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Environmental Finance: Engaging with Water Risk

For most investors, a detailed bottom-up assessment of water risk across hundreds of companies is likely to be impossible. Enter a new tool to assess corporate responses to water risk and opportunity. Ceres' Brooke Barton and Irbaris' David Hampton explain.
by Brooke Barton and David HamptonEnvironmental Finance Posted on Oct 19, 2011

What to do when the trickle of water data risks becoming a floodFor most investors, a detailed bottom-up assessment of water risk across hundreds of companies is likely to be impossible. Enter a new tool to assess corporate responses to water risk and opportunity. Brooke Barton and David Hampton explain.

Much has already been written in this magazine and elsewhere about water risks and opportunities – most obviously from scarcity but also from flooding and, increasingly importantly, quality.

Various NGOs and others have developed tools for assessing corporate water footprints and identifying water risks. These tools tend to be site-specific because any analysis of water risk must take account of its local nature. A litre of water used or polluted in Durban has different impacts and risks than an equivalent amount in water-rich Detroit. This is not only because environmental conditions in these locations vary, but also because their regulatory and socioeconomic contexts are starkly different.

Despite increasing information available through the work of the Carbon Disclosure Project (CDP) Water Initiative and investors’ own engagement activities, the complexity of water use and the importance of location makes it difficult to assess a company’s overall exposure to water risk and, critically, how it is managing those risks.

Few publicly-traded companies operate in a single watershed; even those that do are linked to other watersheds as a result of their supply chains or the markets they serve. For any given multinational, the task of identifying and quantifying the financial impact of potential water risks across hundreds of sites and potentially thousands of suppliers is enormously difficult. Such a task is magnified for portfolio managers, who are faced with the challenge of understanding the financial materiality of water risks facing the hundreds (or even thousands) of companies they hold.

"Measuring and managing a company’s own direct water use and associated risk is necessary but far from sufficient"

For example, an investor that had data on the water use and wastewater discharge associated with all the sites of a major global beverage company would still be at a loss to interpret this data without also understanding the environmental, social and regulatory context in which each of the company’s bottling facilities operate. In other words, the investor would probably still have an unmanageable set of disparate data that would be nearly impossible to aggregate into a single corporate ‘water risk’ metric. Furthermore, any such metric would tell little about how proactively that company is managing these risks.

What’s needed is a different approach, one that helps investors make sense of the complexity by shifting the analysis back to the corporate level – evaluating a company’s overall capacity to manage competitively in more water-constrained world, rather than attempting a bottom-up aggregation that provides limited insight.

Providing a new perspective

Over the past year, investor coalition Ceres, consultancy Irbaris, the World Business Council for Sustainable Development and the Investor Responsibility Research Center Institute have been collaborating to build such a tool. The Ceres Aqua Gauge, launched on 18 October, was developed through extensive analysis and engagement with more than 50 investors, leading companies and NGOs with the aim of providing a resource that:

  • Enables investors to identify those companies better positioned to manage exposure to current and emerging water-related risks and opportunities;
  • Highlights examples of current leading practice in corporate water risk management across multiple sectors, such as agriculture, mining, beverage, apparel and electric power, with the intent of helping companies and investors understand ‘what good looks like’, and ultimately leading to a much-needed proliferation of better practice amongst companies; and
  • Facilitates a more informed and effective discussion between the investment community and companies on this crucial topic.


A flexible Excel-based tool and associated methodology, the Aqua Gauge allows investors to ‘scorecard’ a company’s water risk management activities against detailed definitions of leading practice. Designed to enable both rapid and more comprehensive analysis, the Aqua Gauge provides the option to assess the company against a short list, or ‘Quick Gauge’, of core risk management practices appropriate to the company’s risk profile, and a more detailed set of corporate-level practices that provide a fuller picture of the company’s risk-management approach.

From measurement to stewardship

Water is a limited and shared resource. The actions of one user of a particular water source can profoundly affect all others relying on that same resource. Consequently, measuring and managing a company’s own direct water use and associated risk is necessary but far from sufficient. Ultimately, an effective response requires companies to support and promote the sustainable stewardship of all water resources on which they rely.

The Ceres Aqua Gauge evaluates a company’s response to water risk and opportunity across four broad categories. Measuring water use and discharge and related risks (‘measurement’) is therefore only one aspect of the Aqua Gauge assessment. The others are:

  • Governance and management. How involved is the board and senior management in addressing water issues? How is water factored into capital investments and strategic decisions?
  • Stakeholder engagement. How is the company engaging with outside stakeholders, such as local communities? Is the engagement focused on effective stewardship or trying to defend unsustainable practices?
  • Transparency and disclosure. Is the company clear and transparent on water-related activities and strategies? Is it disclosing information in ways that are meaningful and useful to investors?


Gauging performance

The Aqua Gauge recognises that a company’s response to water challenges will be a multi-year process, from a set of initial steps to more advanced and ‘leading’ practice. The progression typically reflects a journey from ad hoc activities limited to one part of the business to enterprise-wide implementation of the most sophisticated techniques.

Aqua Gauge FrameworkFigure 1 (right) is an illustrative snapshot of the Aqua Gauge evaluation categories and the scorecard it produces for a single company.

Examples of leading practice in each of the four priority areas can be found across a range of companies, although no single company has achieved leading practice across the board. Food company Nestlé, for example, has developed cutting-edge tools for analysing present and future water-related risks at its 450 facilities. Similarly, mining giant Rio Tinto has developed a framework for monetising the value of water for company decision-making, while dairy company Danone has begun making water performance a part of executive compensation.

Making sense of disclosure

The Aqua Gauge itself is not a questionnaire or a survey, but rather a tool to distill and interpret information from companies into an insightful assessment of how they are managing water issues across their business.

By providing this assessment framework, the Aqua Gauge should help facilitate stronger and more focused corporate disclosure (through existing mechanisms such as CDP Water) and enhance investor capacity to assess the strengths and weaknesses of a company’s approach to water issues. The gauge will also help boost investor understanding of corporate water issues and the responses investors should expect from individual companies, as well as entire industries.

Ultimately, we hope the gauge will accelerate much-needed progress toward sustainable water stewardship across all sectors, with positive impacts for ecosystems, communities and the economy as a whole.

Brooke Barton is Boston-based senior manager, water programmes, at Ceres. Ceres directs the Investor Network on Climate Risk, a group of more than 100 US and European institutional investors and financial firms that collectively manage over $10 trillion in assets.

David Hampton is London-based managing partner at Irbaris, a sustainability strategy consulting firm.

Read the post at Environmental Finance

Meet the Expert

Brooke Barton

Brooke leads Ceres’ water program, directing the organization’s research and corporate and investor engagement on the risks and opportunities related to growing water scarcity.

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