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Water Scarcity:
Dealing with the Long-Term Business Risk

Yesterday, in an attempt to stimulate dialogue and increase awareness around global water risk, CDP held its Global Water Forum 2013, “Investing in Water Security.”

The impetus for the conversation, and in general CDP’s water program, is to catalyze sustainable global water stewardship.

Water scarcity is a long-term business risk which has not, quite frankly, been gaining the same level of attention as other sustainability issues, such as energy efficiency and carbon reduction.

However, unlike carbon, water is not a renewable resource.

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“I am very passionate that water is not carbon,” said Will Sarni, Director and Practice Leader, Enterprise Water Strategy at Deloitte Consulting LLP. “There is no replacement for water. Carbon is renewable. Water is not.”

Water is essential for almost all manufacturing processes across several industries including technology, food and beverage, and clothing, yet the financial, political and social risks surrounding water scarcity are underestimated.

Abby Cohen, Partner, Senior Investment Strategist and President, Global Markets Institute, Goldman Sachs, stated that given the rate at which emerging economies are advancing, particularly China and India, it is not surprising that research indicates that 40 percent of the global population will be living in areas of high water stress by 2025, if water stewardship is not taken seriously.

Cohen further noted that the current disconnect between the true value of water, and the actual price paid by consumers, in combination with the misuse of water was vexing, especially from a macro perspective.

“Water markets are not priced fairly,” said Cohen, “which is not good for economic incentives. However, the market will reward investors that pay attention to [water stewardship].”

She elaborated by stating that companies that recognize financial issues pertaining to environmental risks (mostly energy efficiency at this point) have been rewarded with higher P/E ratios, and emphasized that investors reward companies aiming to do the right thing.

However, with the misperception that water is a renewable resource combined with its poor pricing, it is easy to see why the more expensive energy bills and clearer carbon reduction policies are at the forefront for most businesses.

This lack of attention to water is resulting in unforeseen risks, which disrupts business. It is also typically outside of companies’ direct control because it involves local actors.

For example, Deane M Dray, Global Industrials Sector Leader, Citigroup, observed that in 2008, global beverage manufacturer, Coca Cola had to shut down one of its plants in Rajasthan, a drought-stricken region of India, because the water was both polluted and scarce.

This situation attracted local protests, followed quickly by media attention, an undesirable situation for most companies.

Sarni notes that this type of water risk, reputational risk, is the hardest to quantify but extremely important.

Another risk emphasized by the event’s panelists was political risk.

“There are 240 basins in the world that are shared across multiple countries,” said Dray, “You will see more disagreements over water boundaries.”

This is particularly important as the need to possibly export water to water-stressed regions becomes a real concern.

“Water is a community resource,” said Joyce Haboucha, Managing Director & Director, Sustainability & Impact Investments, Rockefeller & Co, “For example, if I export my water to China, but everyone in my society begins to suffer, then we have a problem.”

The solution? A collaborative approach to water stewardship. Companies need to partner with NGOs, governments, local actors to develop policies which focus on safeguarding resources, and educating end-users to prevent mismanagement.

This is also an opportunity for companies to develop technical and financial innovations that address water scarcity.

The panelists identified Singapore as leading innovations that address water scarcity.

The small, yet very dense island nation has no natural water sources, and as a result, has been forced to pipe water from neighbouring Malaysia. However, the country has heavily invested in water technologies, such as reverse osmosis and desalination so they can reuse wastewater and capitalize on surrounding seawater.

Sarni calls the Singaporean approach “brilliant,” particularly as the country has cleverly called their reused wastewater “new water” to reduce consumer fears about the source.

While this example is admirable, it is rare. CDP believes that there needs to be a new momentum to address existing and impending water challenges across multiple industries.

Therefore, CDP will be launching its newly refined, sector-specific questionnaire in 2014, with the goal of capturing more granular information with the hopes of driving greater action and better engagement within the water industry.

This new questionnaire, which promises to be more robust, will be first applied on a confidential basis to Fortune 500 companies before being officially available in 2015.


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