Water is emerging as a defining issue of the first half of the 21st century, yet few CEOs are factoring it into the heart of their decision-making. In our September debate we ask why this is, and how water and business experts can move the issue higher up the business agenda?
Numerous studies point to the scale of the challenge. The 2014 WEF “Global Risks” report ranked water crises as the third biggest global risk – up from fourth place in 2013. The UN’s recent World Water Development Report predicted that 40% of the world population will be living in areas of "severe" water stress by 2050.
Business is already feeling the impact. In June 2014, ASDA reported that 95% of its fresh produce range is already at risk from climate change, mainly the product of water scarcity. Peter Brabeck, Chairman of Nestlé, told the FT in July that “Humankind is running out of water at an alarming pace. Climate change will further affect the water situation, but even if the climate doesn’t change, we have a water problem and this water problem is much more urgent”.
To explore the issue, we have representatives of the key actors in the water drama – a supplier (Peter Simpson, CEO, Anglian Water), a water user (Paul Kelly, Corporate Affairs, Asda) and an investor (Piet Klop, Senior Advisor, PGGM), hosted by Catherine Cameron. Following the debate, we’ll explore the topic further through 10 themed roundtables.
Why is water a strategic issue for some boards, and a technical challenge for others? What information is needed for strategic decisions? Long term price forecasts, link with business growth, water risks – both too little and too much – and relationships with watershed communities? Which CEOs should be considering water as a strategic issue?
2. Opening statement: Social purpose wasn’t discussed during the panel discussion.
• surprised that social purpose wasn’t raised as a reason for CEO’s to invest in water savings;
• Water is a tangible resource that we all rely on daily; it’s easier to feel connected to water than carbon for example. Water is an “emotional resource”;
• Companies could use the social good/purpose rather than the classic risk approach when assessing water sustainability
3. Question to different sectors around the table; what is their current position on water?
• Mines are located where water is abundant; however it is a sensitive issue within the community. Despite this the company takes a Risk approach when assessing water supply.
• Currently working on the Global Water Report and the results from their questionnaire has been varied. Generally companies take a strategic/risk approach, and focus on the short term impacts of water scarcity. CPD do not yet report on the social purpose.
• Their results show that companies are in the early stages of understanding the wider water issues and impacts. Food and drink organisations who are heavily impacted by water scarcity are much more advance with their supply chain management.
• Water is a complex issue and it is managed at a local level, e.g., hotels located in areas with water scarcity (Middle East) prioritize water efficiency. Discussion between the table on how the customer can influence the CEO and their agenda.
• Buildings are built to customer requirements (water intensive appliances) and this can often override water efficient design.
• Water is a global problem and we should move away from the local level issues. Education is important.
• They are at the start of their water journey; they are a private company and sealed off from the typical investor risk assessment.
4. Question: Is social purpose really a driver for the CEO?
• Their work on improving water efficiency started off with a classic risk approach. Their employees and customers place a high value on sustainability and “the right thing to do” – this has influenced the CEO to focus on the social purpose.
• Yes – their collaboration with HSBC has been successful. HSBC score prospective investments on their sustainability (including water) credentials. If they are failing, HSBC will bring the company up to standard through training and education.
• Mapping water scarcity and assessing risks is attractive to CEO’s (vs social purpose)
Should the main actors in water systems be stepping outside their traditional roles to find new ways of pursuing mutual self interest? Should, for example, a retailer consider investing in a reservoir? What’s the role of Special Purpose Vehicles and new types of green loans?
• Anglian Water worked with the Cambridge Institute and other stakeholders to produce a report called “Sink or Swim” which examines new strategies on how water can be sustainably managed to secure supplies while underpinning business and growth. One of the conclusion was that cooperation is key and that no one can work our water solution on its own.
• Securing water supplies comprises finding the right balance of water consumption between the various agricultural and industrial sectors and domestic uses. To get the right balance, sectors and stakeholders must work together.
