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New Tools Measure Corporate Water Risk

Hannah Kett

Climate change will one day wreak havoc on rivers, streams, and lakes – but today’s water shortages flow from sloppy land use and growing populations.  More and more corporations are beginning to take stock of their exposure to water risk, and in the process they are developing tools we can all use to manage this critical resource.  Here’s a look at some of them.

Climate change will one day wreak havoc on rivers, streams, and lakes – but today’s water shortages flow from sloppy land use and growing populations.   More and more corporations are beginning to take stock of their exposure to water risk, and in the process they are developing tools we can all use to manage this critical resource.   Here’s a look at some of them.

This the second in a two-part series.   You’ll find part one here

26 May 2011 | Access to clean water is an essential part of life — there is no way around it.   March’s World Water Day, with a theme of “Water for Cities,” was reminder that not every community has easy or sufficient access to clean water.

With populations growing and the global climate changing, the strain on water in these communities and for everyone will just continue to grow.   Companies are not sheltered from these challenges, as Brooke Barton can attest.

Barton is the Senior Manager for the Corporate Program of Ceres, a non-governmental organization (NGO) aimed at integrating sustainability into business decisions.   Currently, she is leading the group’s work with companies and investors to address the growing pressure of water scarcity on companies’ operations.

 “Some of those pressures are new, and some are trends that have already been in place for a long time, like population growth and industrialization,” she says.   “But then we have the additional impacts of climate change and climate variability.”

Piet Klop agrees, but emphasizes that climate change is just an addition to the long-standing trends already impacting water risk.

“Water risks are not primarily driven by climate change just yet,” says Klop, a Senior Fellow with the World Resources Institute’s (WRI) Markets and Enterprise Program.   “Right now, it is simply economic growth and population increase that drives this.”

We Are Part of Nature

To begin tackling the issue of water risk, Klop believes that companies need to change the way they think about water security.   Rather than simply increasing efficiency, companies need to understand how the surrounding environment impacts the company’s water supply.  

For Klop, the environment includes competing users, the company’s broader management strategy and the actions of the surrounding community.

This environment will continue to impact water supply regardless of attempts to mitigate the impact of climate change.

“We know that these changes to water availability and quality are going to happen no matter what happens in DC,” says Barton, referring to stalled climate-change legislation in the United States.   “These are risks that companies with long and global agricultural supply chains are already beginning to feel in the form of big swings in the prices of agricultural commodities.”

In fact, in a survey conducted by CDP Water Disclosure last year, 39% of the world’s largest companies responded that they had already felt negative impacts due to water.

Working in the World of Water

Organizations are trying to help companies understand their water risks so that they can avoid these negative impacts — and proactively engage in sustainable watershed management.

“Right now there are a lot of initiatives, programs, organizations, NGOS and coalitions being formed on water, and that is a great thing because people are coming to recognize both how fundamental water is to anything that we do,” says Greg Koch, the Director of Global Water Stewardship for The Coca-Cola Company.    

There are a number of ways that companies can contribute to sustainable management, including investing in the surrounding watersheds to ensure clean and efficient water supply and investing in the water supply infrastructure for urban areas.   Some NGOs in this arena think that companies who take action in these areas should benefit when it comes to investment and regulation decisions.

In fact, some regulators are already recognizing the importance of understanding water risk and incorporating it into decision-making.   For example, in January 2010, the United States Securities and Exchange Commission (SEC) released guidelines stating that material risks now include risks that relate to climate change. .

These regulations, however, still bump up against the challenge of understanding how exactly to measure the actions of individual companies and whether they truly are addressing the real water risks to their companies.   Organizations are trying to navigate that for regulators and for investors, and it begins with measuring the risks.

Emphasizing the Landscape

Among the current projects seeking to measure water risk in a meaningful way is the Aqueduct.   Spearheaded by the World Resources Institute (WRI), it is being developed through a partnership between Goldman Sachs, General Electric, Bloomberg and the Coca Cola Company.   Responding to the increased transparency that projects like CDP Water Disclosure have brought, the Aqueduct’s suite of tools will examine a company’s water risk based on its geography — and the business sector it represents.

The aim of the project is “to provide companies and their investors with the actionable information they need to effectively manage and reduce their exposure to water risk.”

Central to the Aqueduct’s suite of tools will be the “Water Risk Atlas”.   The atlas contains maps that illustrate the variance of water risk depending on the geography, and “can be tailored to reflect the particular water related risks that different companies and investors might be exposed to.”

To create the maps, the atlas relies on a database containing over 70,000 geographically-specific data points that WRI identified as affecting water risk.   The water risk is separated into three categories: Access and Growth Constraints; Cost Risk; and Disruption Risk.

