Conference Note: Water-Related Risks and Opportunities

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.