Liquid assets: Strengthening the business case for water management
With global water supplies running dry at an alarming rate, edie's Matt Mace hears from some of the private sector's leading lights on tackling water scarcity to uncover the business case that lies beneath the surface.
The Paris Agreement is set to come into force this week (4 November), and with it a host of companies and nations alike will inevitably strive to scale-up renewable energy investment and reduce carbon emissions. Yet, efforts to transition to a low-carbon economy hinge on a global ability to tackle a climate crisis that is just as is important but too often swept under the rug: water scarcity.
At a glance, a lack of potable water could potentially wreak havoc on nations, going so far as to threaten natural security. A World Resources Institute (WRI) report from 2015 suggested that, by 2040, 33 countries would be at risk from water-stress – 14 are in the Middle East. The deterioration of the Middle East, home to more than 350 million people, looks likely to threaten economic growth and national security, with the WRI report claiming that more migrants and refugees will flock to increasingly overcrowded cities.
The World Bank has also sounded the alarms: in June this year, it warned that water shortages will deliver a “severe hit” to the economies of the Middle East, central Asia, and Africa by the middle of the century – taking double digits off of their GDP.
Even the global power supply isn’t immune to water stress. In January, a study published in the Nature Climate Change journal revealed that more than 60% of the world’s power stations could have their output affected by climate change-related water shortages.
It appears that in the global move to combat climate change, water has been something of a hidden spectre, lurking behind each issue without truly being examined. That was certainly the case a few years ago. Fortunately though, a number of external business drivers have since emerged that place water stress and security at the heart of forward-thinking companies.
The largest of these drivers is the UN’s Sustainable Development Goals (SDGs). Goal Six calls on businesses to “ensure availability and sustainable management of water and sanitation for all” and efforts are being made to achieve this.
In regards to access to drinking water, 91% of the global population reportedly now have access to an improved water source, compared with 82% in 2000. However, an estimated 663 million are still drinking from “unimproved” water sources or even surface water. When looking at sanitation, the number lacking adequate supply jumps to 2.4 billion people.
But other than creating a ‘nice story’ to be shared as part of a company’s CSR commitments, what is the business case for not just investigating water scarcity, but actually improving it?
At a recent Financial Times Water Summit in London, delegates from consumer goods business Unilever, global drinks firm Diageo, wine and spirits producer Pernod Ricard and global disclosure organisation CDP outlined how water is the “lifeblood” of business prosperity and longevity.
Many businesses are already acutely aware of the risks that water security poses. In fact, CDP has already surveyed 174 companies listed on the FTSE Global 500 Equity Index, finding that more than two-thirds of those companies realise that water security could harm business growth. But while companies are going to lengths to mitigate the in-house impacts, the aforementioned companies and organisations are beginning to realise that risks associated with water can actual yield some substantial opportunities.
Beneath the surface
For CDP’s chief executive Paul Simpson – who recently spoke to edie about the business risks and opportunities associated with climate change – a lot of businesses are focusing on in-house management of water – often treating it as a sub-category of overall climate mitigation. In order to truly realise the business case for water, Simpson anticipates a time where investors analyse climate risk – honing in water especially – when investigating companies and portfolios. If businesses are to meet inspector standards, then further examination of water use may be necessary.
“Many of the companies and some of the investors are looking at climate change, but water is the real income risk,” Simpson says. “If climate change is the shark, then in some sectors and some regions, water is going to be the teeth.
“Investors are always trying to predict the future based on the past. There’s a rear-view mirror on financial disclosure and other information. But investors want a full picture on managing risks appropriately. For businesses, impact on suppliers is often the hidden area, and we have to ask ‘are we just looking at the surface of the ocean without understanding what’s underneath it?’”
Simpson says investors are already getting to grips with the potential ramifications of water security. The steel sector is one area that looks set to feel the bite of the ‘shark’s teeth’ if businesses and governments can’t immediately begin to address water use. Currently, around 3% of steel companies are operating in areas of high water risk – by 2020 this looks set to jump to 20%. For Simpson, this forward outlook that investors are viewing water with should be replicated within the business sphere.
