Sink or Swim
By Mark Harper 10 January, 2013
A snapshot of evolving corporate action and disclosure on water related risk & opportunity
“Not only can water float a boat, it can also sink it”, or so warns the 2012 CDP Water Disclosure Project Report (CDP Water Report), highlighting that water presents businesses with both risks and opportunities. So facing a rising storm, what has been corporate action to mitigate water risk to date? Recently, several finance institutions and global think tanks such as KPMG1 and CDP Water2 (supported by 470 investors) released reports that attempted to provide a snapshot of evolving corporate action and disclosure related to water. Some key trends in these reports are covered in this review.
A study by the United Nations Principles for Responsible Investment (UNPRI)3 found that 50% of corporate earnings could be at risk from environmental externalities such as water. This is equal to 11% of global domestic product. A similar study4 quoted in the CDP Water Report stated that, a “business as usual” approach to water issues will put at risk US$63 trillion, or 45% of projected 2050 global GDP.
Water clearly represents a prominent and rising risk, and this is ever-greater as businesses face an increasing frequency of water-related events: 53% of the Global 500 respondents to CDP Water reported that they had experienced damaging water related impacts; up from 38% in the previous year. Associated financial costs of these impacts run as high as US$200 million for some companies. Facing these pressures, 68% of respondents identified water as a substantial risk to their business, up from 59% in 2011. It was reported that 62% of these risks have the potential to impact their business now or within five years.
So are investors starting to take notice and are businesses really starting to take action?
Investors beginning to see risks and opportunities?
The 2012 CDP Water Report was supported by 470 investors representing US$50 trillion in assets. This level of support, up from 137 in 2010, has been rising as shown by the chart below.
We are excited to see investors and shareholders increasingly aware of the risks and opportunities water issues represent within their portfolios. We see they increasingly are looking for the means to address pollution and build long-term resilience to flooding and drought into business planning. (Read more on what investors say about water risk here.)
Stock exchanges in the region are also taking notice. The Hong Kong Exchanges (HKEx) announced in August last year that it is stepping up disclosure with new ESG disclosure requirements and KPIs. The new ESG Guidelines for listed companies encourages issuers with a financial year ending after 31 December 2012 to implement the ESG rules and indicates that the HKEx plans to raise the level of obligation to ”comply or explain” by 2015. (Read more here)
Investors are not focused on risk alone but also see opportunity in the sector. Research by Frontier Economics for HSBC exploring the links between water and economic growth showed that every US$1 invested in water infrastructure can deliver nearly US$5 of wider economic as well as social and environmental benefits.6 For more see ‘Big Spender: Buying up Water.’
It looks like companies are also catching on. 71% of CDP Water responders reported opportunities that had the potential to generate a substantial change in their business operation, revenue or expenditure. Opportunities are identified through cost savings, sale of new products or services and increased brand value. It was surprising that 78% of these opportunities were expected to occur now or within the next five years, some with a sales potential of more than €800 million by 2020.
Corporates – sinking or swimming?
In the face of this rising experience and awareness of risk, we would expect to see increased levels of corporate action on water. KPMG’s report Sustainable Insight report into Water Scarcity found that 76% of the world’s 250 largest companies now address water issues in their corporate responsibility reporting in some way. So companies seem to be swimming; but is this showing us the full picture?
It would appear not.
Results from the KPMG and CDP Water studies suggest that while many companies are at least paying lip service to water in their reports, far fewer, are presenting a thorough and strong response to the challenge. The studies also clearly show that not all companies considered high risk in terms of their impacts and dependency on water by stakeholders, evaluate that risk, in fact the majority are reporting very little information owing to the perceived immateriality of the issue.
CDP Water Report:
With these statistics in mind, can we really say that companies are swimming? Maybe they are just ‘treading water’?
Water blindness in supply chain
Another recent KPMG study7, found three quarters of water consumption by companies listed on the Nikkei 225 Index occurs in their supply chains. Marcus Norton, head of CDP Water and Investor Initiatives in his interview with us, highlighted that companies are often surprised when they are contacted to participate in the survey. Find out what else surprised Marcus Norton like the energy sector here.
They regard themselves as pretty minor users of water because their own processes or operations aren’t necessarily hugely water dependent, he said. A good example of this is the textile industry, which we previously covered in our November 2012 newsletter, where companies are exposed to major reputational risk via negative campaigns by Chinese NGO’s through their supply chain.
So is it a case of out of sight out of mind?
“retailers for example …water risk is hidden further down the value chain – it may be very significant and is likely to be under-reported”
Marcus Norton, Head of Water and Investor Initiatives, CDP Water Disclosure Project
CDP Water reported an increase from 25% to 39% in the proportion of requiring key suppliers to report on their water use, management and risks. In addition the proportion that were unsure if they were exposed to supply chain risks had fallen from 38% to 29%. Whilst this is clearly progress, there remains plenty of room for improvement. KPMG found that of the world’s largest 250 companies only three reported on the water footprint of their supply chain and none reported on the water footprint of its entire supply chain.
