WATER-RELATED RISKS AND OPPORTUNITIES: CORPORATE DISCLOSURE AND ANALYSIS OF AN EMERGING BUSINESS CONCERN

Teleconference, September 12, 2012

The American Bar Association, Section of Environment, Energy, and Resources hosted a teleconference program discussing the emerging trend toward increasing awareness of water-related risks in corporate investments. Investors and consumers have called for greater corporate disclosure of water risks and improved water management due to increasing water scarcity. The ABA called together three panelists to participate in this discussion.

Berkley Adrio, a senior associate at Ceres, a nonprofit organization dedicated to maintaining a sustainable global environment through the promotion of smart business practices and planning, was the first panelist to speak. Adrio explained that Ceres operates by organizing various coalitions of investors, companies, and public interest groups interested in encouraging corporate disclosure of business practices that have an effect on the environment, specifically with regards to water. Adrio began by reminding attendees that global demand for water will soon surpass the available supply. Ceres estimates that by 2030, up to 40% of the demand for water will be unmet due to its limited availability. A 2012 World Economic Forum Global Risks Report also indicates that such unmet demand is highly likely to have a substantially high impact on consumers, agriculture, business, and industry.

Shareholders, due to this eminent water deficiency, are calling for more environmental accountability by companies that, by virtue of being highly dependent on water, have incurred a certain amount of “water risk.” Companies are beginning to respond to this call for environmental accountability through increased disclosure of corporate water risk and occasionally, a plan to mitigate this risk. The market has begun reflecting this developing practice and several instruments for determining water risk are now available. For example, Bloomberg introduced Water Insight, a new product that allows companies to identify where their water risks are located and how policy decisions can affect their investments from both a demand and supply perspective. Standard & Poor has also begun to incorporate the amount of water risk that a company carries into their rating methodologies for certain sectors. Adrio explained that the United States Securities and Exchange Commission (SEC) has also addressed this need for increased disclosure. In 2010, the SEC began requiring companies to include risks emanating from climate change, including water availability, in their SEC filings.

A 2012 report by Ceres, entitled “Clearing the Waters: A Review of Corporate Water Risk Disclosure in SEC Filings,” revealed that corporate disclosure of water-related risks have increased overall, especially in regard to physical and litigious risks. Sectors having a high rate of water risk disclosure include the beverage, electric power, food, home construction, and mining. The report also found increased disclosure of plans designed to mitigate water risk. However, the report noted that corporate disclosures concerning water use, supply chain risk, and performance goals are weak and could use improvement. Adrio ended her presentation with Ceres’s recommendations for the future: corporations should begin to provide investors with more than just baseline disclosure and work toward supplementing their reports with quantitative data. Finally, Adrio recommended that more companies begin presenting investors with viable plans to mitigate present water risks.

The next panelist to present was Marcus Norton, Head of Investor Initiatives & Water at the Carbon Disclosure Project (CDP). Norton agreed with Adrio that the amount of corporate disclosure of water risk currently provided to investors is insufficient. Presently, several companies are already feeling the negative financial effect stemming from impacts to water-dependent industries. Norton provided an example of one well-known international clothing retailer that saw its 2012 first quarter profits plummet after cotton prices increased dramatically due to water shortages.

In 2011 CDP conducted a report on global corporate water disclosure. With a focus on companies heavily dependant on water resources, CDP gathered information from 315 global companies regarding their approach to water resources. To solicit responses, CDP issued a three-part questionnaire to each company. The first part concerned the company’s water management and governance, specifically its policies about water use and the personnel responsible for maintaining oversight of water use. The second part addressed the company’s water-related risks as well as opportunities. It inquired about any mitigating strategies that the company developed in response to such risks and opportunities. The final part of the questionnaire asked about the company’s accounting of its water use, including its dependence on water resources and the effect of this dependence on its supply-side chains.

Three main findings emerged from CDP’s report. First, CDP found that water-dependant companies carry a significant amount of associated risk. From the perspective of business operation, most respondents cited “water scarcity” as a water-related risk. Nevertheless, many respondents did report an opportunity for growth and increased financial returns stemming from the development of cost effective utilization of water resources. Second, the CDP report found that companies are recognizing climate change itself as a risk deserving of consideration in decision-making and future planning. However, companies have not reflected similar concerns about water risk and proper management of its water resources. The third finding by CDP pertained to corporate understanding of the risk present in supply chains. For example, while 90% of respondents in the energy sector accurately assess potential water-related risks in their direct operations, only 52% of respondents in the same sector accurately assessed potential water-related risks in their supply chain.