One such company that are doing just that is IT corporation Dell. The company is trying to establish how exposed they are to water risks and is currently mapping suppliers to create a holistic understanding of its relationship with water. Dell’s hotspot analysis has uncovered the 50 biggest users of water within its supply chain, and the company is now communicating with these firms, calling on them to put heads above the parapet and lead on sustainable water use for the rest of the suppliers to learn from.
According to Simpson, there’s a real “sophistication” coming from investors and companies that are pushing the water agenda across the supply chain and these are the businesses that will thrive if water stress levels exacerbate.
Water is thicker than blood
The saying goes that blood is thicker than water, but for Unilever’s homecare president and head of water business Nitin Paranjpre, water should be viewed by business as the “lifeblood” of the company.
A large portion of the Financial Times summit was spent casting an eye over the agricultural sector, which is linked to 75% of the world’s water use. Even though Unilever doesn’t identify as an agri-company, Paranjpre notes that 80% of the company’s water footprint is found outside of its value chain, and therefore outside of its direct control.
Last year, Unilever ensured that 60% of its agricultural raw materials were sourced substantially, in an effort to reduce that value footprint amongst its suppliers. However, Paranjpre feels that Unilever – and the business sphere as a whole – needs to do more to work with suppliers to uncover the “hidden risks” lurking within supply chains.
“A large part of the problem of inaction is the that people don’t understand and recognise fully the nature of the risks because some of the risks are almost invisible,” Paranjpre says. “Invisible risks mean you haven’t been able to quickly measure the impacts, but we do know that people have money to buy brands and improve their lifestyle, but people in the future won’t have sufficient water to use your brands. This is a serious business risk.
“There is a huge business opportunity for us to intervene. While the availability of water becomes more serious, the quality of water is also becoming worse. There are different issues and as businesses, the ability to truly understand water by segmenting and researching it helps you to have a specific solution and innovative answers to various circumstances.”
While understanding the hidden aspects of water use in supply chains is useful, Paranjpre also notes that influencing consumer behaviour is an area that needs to be accelerated, but that it is an area where Unilever has encountered the most friction. The company has an aim to halve the water footprints of its products by 2020 compared to a 2010 baseline. As of 2015, the company has reduced this water impact by just 1% compared to the baseline standard.
While Paranjpre describes the progress as “modest”, he also reveals that water use in factories has been reduced by 19 million cubic metres compared with 2008 – equating to a 37% decline per tonne of production. The real barrier for Unilever is its consumers, where water use has fallen by 1% per tonne of production. However, Paranjpre doesn’t feel that asking consumers to take less time in the shower is likely to resonate and inspire behaviour change. Instead, businesses should take care to sculpt messages in a way that appeals to the consumer, while also creating the desired water savings.
“It is very difficult to argue the case to consumers to go and have shorter shower times,” Paranjpre says. “It doesn’t work and people don’t like the fact that we are telling them how to live.
“The way we see it, is that if you can introduce a product that saves time and is convenient – like dry shampoo – then the large part of the world may not realise it, but you can truly make a difference to people’s lives. It’s a business opportunity that provides a better message than telling everyone they can only shower for a few minutes.”
According to Paranjpre, some consumers have “woken up” to the looming issue of water scarcity, with awareness driven by droughts in Sao Paulo and California. This awareness subsequently creates the desire to change – as long as it doesn’t have ramifications with normal habits. Unilever has used the increased awareness to offer consumers ways to reduce water footprints – a primary example is the Knorr brand in the UK – but still relaying the message as one of convenience. The company has rolled-out similar initiatives in both South Africa and India, where the issue is more pressing. Paranjpre anticipates a time where this will be addressed across Unilever’s entire brand portfolio.
