Cross-sectoral cooperation key to managing water risk in retail sector
Retailers must widen their investment portfolio and look to engage with a broad range of stakeholder groups if they wish to secure future water supplies within their supply chains, new research suggests.
A study released by the Cambridge Institute for Sustainability Leadership (CISL) outlines four financial models, each of which offers a different approach to achieving multi-sector water investments. The models were developed by examining the value of water to different sectors and scrutinising various income and finance streams.
The findings were informed by a collaboration between nine companies across six sectors, including retail. Retailers have a strong interest to invest in water infrastructure and services as they are major buyers of agricultural products, the yield and quality of which is directly affected by the availability of water.
Retailers often source produce from one or two channels - a direct internal sourcing route and a packer route. When the retailer directly sources products from suppliers, it is exposed to water-related risks and subsequent yield and cost fluctuations.
Through the pack house route, the supplier places an order and the packer guarantees the quantity and quality of the produce. This means the packer is absorbing the risks embedded within sourcing - while the retailer's immediate exposure to water risk is buffered by this, it does not prevent it from being exposed and affected by the longer term impacts of water supply variation.
Under both direct and indirect sourcing, retailers often have to over-contract or source from various suppliers, often overseas, to ensure they have sufficient quantities of produce. To help mitigate against some of the risks involved, the study points to various ways in which retailers could contribute to multi-sector water investment.
These include direct financial investments, where retailers could provide up-front finance or embed the investment in the contractual relationships with suppliers, such as allocating a marginal price per unit of produce to the water project.
Given that many retailers have a retail banking arm, they could also indirectly finance the water reservoir by providing loans to suppliers and growers for subsequent direct investments in the project. Retailers could also act as a broker in a water project, bringing together various suppliers and growers to facilitate the establishment of a water investment consortium.
The study points out that retailers have a broad supplier base and, by being at the end of the supply chain, can exert influence on various stakeholders.
"Retailers could play a crucial role in providing purchasing contract guarantees to growers and suppliers who consume water from the water reservoir," it states. "This would generate consistent water usage from the reservoir, which would ensure a secure income stream; this would be crucial to other investors."
However it adds that this potential retailer purchasing contract guarantee can only realistically be established if there are long-term contracts between suppliers and retailers, and that this is not currently the situation.
Asda is one retailer that has been involved with the (CISL) study - the company is looking at better ways to collaborate on the issue through multi-sector partnerships and supports supplier water-related activities outside the UK. In Spain for example, it has launched a water-trickle scheme for celery growers in which it provides necessary water-spray kit to the farmers.
Commenting on the report, Asda's sustainable business director Chris Brown said: "Inconsistent or unreliable supply of produce caused by water scarcity or flooding has a direct impact on supply chains. Retailers cannot act alone to manage necessary water supplies. A collaborative approach is needed, which is why we are pleased to be part of this initiative."