As Norton says for some companies “water risk is hidden further down the value chain – it may be very significant and is likely to be under-reported”.
China lags behind India
These issues around risk hidden down the value-chain, are compounded by the shifting of production beyond China to other countries in Asia that are particularly vulnerable to water risks such as drought, flooding and scarcity themselves. Of course, unlike carbon, water-associated risks are characterised by their geography i.e. the local and regional context.
KPMG’s review of the world’s 250 largest companies found:
All of this is surprising, especially when you consider the statistics highlighting the depth of the China’s water risk. (See The Big Picture)
So why is China lagging so far behind India? Perhaps this reflects what Marcus Norton described: That it often “takes a catastrophe to grab peoples’ attention and to change behaviour”, and that the level of risk in China is not a visible as it is in India.
Finance & Insurance – Iceberg dead ahead
“water risk is still relatively poorly understood by most investors”
When asked by us whether finance and insurance sectors are exposed to greater risk then they realise via their projects and investments, CDP Water’s Norton said he felt “water risk is still relatively poorly understood by most investors.”
One of the key conclusions of the HSBC ‘No Water No Power’ report based on our analysis and findings was that project financiers and providers of capital should ensure that water availability has been taken into account before a project receives funding, “otherwise certain assets could become stranded, halting capital payback.” (read our review of the report here)
The consensus is that water is undervalued, so with rising water prices, scarcity and pollution, the risk is not going away, and this is being increasingly recognised by investors see here. As shown in the chart the CDP Water report demonstrated the range and immediacy of risks that the respondents were exposed.
However, Norton recognised that the finance and insurance sectors could be major drivers of change: “As understanding of water risk improves within the financial services sector, investors of all classes will price it and include it in their investment decisions, driving capital to those companies that are able to demonstrate that they are managing their water risks”.
This is the central tenet of the 2012 CDP Water report and a guidebook by the CEP Water Mandate9. Collective Action is now emerging as an effective way for companies to address water-related risks and opportunities. Encouragingly CDP Water found 74% of their respondents were taking some form of collective action on water beyond the boundary of their operations. With reported benefits ranging from pooling resources, knowledge exchange, driving change, securing social license to operate and increased brand value.
“water is so multifaceted … the issues are often too long-term and, paradoxically, often too immediate for a single player to address on their own”
Andre Fourie, Head of Sustainable Development at SAB, South African subsidiary of SABMiller
There are clear leaders in the field who recognise that water is a shared resource and calls for shared action. Andre Fourie, Head of Sustainable Development at SAB (the South African subsidiary of SABMiller) recently blogged for the Guardian newspaper, “Because water is so multifaceted, it’s too large an issue for one company or even one sector to tackle alone. The issues are often too long-term and, paradoxically, often too immediate for a single player to address on their own.”8
Respondents to the CDP Water survey indicated that collective action will continue to play a prominent role in their water strategy and overall business strategies. At China Water Risk, we strongly encourage collective action within sectors.
So are companies sinking or swimming? As Marcus Norton stated: There has been “good progress but we have a very long way to go… while many companies have started to ask themselves the right questions, many more have yet to take their first step. We have only just scratched the surface”.
It is essential you know the waters you are navigating, you cannot afford to be “water blind”.
1 Sustainable Insight. Water Scarcity: A dive into global reporting trends, October 2012, KPMG.
2 Collective Responses to Rising Water Challenges: CDP Global Water Report 2012, October 2012, CDP and Deloitte.
3 Universal Ownership: Why Environmental Externalities Matter to Institutional Investors, PRI & UNEP FI, 2010.
4 ‘Finding the blue path to a sustainable economy’, March 2011, a report by Veolia Water and IFPRI
5 No Water, No Power: Is There Enough Water To Fuel China’s Power Expansion?, September 2012, Wai-Shin Chan, Nick Robbins, Zoe Knight
6 Exploring the links between water and economic growth , June 2012, a report for HSBC by Frontier Economics
7 Peak Water: Risks embedded in Japanese Supply chains, 2012, KPMG
8 World Water Week Blog: is corporate action on water security coming of age? 28th August 2012,Andre Fourie, Guardian Professional
9 Guide to Water-Related Collective Action, 2012, The CEO Water Mandate
- Read our interview with the head of CDP Water and Investor Initiatives where he gives his views on progress, stumbling blocks in understanding water and hidden risks
- See what US$1.7 trillion of institutional investors say about water risks in Investors Say: Water Risk is Beyond Pricing
- Check out trends in water investments in ‘Big Spender: Buying up Water.’
- Want to find out more about disclosure of water risks? Check out our disclosure section
Read more from Mark Harper →