Another thing that Unilever is doing to improve water use in developing countries is to partner with NGOs like Oxfam, to build 10 water centres in Nigeria. The water centres not only provide access for those that would normally have to walk miles to gian access to clean water, but it is also educating and empowering the women out in Nigeria – a goal that the company’s chief executive is particularly passionate about.
— Paul Polman (@PaulPolman) October 21, 2016
Partnering with NGOs and governments isn’t just crucial to ensure that businesses can align their goals with those with the expertise to bring about the desired change, but also creates an avenue to ensuring that the company’s water management doesn’t directly contradict any government policies currently in place.
For global beverage company Diageo, the maker of Baileys and Guinness, partnering with government departments has been key in ensuring that the firm’s water management goes beyond its CSR goals and actually strengthens water policies in developing countries.
“Progressively we recognise that it can’t sit in isolation,” Diageo’s sustainable development director David Croft says. “Our water strategy now thinks about raw materials, communities where we source and where we produce and also what policy frameworks and landscape environments that we need to create towards a sustainable future for everybody as part of a very holistic operating environment. The issue is how we support the creation of water policy frameworks and the operating environments to drive a sustainable future.”
Diageo has been making “good progress” on its water management and uses delisting of dams, water storage and safe water and sanitation projects to ensure that it currently replenishes 21% of the water used in final products in water-stressed areas. For Croft, many of these mitigation projects were only possible through collaboration with the relevant national governments. Croft notes that Diageo has spent “significant capital sums” in these water-stressed areas such as Nairobi and Ethiopia.
In Ethiopia, the company has spent £8m on a water treatment site and pumps £1m into water community programmes annually. Some of these programmes interlink and connect to the Government’s water supply, while in Nairobi talks with the Government also coincide with talks with water organisations as to how Diageo can implement its “holistic operating environment”.
“We’re spending significant capital sums around these sites to improve the ambitions and improving community aspirations,” Croft adds. “It allows us to talk end-to-end and then building that into the conversation we would have. We connect, in places like Ethiopia, with the Government’s agricultural agency so that when we see new methods of agriculture come through that are lower uses of water, we can introduce those into curriculums which are also part of the future for those farmers to be more productive and sustainable.
“Connecting that into Government curriculum is really important for the long term success of our supply net, not just for now, but for the next 10, 20, and 30 years.”
While it is important not to tackle water stress individually and in isolation, there is an argument that viewing the operating areas in isolation is crucial to gaining a broader understanding of how a company interacts with water in the immediate environment.
Working across more than 80 markets in four regions, wine wholesaler and importer Pernod Ricard relies on local water sources and farmers to tend to its vineyards. While the company has introduced water reuse systems in its Scottish distilleries and Canadian facilities – which boarder the nearby Detroit river – the company realises that different managerial approaches are needed in water-stressed areas.
“Water targets must be looked at locally to really understand what the impact is, as they are not always equal,” Pernod Ricard’s sustainable performance director Jean-Francois Roucou says. “The impact water has on an area is different in Canada compared to a critical water supply in India and Mexico where the future doesn’t look too bright for water.
“We are making sure we reduce the impact our operations in our immediate environment. The discussion isn’t about ‘stop making wine’ or ‘stop growing grapes’, but rather ensuring we are doing everything we can to introduce precision farming and that all the water we use is recycled.”
Around 90% of the company’s water footprint derives from its agricultural practices. For Roucou, a “very close” relationship with farmers is essential to ensuring that Pernod Ricard gains a greater understanding of how it’s vineyards interact with water and the local environment. While nearby rivers – like in Scotland and Canada – provide ample water for production and reuse for the company’s facilities, countries such as Mexico rely on precision farming techniques to ensure that water use isn’t too high. If Pernod Ricard were to adopt a global strategy for water, then Roucou believes that the areas where water “doesn’t look too bright” would suffer as a result.
It’s difficult to view water as an immediate threat when the majority of the developed world can obtain it at the turn of a tap. But, as these companies have highlighted, this liquid actually acts as a solid foundation upon which businesses can build their CSR and energy credentials, and thus it cannot be ignored.