Forbes: Businesses' Water Risks Are Growing — Ceres Unveils New Management Tool
I recently wrote about new standards from World Resources Institute to measure companies’ greenhouse gas footprints and bemoaned its lack of attention to water issues. But now there is a tool from Ceres — a national coalition of investors and public interest organizations — that goes beyond just reporting to help companies and investors assess and manage water risk: both water availability and water pollution.
Much of the business world has been slow to recognize water issues because water — considered by many, including the United Nations, to be a human right — is often highly subsidized and therefore underpriced. As a result, water costs are insignificant to most companies and investors. But by focusing solely on costs, they miss the risks of business interruptions, increased commodity costs, and reduced earnings.
These issues are coming to the fore now due to climate change and population growth. Historical hydrologic records are no longer reliable baselines. Changing climate, in addition to land-use changes, are making water supplies increasingly erratic, as climate scientists have predicted.
In the past year we’ve seen many examples of that: unprecedented droughts in Russia, China, and Texas and extreme floods in Australia, Pakistan, and all along the Missouri and Mississippi in the United States.
Many businesses saw financial losses due to this extreme weather. For example, when drought devastated Texas’ cotton crop this year, apparel retailer Gap Inc. cut its annual profit forecast by 22 percent in anticipation of significantly higher cotton prices, says the report.
Water availability is further affected by unsustainable population growth in drought-prone areas, such as Phoenix and Las Vegas; unsustainable population growth globally; overextraction of groundwater in many places, including India and the United States; and economic booms in hyperpopulated developing countries like India and China, where individuals who have long used far fewer resources than westerners are quickly catching up.
Water uncertainty is expected to increase in the coming years. A report from the 2030 Water Resources Group (PDF), including the International Finance Corporation and McKinsey & Company, found that the world faces a 40 percent global shortfall between forecasted water demand and availability by 2030.
Water availability is not the only problem. Water quality issues also create risk for companies, from stricter pollution standards on their own effluent to other entities polluting water upstream, requiring them to clean up water prior to use.
The Ceres report said:
A 2010 investor-backed survey sent to global companies found that 39 percent of 150 respondents had already experienced negative water-related impacts. They included disruption to operations from drought or flooding, declining water quality that required costly on-site pretreatment, increases in water prices, and fines and litigation relating to pollution incidents.
A few businesses have long been focused on reducing their water footprint and minimizing their effluent pollution. Some companies are now supporting new protocols, such as the Water Footprint Network’s guidelines for measuring water footprints and impacts of companies and products. Some industries are beginning to define industry-specific water stewardship principles and water accounting standards.
But many other companies and investors have not yet woken up to this area of risk. Most companies are not yet disclosing these risks to investors, nor taking comprehensive steps to manage them.
The new report, called the “Ceres Aqua Gauge: A Framework for 21st Century Water Management,” aims to identify challenges and outline key elements of effective corporate water management. It also allows investors to measure a company’s water management against leading practices and helps them identify riskier holdings based on sector and geographic exposure. The report was done in collaboration with the World Business Council for Sustainable Development, sustainability consultancy firm Irbaris, and the Investor Responsibility Research Center Institute.
Over most of our industrial history, corporations have taken for granted ecosystem services, such as water availability, and have externalized problems like water pollution, avoiding financial responsibility for their operations’ impacts. For example, when Texaco dumped oil sludge into the river in a remote Amazon community, it got away with it for decades because it was so remote and the population affected was so poor. But now our world is getting too crowded — and too connected — for such behavior to fly.
And as resources grow increasingly scarce, companies are beginning to notice what they’ve long taken for granted. For example, the Amazon plays a significant role in generating rainfall not just in South American but in North American as well. When loggers cut trees in the Amazon, both local and global farmers have less easily accessible water for crops.
Water affects all living systems and many things we need: energy generation, biodiversity, food security, human rights, health, sanitation. In an increasingly crowded world, businesses must look at the big picture. By focusing exclusively on the bottom line and neglecting their impact on these entwined issues, businesses are beginning to find their bottom line negatively affected.
Also, in today’s global world, good management goes far beyond company headquarters. Part of comprehensive water management means getting a better hold on supply chains. Many companies only have direct relationships with their assembly factories but don’t know even know who second and third-tier suppliers are. Such absentee management can come home to roost, such as when Apple was called to task for egregious water pollution committed by its suppliers in China.
Investors are beginning to get impatient with some companies’ lack of attention to water risk.
According to the report, this year:
354 investors collectively managing $43 trillion in assets backed the Carbon Disclosure Project’s Water Initiative, asking 408 of the world’s largest companies to disclose more information on water-related risks, opportunities, management approaches, and performance.
Investors have filed hundreds of water-related shareholder resolutions, filed primarily with oil and gas, electric power, and food and beverage companies.
In 2010, the U.S. Securities and Exchange Commission required publicly traded companies to disclose to their investors all financially material climate-related risks, including those linked to water availability and quality.
Water management is quickly emerging as a core business issue, along with other environmental, social, and governance factors. Companies without sustainable water management practices could see restricted access to capital, high loan rates, and inflated insurance premiums.
On the other hand, companies that get proactive are likely to enjoy a competitive advantage. But this isn’t a go-it-alone strategy; since water is a resource shared by all, leading companies will have to engage in watershed-based collaborations with other stakeholders.