Gregory J. Koch was the final panelist to speak during the teleconference. As a Managing Director of Coca-Cola’s Corporate Sustainability Office, Koch discussed Coca-Cola’s Global Water Stewardship program. The only panelist from a for-profit company, Koch brought a unique perspective on contemporary real-world issues facing many global water-dependant corporations. Koch explained that individual water risks facing each of Coca-Cola’s product manufacturing locations all over the word are largely location-specific.

All of Coca-Cola’s manufacturing plants hold some water risk. Koch explained that most of Coca-Cola’s products command water as a necessary ingredient. This dependency necessarily opens the corporation to at least some level of risk. Factors such as the physical availability of surface or groundwater, the existence and condition of infrastructure, climate change, competing uses by other companies, and regulatory limits placed on water withdrawal, either increase or decrease the supply of water available to Coca-Cola’s supply chain, effectively increasing or decreasing the level of risk incurred.

Separate from supply economics, Coca-Cola carries risk in other areas of their business. For example, Coca-Cola is aware that it carries risk with regards to its reputation and social responsibilities implicating rising community awareness, increased media coverage, demand for corporate disclosure, and responsible business practices. Koch noted another area of risk: resource sustainability. As 40% of Coca-Cola’s total water risk, the ability to sustain its water resources presents the greatest water risk for the company. Growing worldwide use of water, combined with inadequate government action and policy, have a devastating affect on the both the quantity and quality of the renewable water supply in many countries.

In response to this growing crisis, Coca-Cola has developed a four-part strategic framework designed to address its own water use. The four focus areas include plant performance, watershed protection, building sustainable communities, and global awareness and action. Koch detailed Coca-Cola’s plan regarding watershed protection, a plan that focuses on both water quantity as well as quality. Coca-Cola implements this plan through practices such as sustainable agricultural land use, storm water management, recapturing leakage from water systems, wastewater treatment, water reuse, and rainwater harvesting. Koch also addressed the aspect of building sustainable communities, describing an approach focusing on local communities that supply water to Coca-Cola’s manufacturing plants. To date, 386 community water programs in 94 countries are replenishing 35% of the water that Coca-Cola currently withdraws. Additionally, there is corporate support for improving local access to water and water sanitation, and increasing awareness of smart water practices.

Koch closed with an explanation of Coca-Cola’s use of Aqua Gauge, an analytical tool for companies to measure company water risk by comparing its current water management policies against those employed by similar companies. Developed by Ceres, this tool allows each company to evaluate where its own water management policies necessitate improvement. While Coca-Cola performs well in the areas of data gathering, watershed and wastewater standards, board oversight, and engagement with NGOs and community interest groups, it could improve practices regarding risk assessment of its supply chain, product design, and working with suppliers to address water use concerns.


Brown v. City of Eugene, 250 Or. App. 132 (2012) (holding that the term “water service” in a city charter granted a city council control over extensions of water service to end users but not over wholesale transfers of water).

In April 2010, the Eugene Water and Electric Board (“EWEB”) contracted with the City of Veneta (“Veneta”) for Veneta to purchase water from EWEB. The contract further specified that EWEB would not provide service directly to customers in Veneta, the sale would be characterized as wholesale, and the point of delivery would be within Eugene city limits. In accordance with Oregon statute, EWEB petitioned for judicial validation of the contract. The trial court subsequently granted motions to intervene by the City of Eugene (“Eugene”) and other interested parties (collectively “intervenors”).

Intervenors moved for summary judgment, arguing that the proposed contract between EWEB and Veneta violated section 44(3) of the Eugene Charter (“Charter”) that gives only the Eugene City Council the authority to approve sales of water. EWEB also moved for summary judgment. EWEB argued that other than the city council’s control over the extension of water service, the same provision of the Charter grants the EWEB full authority over the water utility, including wholesale transactions. The trial court granted EWEB’s motion for summary judgment and the intervenors appealed to the Court of Appeals of Oregon.

On appeal, intervenors contended that the term “water service” encompasses the wholesale sale of water to other entities, regardless of what entity distributes that water to end users. Thus, the Court of Appeals of Oregon sought to interpret the meaning of section 44(3) of the Charter.

First, the court established that section 44(3) provides EWEB with authority over wholesale water sales unless those sales constitute an extension of water service. The parties agreed on the meaning of extension, but the disagreement centered on the meaning of water service.

