Why water is weighing on the bottom line

Water-related risks and regulation- ranging from droughts and water scarcity, flooding, pollution and tougher environmental regulation-will cost companies around the world up to US$14bn this year against US$2.6bn in 2015, according to a report by CDP (the former Carbon Disclosure Project).

The UK-based non-profit entity works with 3,000 of the world’s largest corporations to help develop an effective carbon emissions reduction strategy. Its latest estimate comes in a report entitled ‘Thirsty Business: Why Water is Vital to Climate Action’, presented at CDP’s Global Water Forum at the 22^nd Conference of the Parties (COP22) in Marrakesh, Morocco.

Much of the increase between 2015 and 2016 related to Japanese power utility Tokyo Electric Power Company (Tepco), which has spent US$10bn over the past year to clean up groundwater pollution from its Daiichi nuclear power plant, damaged in the March 2011 tsunami. South African mining group Anglo American Platinum said it was spending millions of dollars on infrastructure at its Mogalakwena site to protect against potential future water supply shortages, including a US$6m upgrade to a nearby sewage works.

In the US, drought conditions cost General Motors an additional US$8m due to increased water rates from drought conditions and hydro-electric costs, while United Technologies Corporations disclosed invested US$1.7m in water-saving infrastructure in South California, in response to what the National Aeronautics and Space Administration (NASA) has warned could be a “decades-long megadrought.”

In 2016, 61% of companies participating in the survey confirmed that they track their water use, a rise of just 3% from last year. Eighty-seven percent said they assessed water risks, but only 13% of disclosing companies also conducted company-wide risk assessments including direct operations and supply chains- a modest rise from just 10% in 2015.

The report outlines how a water secure future is key to achieving low-carbon emissions and enabling companies and businesses to adapt to climate change. “Every business in every sector needs water in some form or another,” said Morgan Gillespy, head of water at CDP and the report’s lead author. “Addressing water risks is vital for business continuity, protecting the bottom-line and to enable an effective response to climate change.”

“For a long time companies have taken water for granted as a free and plentiful resource. This current understanding, especially in the energy sector, means that they don’t see water as a material concern.

“But these assumptions are unravelling as the impacts of climate change gather pace. From the US$100bn worth of energy infrastructure at risk from rising sea levels in Louisiana, to Chinese industry facing tightening restrictions on water use, investors are right to worry about the impacts of water risks on their assets.”

The report concludes that a growing number of companies have made tackling climate change a priority in their sustainability policies, but still aren’t moving fast enough to tackle water risks.

Research for the report involved approaching more than 1,200 of the world’s largest listed companies in sectors exposed to water risk. Just over half responded, suggesting that the estimated US$14bn financial impact could be overly conservative, although in a similar survey in 2015 only 38% of the companies approached participated.

Companies recognise an increasing number of water-related risks through direct impact on their finances. More than one in four of those featured in the CDP report say they have experienced serious water-related losses from floods or pollution, typically from higher operating costs or loss of production.

A similar number said that their greenhouse gas (GHG) reduction plans rely on a steady supply of water, while 54% said more efficient water use had led to lower GHG emissions.

Nearly three in four companies approached in the IT sector by CDP’s researchers responded, followed by those in the food, beverage and consumer products sector. However, less than one in three (32 out of 109) companies in the energy sector replied. The report’s authors note that Exxon Mobile, Chevron and Royal Dutch Shell are among those that have “failed to disclose critical water information to their investor shareholders” via CDP for the past five years.

More than one in three energy companies do not evaluate how water risk could impact their business in the future. Yet in the US about 70% of electricity is derived from power plants that require water for cooling, while even less carbon-intensive power sources such as biofuels, nuclear power, hydropower and solar photovoltaics depend on a regular supply, at least for cleaning.  

The star acts

Companies that participated in CDP’s research were assessed on various factors, such as their efforts to track water use and goal-setting to save water. More than half said they had set targets and goals to better manage their water supply. UK pharmaceutical group GlaxoSmithKline confirmed that it had met a target set in 2010 to cut the volume of water used in its operations by 20% within five years.

Reduced water use also created energy savings, according to more than half the companies. Swiss consumer goods giant Nestlé reduced water use by 1.7m cubic meters and also reduced its carbon emissions by 80,000 tons in 2015.

The CDP report also highlighted 24 brands that were leading the way in mitigating water risks, up from eight that made the list last year. L’Oréal and German chemical company BASF were among the new additions, joining six firms that made the list for the second year in a row, including Ford and consumer goods company Colgate Palmolive.

A total of 23 companies were specially commended by CDP in its ‘Water A’ list for their efforts to conserve water, against eight in 2015. They included Coca-Cola European Partners, Colgate Palmolive Company and Ford Motor, the latter named along with Fiat Chrysler and Toyota for implementing best-practice water strategies.

However, generally companies are still not doing enough. “This year’s findings offer two clear lessons for the private sector, says CDP’s chief executive officer (CEO0 Paul Simpson. “Firstly, that water risks can rip the rug from right under business, posing a serious threat to bottom lines.

“Secondly, and crucially, water will be a fundamental global commodity in the transition to a low-carbon economy. Every drop of clean, sustainable water will be essential for the emissions reduction activities countries and companies have planned. This is a wake-up call to companies everywhere to take water more seriously.”

Last month, a separate report published by CDP found that a number of global corporations were making progress in transitioning to a low-carbon economy and 85% had emissions reduction targets in place, but there were still many at risk of being left behind.

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