So far, the project has completed prototype maps of the Yellow River in China.   Now it is looking to expand the analysis to include other water basins, starting with economically significant and water-stressed river basins like the Colorado in the U.S. and the Ganges in India, and additional business sectors, as each sector is affected by water stress in a different way.

“We are certainly not done,” says Klop, “We have barely started.”

Through this project, Coke sees an opportunity to learn as well as share lessons they have learned.   According to Koch, the project is addressing a number of difficult questions, such as how to best model gathered information, what types of metrics can be developed from current data and, importantly, how companies can respond to and mitigate risk.   Koch thinks that the work they are doing will be beneficial for corporations as well as the water sector at large.

“We hope – and we fully intend – that that process will help advance could be a major step change in how people understand and look at risk around water,” he says.

Mitigating Risk

But as companies are doing this work and NGOs are gathering this information, how do investors make sense of it?

This is where groups like Ceres come in.   They work with networks of investors and environmental organizations to address threats to a sustainable economy such as climate change and water security.

Ceres is working to translate all that data and analysis gathered by NGOs about these threats into usable comparisons for investors, which, for now, mainly focuses on water management strategies.

“Where we see ourselves fitting in is both in helping to provide guidance to investors on what are the best tools to be using and to also clarify what are the best approaches that companies can be using to manage their water risk,” says Barton. “What investors can look at today is how sophisticated companies are in terms of understanding their own risks and if they have management and governance polices in place that allow them to adapt and react and really drive down those risks at the watershed level.”

Ceres has recently published two reports around this topic.   The most recent report, published one year after the SEC published its guidelines around climate change risk, includes concrete steps to improve the way in which companies report on climate change risk.   According to the press release, the report is responding to the relatively weak guidance around this area.

A second report, published this past fall, is entitled “The Ripple Effect: Water Risk in the Municipal Bond Market.”   Realizing that water risk is a financial risk for investors who buy water and electric bonds, the report examines the water scarcity risks for various utility and power companies around the U.S.

Currently, Barton is working with a team from CERES and the World Business Council for Sustainable Development to develop a water management framework.  

“It is an analytical tool that investors can use to assess companies on how well they are managing water risk,” she says.   “It gives investors a tool so they can begin to compare and assess companies against their peers.”

The framework, which they are planning to launch fall 2011, will work to identify best practices, such as global wastewater discharge standards, auditing data and setting performance goals.   It will include common practices as well as more sophisticated processes in which only a few companies are involved.

“It’s trying to take (all this work around water risk) and say ‘how do you make sense out of all the things that are going on and start to give direction to investors of what makes sense?’” says Koch.

Where is it Headed?

With new initiatives emerging every day, the water sector is anything but stagnant.   For example, earlier this year, the Global Environmental Management Initiative (GEMI) announced the development of a free tool to assist companies in mitigating local water risks.

Just last week, Puma announced the results of its first Environmental Profit and Loss Account.   This account examines the value of the environmental impacts in the areas of greenhouse gas emissions and water consumption.   Understanding this helps the company take the first step towards mitigating those impacts and allows them to incorporate environmental risk into their business model.

With all of the work occurring around water risk, there is an opportunity for convergence on some points.

“We are in a moment of a lot of piloting and really interesting work by different groups,” says Barton.   “And by and large, these groups are all talking to each other and trying to figure out their relative merits of their tools and their approaches to looking at this issue… it takes a while to figure out what is the important information and what is the best way to measure it.”

With the initiatives around water risk and transparency evolving at a rapid pace, some NGOs are conscious of not leaving companies behind.

CDP Water Disclosure, for example, is continuing to maintain low barriers to entry for their survey.   Since many companies are just beginning to understand water risk, CDP Water Disclosure wants to make participation in the project as easy as possible in order to increase collaboration, according to Marcus Norton, who heads CDP Water Disclosure.   In this way, says Norton, the project will not be simply a forum for leaders.

“We don’t want to leave behind companies that are really just beginning to try and understand water as an issue,” says Norton, “One of the goals is to share best practices and to give companies the chance to build capacity and respond in a more meaningful way in the future.”

As populations growth continues exponentially, the issues related to water supply and quality only becomes more urgent especially in the face of predicted impacts due to climate change making the call to action that much more urgent.   Companies that are not proactively engaging in water risk assessments may find themselves in hot water.

 

Additional resources
Hannah Kett is an editorial assistant with Ecosystem Marketplace and a free-lance journalist focused on the non-profit sector.  She can be reached at hkett@ecosystemmarketplace.com.

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