• The water distribution model of a reservoir can vary greatly. This should be in line with the concept of “right balance” mentioned above. However, water distribution should be integrated in the business model or the investment mode of the reservoir. Investing in a reservoir could be an opportunity for companies from the agricultural sectors or depending on the agricultural sectors to securing their crops.
• Some built they own reservoirs to secure their water supply but this is probably not the most efficient way of proceeding; collaboration should be more efficient.
• In terms of responsibility, water companies should ask themselves the role they want to take on this problematic. Additionally, it is not necessarily the most obvious stakeholders who would commit into investing into a reservoir. When thinking about the business model of a future reservoir, we should look at a wider market. Furthermore, this type of investment could be way to make profit; in a similar way that carbon credits attracted a wide range of investors.
• What should be the responsibility of the company considering that they are not water experts? Some might think that companies will be forces to become water experts as this topic will be included in legislation.
• Impact Investing is a form or environmental and social responsible investing and allows to quantify the environmental and social impact of an investment alongside traditional financial metrics. Impact investing could be applied to reservoirs, as it could be a way to attract a new range of investors.
• Identifying the aims of a green investment is easy. The most challenging aspect consist in building the investment model.
• One of the reason why water in not consumed in a sustainable way is become of its low price. However, it is unlikely to see a water price increase on any political agenda in the coming years.
Whilst most corporate water reporting focuses on operational success stories, there is a trend towards “virtual” or “embedded” water. This table looks at how water reporting is evolving, and how new forms of reporting can shape decision-making.
How does the use of a “shadow price” for water result in better decision-making? What does the table think of Nestlé’s $1/cubic metre for sites with abundant water and $5 for drier spots? What factors should be considered in determining a shadow price: brand, credit rating, insurance costs and more?
• As part of their recent stakeholder engagement Affinity Water asked consumers if they would pay £10 to ensure that the river had enough water for wildlife. Whilst consumers responded that they valued the river and the wildlife they were not willing to pay £10 for it.
• Veolia Water have developed a “True Cost of Water” tool and they have been using it with their customers e.g. the oil and gas industry in North America using it to monetize their water risks. http://www.veoliawatertechnologies.co.uk/processwater/sustainability/true-cost-water/
• Unilever are using hard top-down targets to manage water rather than considering a shadow water price.
• The World Business Council on Sustainable Development published a report in 2012 including 21 business case studies on water valuation. http://www.wbcsd.org/Pages/EDocument/EDocumentDetails.aspx?ID=15099&NoSearchContextKey=true
• Chief Financial Officer’s need support to understand the potential issues around shadow water pricing.
• Water shadow prices would need to be country, region and in some cases seasonally specific. One size will not fit all.
• Before deciding on a water shadow price a business should first decide what the shadow price will be used for.
• Setting a water shadow price in some organisations would be contentious and would lead to ‘experts’ debating the evidence base and rationale rather than supporting the price and using it to inform decisions.
• Strong examples are needed of where the shadow price of water has influenced a significant business decision which isn’t the most economical in the short to medium term.
• Two of the Water Companies in the room voiced future water concerns; Anglian Water will have a supply shortfall of 250M litres per day by 2040 and Affinity Water a supply shortfall of 160M litres of water per day by 2040. There will need to be radical demand reductions if astronomical real water prices are to be avoided in the UK.
• The Natural Capital Coalition has recently published its report on Valuing Nature In Buisness and is supporting work to develop a consistent international protocol. http://www.naturalcapitalcoalition.org
• Publications such as TruCost’s White Paper on Valuing water to drive more effective decisions will help to drive action http://www.trucost.com/news-2013/174/valuing-water-to-drive-more-effective-decisions
• Water footprinting and water mapping are being used increasingly in multinational businesses to help understand supply chain risks. Use of these approaches should create the foundations for businesses to consider the ‘True Cost of Water”.
“If climate change were a shark, water would be its teeth”. This table will explore how business can play a role in making Paris 2015 a breakthrough year in climate negotiations: signing the Trillion Tonne Communiqué, attending COP21 and more.
