State of Green Business: Water risk trickles from awareness to action

State of Green Business: Water risk trickles from awareness to action

An empty irrigation channel in Owens Valley, Calif.
ShutterstockTom Grundy
An empty irrigation channel in Owens Valley, Calif.

This article is part of a series of excerpts from the 2015 State of Green Business report.

Water scarcity has been on companies’ radar for some time. But turning awareness into action by incorporating water risk calculations into company decision making and strategic planning has been another matter. Suddenly, there’s a trickle of progress.

The latest results from CDP’s water program are telling. They found two-thirds of the world’s largest companies acknowledging that they are exposed to water-related risks, with almost a quarter saying such risks could limit their growth — for some, within the next year.

For example, beverage giant Diageo says growth of its operations in Nairobi is likely to be constrained within five years by water scarcity. Last year, Coca-Cola had to shut down a bottling plant in India due to community concerns over water use. Mining companies Barrick Gold and Rio Tinto both walked away from planned developments in 2014 as a result of water impact issues, while BHP Billiton invested almost $2 billion in a desalination plant to ensure water availability for its mine in Chile’s Atacama Desert.

Despite increased awareness, many firms struggle to find effective ways to measure and manage water risks. The CDP survey found that the risk assessments carried out by many companies may be inadequate, as 60 percent do not require key suppliers to disclose water risks they face, and only 25 percent conduct an assessment at the river-basin level.

Nevertheless, some firms are forging ahead with water infrastructure investments. Nestlé, for example, announced a “zero water” powdered milk plant in Lagos de Moreno, Mexico, which recycles water extracted from milk for use as cleaning waterinstead of abstracting groundwater. The nnovation saves some 1.6 million liters of water per year, equivalent to 15 percent of Nestlé’s water use in Mexico, and was part of a $15 million plant upgrade. Nestlé also applies an internal shadow priceto water to spur more efficient use in its factories. Initiatives such as these have helped the company cut its water consumption by a third over the past 10 years.

Other companies are looking beyond their own operations to understand water risks in their supply chain. For example, General Mills measured its dependence on natural capital — including water — across the value chain for 17 of its top commodities. The results identified “hotspots” of water consumption, dominated by upstream sources such as agriculture, packaging and ingredient processing,which combined accounted for 99 percent of water use. This robust, quantitative assessment helped inform the company’s commitment to sustainably source 100 percent of its 10 priority ingredients by 2020.

Companies are being helped in their efforts by new tools and standards. For example, the Alliance for Water Stewardship’s new standard guides businesses in working with other stakeholders to safeguard future supplies at a local site or catchment. Its six-step framework provides businesses with a road map to tackle the complexity of dealing with water as a shared resource, where businesses need to move beyond water efficiency within their own operations.

The launch of the free, online Water Risk Monetizer tool takes water assessment to a new level by providing businesses with actionable site-specific water scarcity data — in monetary terms. Being able to quantify risk into dollars, euros and the like is much more likely to drive effective action towards water stewardship.

Developed through a collaboration between Ecolab and Trucost, the tool takes into account the full value of water and business value at risk from water scarcity. Companies are able to use the tool to make the business case for water efficiency and treatment, assess how future operating costs could affect profitability, or compare growth strategies indifferent regions.

Such tools represent a growing recognition of the need for companies and governments to account for the “true value” of water. In most markets, the price of water does not obey the law of supply and demand, with water bills in some drought-prone areas of the United States actually lower than in regions with higher rainfall. In some developing countries, abstracting water is almost a free-for-all.

Incorporating the full cost of water into decision-making was the recurring theme at World Water Week in Stockholm, as well as the Economist World Water Summit in November. At the summit, environment ministers from Uganda and Singapore discussed the potential for water pricing in their countries, showing that water scarcity is rising up the agenda of the world’s politicians. This elevates the regulatory risks for companies that do not respond by managing their water impacts.

Location matters. Christophe Beck, Ecolab international president, points out that if companies in China had to pay Danish water prices, it would cost them an additional $130 billion annually, equivalent to 1.5 percent of Chinese GDP. He argued that as problems due to water shortagesbecome ever more acute, low water prices tarnish the business case for taking action. Accounting for water’s full value helps businesses transform their operations to be more risk-resilient and resource-efficient — whatever water’s cost.