Water, No Power Report). As water (regulatory, physical, operational and reputation) risk rises we expect the number of funds requesting water risk assessments and sector analysts including water in their analyses to rise accordingly.
The other good news is that new risk measuring tools are surfacing. The Aqueduct Alliance has also just released a new online tool that maps water risk worldwide. The Aqueduct Water Risk Atlas can be used to see how water stress will affect operations locally and globally, and help prioritize investments that will increase water security. But tools are only good if  they are used… on this front it is good to see the Water Risk Filter (launched last year) gaining ground with use by corporates such as H&M.
We also expect to see some industry sectors (particularly those under NGO pressure) such as the textiles industry to respond with collective action faster than others. Their aim here is not to just stem brand damage from pollution but to stay ahead of the game by finding a way forward to continue to grow your business with limited resources.

It is business and not environmental risks that drive their action, but in finding the solution, environmental and societal risks are addressed as well.

To sum up …

Bottom line is water risks are important and are only rising in importance going forward. Water risks are here to stay.
The WEF says the impact of a water supply crisis is greater than terrorism and yet billions of dollars are not thrown at addressing water risks. In short, a water crisis brings about economic, societal, geopolitical and environmental risks. It could also bring about technological risks of unforeseen consequences of geo-engineering to stabilise climate change and create more water, nanotechnology or GM food as we push the boundaries of agri-tech given limited water resources.

“Water … A coordinated strike on all fronts is key in the year of the Snake”

China Water Risk

In China the tipping point has come. Li Keqiang, China’s next Premier-to-be in March, said that China’s limited water resources have become serious economic and social development constraints; saving water and improving water-use efficiency are priorities. We hope to see more coordination between the different divisions of government and more ‘interwoven policies’ such as tying water policy into food & energy policies.
Collaborations within and between different industries are also critical in managing risks, creating industry benchmarks for water use and protecting shared water resources.  A coordinated strike on all fronts is key in the year of the Snake, to avoid slithering into dangerous waters.