Two-thirds of the world's largest companies are reporting exposure to water risks, some of which have potential to limit growth, according to a new report by CDP. The news comes amid mounting shareholder concern around the business impacts from water scarcity, accessibility and poor water quality.
CDP’s latest annual global water report — launched today at both the SB ’14 London conference (see CDP chief executive Paul Dickinson’s presentation here) and the Conference of the EU Innovation Partnership on Water in Barcelona — finds that 68 percent of businesses report exposure to water risk that could generate a substantive change in their business, operations or revenue. 22 percent of companies anticipate that issues around water could actually limit the growth of their business.
"If water scarcity prevails, companies could face constraints to growth," says Constantina Bichta, manager of ESG research at Boston Common Asset Management. “They may not be able to provide their core products and services, or may lose the ability to expand their business. As investors in these companies, this is something we are deeply concerned about. Companies with large supply chains also run the risk of finding themselves in conflict with communities over access to water issues, thus putting their license to operate at risk."
The analysis is based on the water management data of 174 companies listed on the FTSE Global 500 Equity Index provided to CDP at the request of 573 institutional investors with US$60 trillion in assets. The number of investors pressing for corporate accountability on water and related information through CDP has increased by more than 300 percent since 2010, reflecting growing shareholder attention to water challenges.
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Almost half of reported risks to impact business in next three years
Given almost half of the 853 reported risks — such as closure of operations and decrease in shareholder value — are expected to impact now or in the next three years, companies could quickly find themselves at a competitive disadvantage. In addition, the report highlights that water pressures will be most keenly felt in emerging markets where companies see new opportunities for growth, such as Brazil, China, India and Mexico. This is a message likely to be keenly understood in South America's biggest and wealthiest city, Sao Paulo, which is widely reported to be dangerously close to running out of water.
Companies such as Diageo, H&M, Merck and Unilever are, however, beginning to respond to this risk, with three-quarters of companies evaluating how water quality and quantity affects their growth strategy. This change comes as water increasingly moves from an operational issue into the boardroom: ultimate responsibility for water issues lies at board level in 62 percent of respondents, up from 58 percent in 2013, with the vast majority of companies (90 percent) integrating water into their group-wide business strategies and 82 percent setting goals and targets to reduce water use.
Billions in sales, millions in costs savings?
Leading companies are investing in order to reduce the value at risk from water stress and capitalize on opportunities such as cost savings or increased revenues. In fact, three-quarters report that water offers operational, strategic or market opportunities. Chemicals giant BASF estimates that water saving, recycling, reuse and drinking water treatment products offer the company potential sales of US$1 billion up to 2020; while Cisco is already saving US$1 million a year by using less water as a result of a change to a soldering practice.
However, despite these positive actions, disclosure levels of the Global 500 have not kept up with investor demand for information, stagnating over the past year. 42 percent of the companies requested by investors to divulge information related to their water risks failed to do so. The energy sector has the lowest level of disclosure, despite companies reporting high levels of exposure to risk. The largest persistent non-disclosing companies by market capitalization and identified as having potentially the greatest impact on water resources include NIKE, Inc. and Exxon Mobil.
Paul Simpson, chief executive officer at CDP, says: "Water is an essential resource for any business. The potential for water-related problems to damage brand value or limit corporate growth is increasingly understood. We live in a time of unprecedented demand for water and have seen the number of investors seeking accountability from companies on this issue through CDP rise more than fourfold in just four years. It is of grave concern that such a significant group of companies is failing to communicate management of water risks to their shareholders through our global system."
CDP’s Global Water Report 2014, From water risk to value creation, is accompanied by the release of CDP's wider global water dataset on an easily accessible online platform.
In September, CDP reported that S&P 500 industry leaders that are actively managing and planning for climate change are generating 18 percent higher ROE than peers and 67 percent higher than companies that do not disclose on climate change. And last month, the organization named companies including Cisco, CVS Health, HP, Microsoft, Novozymes, Philips, SAP and Unilever to the “A List” on its Climate Performance Leadership Index — 187 businesses from around the world that are demonstrating a superior approach to climate-change mitigation.