Second, the court determined the meaning of water service. The court discounted the varied and numerous dictionary meanings of service, and instead relied on what voters understood water service to mean when they voted for section 44(3) in 1976. From the voters’ perspective, the court stated, water service would have connoted the provision of water to the end user, consistent with EWEB’s argument. The court thought it unlikely that voters would have understood water service to encompass the wholesale transfer of water from one utility or entity to another.

Third, the court looked to the Charter provision’s context to discern a meaning of extension of water service. To do this, the court reviewed the statutory framework that existed at the time of the Charter vote. The court found that in 1969 the Oregon state legislature created three local government boundary commissions and used the word “service” in a way that enforced EWEB’s definition and understanding of service. Therefore statutory references to service in the 1969 legislation reflected the general understanding of service to individuals and entities, not to wholesale utilities and municipalities.

Fourth, the court reviewed the charter’s enactment history, which included a statement in the voters’ guide that the city council’s authority over the extension of water service provided it with a tool in land use planning and control of urban sprawl. The court stated that its meaning of water service would still provide the city council with some measure of control over land use and urban sprawl.

Accordingly, the court held that EWEB had authority to enter into the contract with Veneta without first obtaining approval from the Eugene City Council and that the trial court properly validated the contract.


Background

In 2008, the Vermont legislature substantially revised its groundwater protection laws. Historically, the common law doctrine of absolute ownership governed groundwater. However, in 1985 it was replaced by the more modern correlative rights doctrine. Vermont’s groundwater laws changed again when Vt. Stat. Ann. tit. 10, § 1390(5) (West 2008) was enacted, designating groundwater as a public trust resource. As a result, groundwater now must be managed for the benefit of all Vermont citizens. In 2011 the Vermont Environmental Court (“court”) interpreted this statute for the first time when it examined the final certification of Omya Inc.’s (“Omya”) solid waste facility. While the court did not addresses every question the 2008 statute presents, the court established a baseline context in which to examine groundwater, both quantity and quality needs to be addressed.

Environmental Court’s Interpretation

In Omya Solid Waste Facility Final Certification, No. 69-6-10 Vtec., 2011 WL 1055575, (Vt. Feb. 28, 2011), Omya applied to The Vermont Agency of Natural Resources (“ANR”) for a 5-year, final certification of a lined tailings disposal facility, a solid waste permit. Omya operates a calcium carbonate processing facility and the groundwater within the site has tested for elevated levels of iron, manganese, arsenic, and aminoethylethanolamine. ANR granted Omya’s application for a final certification based on the requirements set forth in its 2005 Groundwater Protection Rule and Strategy (“2005 Rule”). The Appellant, concerned about the disposal facility, appealed the ANR decision to grant the final certification.

The court, in a decision and order on motion for summary judgment, determined whether the final certification issued by ANR took into account the new public trust statute, Vt. Stat. Ann. tit. 10 § 1390(5). The court first examined what the public trust doctrine required for a groundwater analysis. Looking at the plain meaning and relationship to related sections, the court found that the public trust is not limited to solely managing groundwater quantity. The public trust should also manage groundwater quality. Next, the court looked at the 2005 Rule used to issue the final certification to see if ANR took into consideration the public trust doctrine with regards to groundwater quantity and quality. Because the 2005 Rule was created before Vt. Stat. Ann. Tit. 10 § 1390, the court held that use of the 2005 Rule is not sufficient to ensure that ANR is carrying out its public trust responsibilities. The court, however, did not find the 2005 Rule to explicitly violate Vt. Stat. Ann. Tit. 10 § 1390.

After the summary judgment decision issued by the court, the Appellants submitted a motion for clarification, asking if the decision required ANR to develop a new policy for certification. The court clarified its original decision and stated that ANR had the responsibility to develop the process of how to perform a public trust analysis. The court only determined that ANR’s 2005 Rules had not specifically considered groundwater as within public trust and therefore must be revisited. This decision, however, did not require that the final certification result be changed or the 2005 rule be changed.

In July 2011 ANR finalized an interim procedure for implementing the new public trust doctrine for groundwater called the Agency of Natural Resources, Interim Procedure for Implementation of Groundwater Public Trust Principles for Groundwater Quality Summary of Changes (July 20, 2011). The interim procedure recognizes that the ANR needed to protect both quantity and quality of groundwater with a dynamic set of rules designed to react to changes in public needs. Activities are now categorized into two tiers, recognizing that some activities are more harmful to groundwater then others. Tier I activities are high-risk activities that require a more stringent permitting process and a public benefit showing. Tier II activities pose a much lower risk to groundwater and therefore the permitting process is much easier. Tier II activities also include remedial activities directed to contaminated sites. Additionally, ANR set up a public comment process for participation in the permitting process.

