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Andrew Burger headshot

The Business Risks of Water Shortages


Whether it's greenhouse gas emissions, deforestation and climate change, waste management and recycling, or water usage, investors and businesses are increasingly sensitive and exposed to the risks environmental crises pose to the financial bottom line.

Yesterday, CDP (formerly known as the Carbon Disclosure Project) released the CDP Global Water Report 2014: From water risk to value creation. Representing 573 professional investment management companies responsible for managing a mind-boggling $60 trillion in assets, CDP surveyed 174 of the world's largest companies regarding their water usage, their exposure to threats to water resources and how they are, or are planning, to cope.

Indicative of the widespread risks and seriousness of the threats to water resources they perceive, more than two-thirds (68 percent) of survey respondents reported exposure to water risk. Ninety percent are integrating water resource management into group-wide business strategies, and 82 percent are setting goals and targets to reduce water use.

Water: A growing risk to businesses and society

Ongoing drought in California and across the U.S. West has brought home the harsh realities water shortages and poor water quality can have on businesses and communities.

An international NGO founded in 2000 to promote and foster accountability, transparency and adoption of standardized reporting for companies' carbon and greenhouse gas emissions, CDP has since expanded. Over the years, it launched programs that promote sustainability standards, transparency and reporting for cities, supply chains, forest and water resources. In 2010, U.K-based CDP established its Water Program.

Indicative of just how quickly and to what extent water resource use and management has emerged as an issue of serious interest and concern for shareholders, boards and business managers, the number of investors calling for corporate accountability regarding water and related information through CDP has increased over 300 percent since 2010.

Nearly half the reported water risks elaborated in CDP's water report are expected to negatively impact businesses now or in the next three years. These include shutting down operations and share price declines. All that spells trouble for shareholders, company directors, management, employees, business partners and customers.

Growing recognition of water risks, actions on the part of multinational businesses

Notably, pressures on water resources will be felt most in emerging markets, such as Brazil, China, India and Mexico, where middle classes have begun to develop and expand and where the world's multinationals and largest companies see the greatest opportunities for growth, according to CDP's report. The largest and wealthiest city in South America – Brazil's Sao Paolo – is in the midst of a socially, politically and economically debilitating water crisis, CDP notes.

Commenting on the results of CDP's 2014 Global Water Report, CEO Paul Simpson stated:

"Water is an essential resource for any business. The potential for water-related problems to damage brand value or limit corporate growth is increasingly understood."

The 174 multinational companies that make up the FTSE Global 500 Equity Index responded to the latest annual CDP global water report. Respondents, such as Diageo, H&M, Merck and Unilever, are responding to the increased risks lack of access to water or poor water quality poses to their businesses. Three-quarters said they are evaluating how water quality and quantity affects their growth strategies.

Initiatives to boost water efficiency and assure sustainable access to water resources is resulting in benefits, as well as challenges, CDP reports. Three-quarters of companies reported that water opens up operational, strategic or market opportunities.

CDP cites the example of German chemicals multinational BASF, which estimates that water saving, recycling, reuse and drinking water treatment products holds out the prospect of US$1 billion in sales to 2020. Cisco, for its part, is saving US$1 million a year worth of water as a result of change to a soldering practice.

Water risk disclosure: Management responses lag investor demands

Despite growing water risks, their material impact on businesses and calls by investors for greater water accountability and public reporting, “disclosure levels of the Global 500 have not kept up with investor demand for information, stagnating over the past year,” CDP highlights.

Forty-two percent of the companies who received requests from investors to disclose information related to water risks have failed to do so. According to CDP, “The energy sector has the lowest level of disclossure, despite companies in this sector reporting high levels of exposure to risk.”

Besides the world's largest integrated oil and gas company – Exxon Mobil – Nike was identified as “the largest persistent non-disclosing companies by market capitalization and identified as having potetially the greatest impact on water resources.”

“We live in a time of unprecedented demand for water and have seen the number of investors seeking accountability from companies on this issue through CDP rise more than four-fold in just four years,” Simpson commented. “It is of grave concern that such a significant group of companies is failing to communicate management of water risks to their shareholders through our global system.”

Added Constantina Bichta, manager for environmental, social and governance research at Boston Common Asset Management: “If water scarcity prevails, companies could face constraints to growth.

“They may not be able to provide their core products and services, or may lose the ability to expand their business. As investors in these companies, this is something we are deeply concerned about. Companies with large supply chains also run the risk of finding themselves in conflict with communities over access to water issues, thus putting their license to operate at risk."

*Images credit: CDP, Global Water Report 2014

Andrew Burger headshotAndrew Burger

An experienced, independent journalist, editor and researcher, Andrew has crisscrossed the globe while reporting on sustainability, corporate social responsibility, social and environmental entrepreneurship, renewable energy, energy efficiency and clean technology. He studied geology at CU, Boulder, has an MBA in finance from Pace University, and completed a certificate program in international governance for biodiversity at UN University in Japan.

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