What is the Trillion Tonne Communiqué?
• The Trillion Tonne Communiqué, published by the Price of Wales’s Corporate Leaders Group, is one of a number of statements and investor communiqués going around ahead of the upcoming water summit in New York and Paris 2015. http://www.climatecommuniques.com/
• It has a clear message – to keep under 2 degrees the approximate carbon budget we have is a trillion tonnes – leading to good corporate strategic advantage.
How is this Communiqué different?
• Each communiqué or statement has a different story and is designed for a different space, but the overarching goal is to create a mandate to open up a conversation, start a debate and push the issue up the agenda.
• Communiqués are also always utilised by negotiators behind the scenes, although usually this cannot be publicised.
• Companies have used it as an excuse to bring climate up the board agenda.
• The Carbon Price Communiqué for example, was quite ‘scary’ for companies to sign to at first, but now it is leading to change as the World Bank is building on the effort by bringing together the signatories to create the next step.
How does water fit into this?
• Because often we miss the point by focusing on carbon comparisons only. Differentiating based on water and waste can lead to wildly different conclusions and we need that more sophisticated conversation.
• For example, renewable energies are not only low-carbon but also have the lowest required water use amongst all energy generation types, whilst biofuels quadruple the amount of water used. The Energy Technology Institute, advisors to the government, recommend using Biomass with CCS to create negative emissions allowing hydrocarbons to be used in travelling – it is difficult to imagine a higher water footprint scenario. Evaluation between energy technologies needs to include the dimension of water. This layer of discussion doesn’t exist in policy but needs to be there.
What can we do to add to the voice that is going into the negotiations?
• The discourse on water is lagging behind the discourse on carbon in part owing to the fact that the impacts of climate change on water are not publicised enough. The link between water and the likes of the Trillion Tonne Communiqué is therefore that they are trying to prevent unmanageable climate change and its impacts on water in terms of flooding and water scarcity.
• People have a higher emotional attachment to water than carbon, therefore reframing the climate change argument to include water is a much more powerful argument.
• Carbon has become a divisive topic but water doesn’t have to be, because it affects all of us everywhere. There are strong links between water and energy use but it’s much easier to agree on a water agenda. The original framing of the climate negotiations was around loss, cutting carbon and the threat to growth. The idea is to focus on the opportunity for growth – you are risking your growth by not addressing water. Linking water to energy will cut through the discourse and get to a new narrative.
• The overarching sentiment on the table was that we need to add water to climate negotiations, to the narrative enables it to change so it has a higher chance of succeeding.
It can be argued that a lack of data, both operational and within the supply chain, is the biggest obstacle to better decision-making. This table will look at how innovations in data management, from constant water use feeds to software, could be transformative in the years to come.
Balancing the use of water between agriculture and local communities means there is a constant tension between innovation and risk. How can companies, growers and communities collaborate together to sustain the water supplies required to grow key food crops?
It is estimated that it takes 2,400 litres of water to produce a hamburger, versus 30 litres for a potato. Water footprinting is a complex art – what is the value in undertaking this kind of activity, and can the table give examples of how it can improve decision-making?
- Water footprinting can be a useful tool to help show consumers how much water is used, and to demonstrate year-on-year improvements.
- But improvements in one number mean nothing without the context – e.g. where the water is being used.
- Companies must undertake risk profiling of water, to show (to investors and other stakeholders) that they are managing water as a business continuity risk.
- Materiality of water dependent on industry – more important for a brewer than a bank.
- If you can’t measure it, you can’t manage it. So it is important to know how much water is going into something. But if this is combined into one number it doesn’t provide the context required.
- The pressure from both sides – consumers and investors – requires different approaches. Investors are interested in water as a business continuity risk. Risk profile is therefore vital for companies for which water is a material risk.
- Could reporting on water become mandatory and if so what would they report?
o Reporting on water risk is already happening with the CDP water programme. This is from a risk profile perspective and understanding use across the value chain rather than just overall quantity.
o To effectively manage it and make it worthwhile reporting – need to provide the context to use. Dependent on geography, etc.