Effects

Vermont, by identifying groundwater as within the public trust doctrine, is trying to balance public interest and individual property rights for an ever more important natural resource. The public trust doctrine allows for environmental concerns to be addressed with an eye towards future generations. This type of consideration is necessary for important and vital natural resources like water. Interpreting a broad law like Vt. Stat. Ann. Tit. 10 § 1390, however, has its own unique challenges and it will take years to generate a clear picture of how protecting groundwater, as part of the public trust, will be done through Vermont’s legal system. It took three years from the time the statute was enacted for a court to be faced with a decision where it needed to interpret the statute, and additional administrative action is still needed. While the public trust doctrine may take some time to fully realize the scope of protections, future generations should be better protected.

The extent of a public trust doctrine is determined by a state-to-state basis; therefore, Vermont can serve as a basis for other states that wish to implement similar groundwater policies. Colorado, for example, though a prior appropriation state, could easily work those policies into any public trust statute. Implementing a public trust to protect groundwater will not change groundwater laws overnight as Vermont has shown. Most public trust laws can be worked into a state’s existing legal framework.


In re Revised Abandonment List of Water Rights in Water Div. 2, 276 P.3d 571 (Colo. 2012) (en banc) (holding that an application for a change of a water right must be proven by historic use; a denial of an application for a change of a water right for failure to prove historic use does not amount to an unconstitutional taking of property without just compensation; and the failure of an applicant to prove historic use does not establish abandonment of the water right).

John C. Harrison (“Harrison”), acting as personal representative for the estate of Nolan G. Thorsteinson and trustee of The Margie (Dotts) M. Thorsteinson Trust, sought to avoid an abandonment order over a disputed water right in the Mexican Ditch. In May 2001, the Division Engineer placed this disputed water right on the decennial abandonment list and Harrison filed protests in the Water Court for Water Division No. 2. In 2006, Harrison entered into a stipulation with the State and Division Engineers (“Engineers”) whereby he would file an application for a change in the point of diversion reflecting the historic use of the water right and the Engineers would remove the water right from the abandonment list. The stipulation also specified that the water right not divert from any location other than the one originally decreed. If Harrison failed to follow the prescribed stipulations, he could not oppose a motion of the Engineers to have the water right declared abandoned.

Harrison timely filed an application for change of the water right and on the same day the water court accepted the stipulations, removed the water right from the abandonment list, and dismissed the case. The water court heard Harrison’s application in January 2011 and subsequently denied the application on its merits citing Harrison’s failure to prove the historic use of the water right. One month later, the water court granted the Engineers’ motion to have the water right declared abandoned. Harrison appealed both rulings directly to the Supreme Court of Colorado.

The court addressed three issues on appeal. First, whether Harrison fell within an exception to the requirement of proving historic use for a change of a water right. Second, whether the denial of a change of a water right for failure to prove historic use is tantamount to an unconstitutional taking of property without just compensation. And finally, whether abandonment is the proper remedy for failure to prove historic use.

On appeal, Harrison contended that he fell within an exception to the requirement that a requested change of a water right be proven by the actual historic use of the right over a representative period. The court rejected Harrison’s contention, however, because the exception, as created by the court in Flasche v. Westcolo Co., 112 Colo. 387 (1944), is not in regard to the general requirement of proving historic use. Rather, the exception is in regard to the representative period over which a showing of historic use could be sufficient. Moreover, a representative period of historic use was moot in this case because the water court did not find, and Harrison did not assert, a proven historic use.

Next, the court held that the water court’s denial of a change of a water right for failing to prove historic use does not unconstitutionally deprive an applicant of property without just compensation and is therefore not in violation of the Fifth Amendment of the United States Constitution or article II, section 15 of the Colorado Constitution. The court reasoned that although a water right is characterized as a property right, it remains usufructuary in nature and merely permits the use of water within the limitations of the prior appropriation doctrine.

Finally, the court addressed the parties’ stipulation that Harrison’s failure to include historic use in his application would result in abandonment of the water right. The court stated that the failure of a change applicant to prove historic use by a preponderance of the evidence does not establish an abandonment of that right. The court reasoned that although the parties stipulated to this remedy and the water court adopted this remedy, the language of the stipulation is ambiguous, there is more than one reasonable interpretation of the stipulation, and the parties’ actions were not consistent with the stipulation.

