Drip, Drip, Drip

Water water everywhere—and no one stops to think.

By Mindy Lubber

In November the Intergovernmental Panel on Climate Change (IPCC) issued a special report examining the link between climate change and extreme weather events. Its finding: Climate change is indeed responsible for the increased frequency of pronounced heat waves, droughts, and heavy precipitation.

The report confirms what many sustainability executives reading these pages already know: Water issues—both the lack of water and too much of it—are posing real financial risks to business operations and supply chains.

Water issues pose a growing risk for companies in diverse locales and industries. For the apparel sector, recent severe droughts in Texas and China plus floods in Pakistan have played havoc with cotton prices, forcing retailers and brands from H&M to Polo Ralph Lauren to increase prices or eat higher costs. With the swamping of computer hard disk factories during Thailand’s worst floods in 70 years, production disruptions are expected to severely cramp global PC availability; companies including Dell and Western Digital are warning investors that production and revenues may be affected. In China, new government figures show that 52 percent of the country’s industrial output—more than $4.5 trillion in value—comes from regions facing serious water scarcity. Global banker HSBC has warned that businesses operating in 14 water-scarce Chinese provinces need to plan for significant resource constraints.

The pressure on water resources emerges from a complex set of risks that go beyond extreme weather. We’re not just short on water, we’re also long on people (7 billion and counting). Companies aren’t just dealing with compliance risks related to water, but are exposed to physical and reputational risks stemming from government inaction to protect water quality and supply. Water isn’t just another a commodity whose price reflects global supply and demand, it’s an ultra-local public good, the rights to which are increasingly contested.

Corporate boards do not yet appear up to the task of dealing with this complexity. The Carbon Disclosure Project’s latest water survey revealed that far fewer global companies report board oversight of water issues than oversight of carbon.

Sustainable governance means more than just having a smartly-named board committee that occasionally tends to green issues. It means embedding consideration of sustainability-related risks and opportunities into day-to-day business decision-making—from product design and facility siting to supplier policies and procurement practices.

Yet few companies have fully embraced this vision, particularly when it comes to water. Many senior executives still think of water (when they think of it at all), as cheap and plentiful.

Unfortunately, in most places water is cheap; in much of the United States and world the water bill is a tiny portion of a company’s total operating costs. But if companies and their investors use only that price signal, they miss the very real risks of business disruption from a lack of clean water, or the increased capital costs of replacing it.

So the paradigm must change. The business community is starting to realize this, with companies from Levi Strauss to PepsiCo to IBM seeing the need and seizing the opportunity to act. Institutional investors from the Norwegian sovereign wealth fund to the California State Teacher’s Retirement System are also asking companies in their investment portfolios to better manage water risks.

That’s why Ceres—in collaboration with the World Business Council for Sustainable Development, the IRRC Institute and the United Kingdom consultancy Irbaris—recently released a new roadmap for corporate water management, the Ceres Aqua Gauge. It’s a comprehensive evaluation tool that outlines detailed steps for water risk management and for seizing opportunity, from the boardroom to the factory floor to the farm field, and it’s backed by some of the world’s largest institutional investors plus companies like Coca-Cola that see it as a risk-management tool going forward.

This free tool provides a step-by-step roadmap to help companies develop robust water strategies in four key areas:
• Measurement: Measuring water use in direct operations and supply
chains, and understanding risk in those areas.
• Governance and Management: How involved are the board and
senior management in addressing water issues? How is water factored into capital investments and strategic decisions? How are water risks in facilities, supply chains, and products being mitigated?
• Stakeholder Engagement: How is the company engaging on water
with interested outside stakeholders such as local communities? Is the engagement focused on effective stewardship or trying to maintain 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 and other stakeholders?

Given demographic and climate trends, today’s already-urgent water risks can only grow. The Ceres Aqua Gauge helps companies manage these risks, but even more it’s a roadmap for sustainable stewardship. We look forward to working with companies and investors to speed their progress, and with it the sustainability of ecosystems, communities and the economy, as a whole.

Mindy S. Lubber is president of Ceres, a national coalition of investors, environmental organizations, and other public interest groups working with companies to address sustainability challenges such as global climate change and water scarcity. To download the free tool and report, visit www.ceres.org/aquagauge.

Posted January 4, 2012 in Corporate Governance