Corporate Exposure to Water-Related Risks and Engagement with Key Stakeholders

CDP Water Disclosure, a program of the Carbon Disclosure Project, released its first water disclosure report (.pdf) last week.  The report summarizes the results of a survey of 302 companies from 34 countries regarding their water use and their management of water-related risks.  The findings highlight the degree to which water-related challenges are capturing the attention of a wide range of corporate stakeholders.

Of the 150 companies that responded to CDP’s questionnaire: 67% reported that responsibility for water-related issues lies at the Board or Executive Committee level; 89% have developed specific water policies, strategies, and plans; and 60% stated they have established water-related performance targets.

As companies evaluate approaches to water management, they must confront a wide range of operational, reputational, regulatory, and legal risks, including:

  • scaled-back production or production interruptions due to water shortages in water-stressed areas;
  • community opposition as a result of a company’s real or perceived impacts on local watersheds, and the potential loss of a social license to operate;
  • regulatory changes leading to changes in available supply and/or higher costs; and
  • litigation stemming from disputes regarding corporate usage of, and impacts on, local watersheds.

Notably, 96% of the respondents to CDP’s questionnaire were able to identify water-related risks in their own operations, while only 53% were able to identify such risks in their supply chains.  This is surprising given the potential impact of supply chain concerns.  A 2008 report by JPMorgan Global Environmental, Social, and Governance Research found that the risks associated with water scarcity “may actually be greater in companies’ supply chains than in their own operations.”

As companies identify the water-related risks specific to their operations, the information they gather will increasingly inform dialogues with two distinct groups of stakeholders: investors and the communities living in the vicinity of company facilities.

Investors.  Investors are becoming increasingly aware of the business risks associated with water.  The JPMorgan report cited above, Watching Water: A Guide to Evaluating Water Risks in a Thirsty Worldrecommended that “investors assess the reliance of their portfolios on water resources and their vulnerability to problems of water availability and pollution.”

A more recent report published by CeresMurky WatersCorporate Reporting on Water Risk, recommended that investors “engage the companies they own in key water-intensive sectors about how they are assessing and disclosing water risks and related performance information.”  The Murky Waters report cited the January 2010 interpretive guidance issued by the Securities and Exchange Commission which found that companies have an obligation to disclose material risks associated with climate change, including those risks related to water.

As a result of concerns about water issues, investor groups are filing shareholder resolutions asking companies about the management of water-related risks.  Another Ceres report, authored by the Pacific InstituteWater Scarcity and Climate Change: Growing Risks for Businesses and Investorsfound that

Investors are now filing resolutions asking companies for more disclosure on water practices and performance, including water policies, environmental and social impacts of water use, and water usage throughout the value chain. A large number of resolutions also ask for new company-wide policies on the human right to water, water reuse and recycling, and water-efficient technology.

Both mainstream investors and socially responsible investors are evaluating the water-related risks in their portfolios.  As awareness about the risks associated with water scarcity increases, companies will face increasing pressure from investors to identify and disclose their vulnerabilities to water-related challenges.

Communities.  Water concerns are local concerns, and companies need to evaluate the impacts of their operations on specific watersheds and the communities that are directly impacted by their activities in those watersheds.  Communities will increasingly expect companies to be both comprehensive in their assessments and disclosures of water use and responsible in their use of local watersheds.  As the CDP Water Disclosure report observed

Although water issues are as unique and varied as their local context, the overarching concern of water management is access: whether the appropriate quantity and quality of water is available for competing water users and for environmental health both now and in the future.

Companies often are, and will be seen as, competitors for scarce local water resources, and social, political, and legal conflicts over local watersheds are likely to increase.  A recent report by the 2030 Water Resources Group found that

growing competition for scarce water resources is a growing business risk…[i]t is an issue that has real implications for the stability of countries in which businesses operate and the sustainability of communities and the ecosystems they rely upon.

Community opposition to the real or perceived impacts of a company’s operations on local water supplies can lead to protests, lawsuits, and the loss of a social license to operate.  Responsible dialogues with community members about local water concerns must be a part of corporate stakeholder engagement efforts.

Many companies will be called upon to use rights-based approaches to the management of their water use.  As noted above, investors have advocated that companies recognize the human right to water.  In July 2010, the United Nations General Assembly officially recognized access to clean water as a human right.  In September, the U.N. Human Rights Council adopted a resolution recognizing access to clean water and sanitation as a fundamental human right, “equal to all other human rights” and capable of legal enforcement. Companies will be expected to incorporate water-related concerns into their human rights impact assessments and to evaluate water usage in a manner that protects the access rights of all water users.

Ultimately, companies are water consumers, but they can also be water protectors and providers (.pdf).  As water scarcity impacts the lives of communities, and the operations of companies, it will be increasingly important for corporate managers to navigate the expectations and challenges associated with these complex roles.

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