Accordingly, the court affirmed the water court’s dismissal of Harrison’s application because he failed to prove historic use and because denying a change of a water right for failure to prove historic use does not amount to an unconstitutional taking of property. The court reversed the water court’s decision to grant the Engineers’ motion for abandonment because the stipulation did not intend for abandonment as the consequence of Harrison’s failing to succeed in his change application.


Pioneer Irr. Dist. v. City of Caldwell, No. 37242, 2012 WL 1449597 (Idaho Apr. 27, 2012) (holding that an irrigation district had the authority to evaluate the reasonableness of encroachments on its easements and rights-of-way and subsequently permit, refuse, or remove encroachments, though the irrigation district did not retain exclusive ownership rights over said property).

The City of Caldwell (“City”) impermissibly authorized developers to construct a municipal stormwater discharge system to discharge into Pioneer Irrigation District’s (“Pioneer”) delivery and drainage facilities. Pioneer sought declaratory and injunctive relief to remove the City’s conduits, arguing that they “unreasonably and materially interfered” with its irrigation system. Both parties moved for summary judgment. The district court delivered a judgment for Pioneer and held that, pursuant to Idaho Code Ann Section 42-1209 (2012) (“Section 42-1209”), Pioneer had exclusive interests in its property. Therefore it had the authority to unilaterally determine which projects could be installed on and removed from its facilities. Because an irrigation district is a quasi-municipal corporation, the district court also held that the standard of review for decisions of irrigation delivery entities, such as Pioneer’s, should be reviewed under the arbitrary and capricious; based upon clearly erroneous findings; or reached through an unreasonable decision-making process standard.

On appeal, the Supreme Court of Idaho (“court”) also applied these standards of review to Pioneer’s decision to deny the City access to build upon its easements and rights-of way. The court reasoned that such limited review was warranted, as the plain language of Section 42-1209 authorized Pioneer to evaluate the impact of proposed projects on its easements and rights-of-way and, based upon its determination, either allow or prohibit projects. Furthermore, Pioneer was required to comply with strict statutory requirements or face liability. Therefore, Pioneer was entitled to judicial deference and limited review.

Applying canons of statutory construction, the court also affirmed the district court’s holding that Pioneer could remove the City’s conduits without a judicial order. This conclusion was consistent with the relevant common law right to “self-help” and furthered the underlying policy of Section 42-1209 – to enable irrigation districts to restore their facilities to conditions that maximize efficiency and minimize liability. Furthermore, the court held that the justifications for limited review of Pioneer’s decision to permit or prohibit a project on its property applied equally to the entity’s decision to remove the conduits without instituting judicial proceedings. Thus, the court applied the same limited standards of review to Pioneer’s decisions to deny projects on, and remove them from, its property.

Notably, the court rejected the district court’s conclusion that irrigation entities retain exclusive interests in their easements and rights-of-way. The court reasoned that Idaho common law provides for community and individual use and enjoyment of an irrigation district’s property so long as such use does not unreasonably interfere with the district’s purpose. Nothing in Section 42-1209 indicated that the legislature wished to abrogate this right.

In sum, the court held that judicial review of such decisions should be limited to determining whether the decisions were arbitrary and capricious, based upon clearly erroneous findings, or reached through an unreasonable decision-making process. The court also affirmed the district court’s holding that Section 42-1209 authorized Pioneer to provide or withhold permission for the construction of the City’s drainage system on Pioneer’s property and to remove those pipes that Pioneer believed interfered with its own system.

The concurring justices disagreed that Section 42-1209 required deferential review of the decisions at issue. The concurrence based its conclusion on the legislature’s failure to explicitly provide for limited review in Section 42-1209 as it had in other statutes. Furthermore, the concurrence argued that applying limited review to a party simply because it has acted in a quasi-municipal capacity would improperly extend limited review to an indefinite number of non-government parties. Instead, the concurrence argued that the court should review an irrigation entity’s decision regarding encroachments on its easements and rights-of-way by determining whether the trespass was unreasonable or materially interfered with the irrigation district’s system. Under this approach, irrigation districts may challenge potentially unreasonable encroachments but may not unilaterally remove systems that were rightfully in place. For these reasons, the concurrence also argued that irrigation districts should not remove encroachments prior to receiving a judicial order finding the encroachment unreasonable.