- With carbon, we’re used to asking the number first and then finding out the context behind it, but with water, we need to know the context before the number can make any sense.
- Price of water is often so low that there is little incentive to reduce use, and it is not considered material. This will remain until cost is closer to value. Linking water saving to energy saving further upstream can help to provide a business case for reductions.
- To be able to understand the position that we are in now, we need to be able to benchmark our performance against one another. This is especially difficult with water, as it is very dependent on industry and location. This will be an important starting point to driving progress.
Most companies are better at factoring water into operational decisions than their product design. This table will consider why this is the case for consumer-facing businesses, and review the emerging solutions – from product EP&L’s to how the sustainability and product development teams work together.
For a business to tackle its water risk it needs to engage with other stakeholders and water management institutions. This is unfamiliar territory for many businesses and, badly done, brings with it a set of additional reputational risks. What are the best responses to dealing with risk? What are the potential pitfalls and where are the opportunities?
What are the best responses to dealing with risk?
What are the potential pitfalls and where are the opportunities?
• Framework needed for how water is controlled – how do businesses do that? How do they work with others to influence governments. Water companies produce plan every 5 years looking ahead 50 years making sure supply meets demand – can other companies to do a similar thing?
• Different context in UK compared to intl. Intl no understanding of resources and how they manage the demand.
• If you are opening a textile company in a poor region is there any engagement with community on resources? In mining you have to engage with communities eg Peru. Manage supply chain water use but you need to know your own.
• Banks not financing the companies moving into areas with scarce water supplies. They do work with customers to help them meet water protection criteria. (eg. Examples of working to help develop forestry policy – something similar for water?) Can you leverage improvements through imposing conditions on loans?
• Business has used risk assessments to make decisions?
o Risk mapping – hot spots in supply chain. Engagement with local suppliers manageable. Managing water resource in country much harder for a company to deal with that. Can reduce individual water issues but collaboration required to tackle at country level
o NGOs want to collaborate with a business as that relationship has weight. The business doesn’t need to lead but their involvement helps.
• Example of company in African country who saw risks but no solution in their hands so collaborated with other to lobby local gov. They succeeded in bringing to government’s attention that supply was flat but demand was growing so put plans in place.
• Emphasis on waste water or availability. Focus on availability, discharge is more of a reputational risk – being exposed etc. Waste compliance is mor focused on by companies. Big relationship between two though. Pollution in water scarce countries much worse.
• Water in agriculture – work with farmers to improve land management practices. Agriculture is heaviest user of water and having a small part of your supply chain in a water scarce area doesn’t mean less risk due to materiality especially if you are unable to source an alternative option easily/quickly/cheaply.
o Effort on irrigation efficiency but no legislation. Licenses in UK but in places too many licenses. Most of licence is for an amount of water doesn’t reflect what is in the environment – will change.
o In India, Pakistan no regulations. Save pumping of water but then they use the rest of the water to irrigate more fields
• Do you forward procure water for your processes? EPC has come in for energy
o Trading system has come in so you can sell you allowance to others if you’re efficient.
• Water/ Energy link
o Examples of undertaking water strategy separately to energy (lots of heating water) its all compartmentalised but the benefits are all across the board.
o Hotel chains for eg could benefit from energy/water strategy.
o French nuclear reactions being turned off due to lack of cooling water.
o IT company looking to cool equipment, discharging heat into a lock.
o Defra map excess heat in urban rivers – transferred heat from residential. To encourage district heating
• Water in transport sector
o Lack of knowledge about embodied water – asking a lot from supply chain. Value of carbon is known (£12-£15) but water is less known. Managing, using, etc. Best to go to supply chain to understand embodied water but not enough information out there.
o Not enough urgency from government to do something, not enough guidance.
o Thinking holistically but also materiality – is it relevant to each company.
• Airports – heathrow uses as much water as Canterbury.
• Absolute reduction – allocated resource forces you to be more efficient.
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