This article was first published in the September 2016 China edition of Accounting and Business magazine.

Record droughts across Asia over the past year have highlighted the need for societies to save water, for governments to price it properly and for companies to develop strategies to cut rapidly rising water costs.

For companies, water risk is on the rise. In the World Economic Forum’s Global Risks 2015 report, businesses rated ‘water crisis’ as a top risk for this year and said it will remain a chief concern over the next decade. 

In a report last year, investor-led data transparency organisation CDP found that almost two-thirds of the 405 companies it surveyed had some exposure to water risk. The financial impact of this risk topped US$2.5bn. CDP’s report was published on behalf of 617 institutional investors with US$63 trillion in assets. 

‘The biggest problem we have is the water issue. I said 10 years ago that we will run out of water long before we are out of oil. At that time, everybody smiled. People have stopped smiling now,’ Peter Brabeck-Letmathe, chairman of giant multinational Nestlé, told delegates at the Asian Financial Forum in Hong Kong in January, adding that this year water usage has increased by 20%. 

Water security concerns are increasingly prevalent around the globe. Companies are stalling projects because of supply concerns or because they don’t meet new standards. As the issue gains more attention, investors are asking companies what action they’re taking to prevent a full-blown water crisis.

Some of the most dramatic water shortages have been felt in India, where millions have been waiting for two years for rains that have yet to come. Crops have failed and debts have piled up. P Chengal Reddy, secretary general of the Consortium of Indian Farmers’ Associations, stresses how frustrating the situation is: ‘More than 60% of India’s agriculture depends on the monsoon season,’ he says. ‘Currently we are seeing 30% to 40% of farmland receiving less than normal rain since last year.’

In Thailand, the Mekong river hit record low levels until China took the unusual step of opening dams upriver to alleviate the situation. The aim of the release was to aid farmers not only in Thailand but also downriver in Cambodia, Laos and Vietnam. Unfortunately, Thailand made the unilateral decision to install four large pumps and divert more than 47 million cubic metres of water, which left Vietnamese farmers dry. 

Boost charges

In China, where water is very cheap, there have been calls to boost charges. Research by Global Water Intelligence shows that the average water price in 25 major Chinese cities was US$0.46 per cubic metre in 2011, compared with a global average of US$2.03 per cubic metre. Water rates in China are less than one-tenth of those of many developed countries such as the US, Germany and France. 

‘Low price is, of course, one of the many factors that lead to water waste, especially in those water-scarce regions like the North China Plain,’ says Liu Hongqiao, a researcher at advocacy group China Water Risk. 

‘Water prices cannot reflect the value and scarcity,’ adds David Chen Yongqin, professor of geography and resource management at the Chinese University of Hong Kong. ‘People take it for granted as it is a basic need.’ He adds that the demand for water is particularly large in developing countries, with make up most of Asia.

One example of how effective water management can go a long way towards alleviating even the most dire conditions comes from Israel, which has very limited freshwater resources.  

‘Israel adopted sustainable development guidelines and legislation to maximise the utilisation of existing water resources,’ explains Neil Wang, global partner and China president at Frost & Sullivan, an international business intelligence provider. ‘Meanwhile, it reshaped its pricing structure, reflecting the true value of water. Differentiated prices are set up for different user groups. For instance, for agricultural use, the prices are much lower than those for household use.’

In addition, Israel has built up one of the largest and most advanced desalination systems in the world and has established massive water recycling facilities, boosting the recycling rate of wastewater to above 80%, compared with just 10% in US, according to Wang.

Companies should take note, according to William Ambrose, global head of ownership strategies at Norges Bank Investment Management. ‘We expect that boards should incorporate water management into strategy, investment planning and risk management,’ he says. ‘We emphasise transparency and disclosure. We use such information to identify how water challenges may affect companies’ performance and prospects. We assess, as relevant, whether the company board and management are taking steps to develop a long-term business strategy addressing such challenges. As an investor, we analyse opportunities and risks to our investments.’

Multinational drug maker Bayer, for example, includes water issues in its planning. The company has introduced a number of initiatives to reduce water use, including awareness campaigns, more stringent monitoring of water consumption and leaks, and recycling cooling water. Admittedly, part of the focus is cutting costs. 

‘Our Ansung site in South Korea has been exposed to increased water and wastewater prices, which have averaged 5% per year for the past decade,’ says Bayer, quoted in the CDP Global Water Report 2015

With one in 10 people worldwide – almost twice the population of the US – lacking access to clean water, conserving the resource is more important now than ever. There is increasing understanding that water is not inexhaustible. Current levels of water use are significantly in excess of what is sustainable in the long run and estimates suggest that the shortfall will get much worse by 2030. 

‘Water impacts business beyond the agriculture sector because it is required for the production of goods, such as textiles, and subject to increasing energy related demands,’ Brabeck-Letmathe said at the Asian Financial Forum. ‘Nestlé has successfully introduced “shadow pricing” to set a cost for water use in its facilities that is tied to the local availability of water,’ he added. ‘The artificial price provides an incentive for factory managers to monitor usage more closely and use resources more efficiently.’

Lack of knowledge

While awareness about water scarcity has risen among companies and governments in the past decade, inefficient usage in agriculture and other areas is still a global issue, in part due to lack of knowledge. 

‘Politicians often favour more high-profile, short-term solutions that are often very inefficient, such as damming rivers and building canals, rather than addressing lower profile, long-term solutions such as working with local farmers on water conservation methods,’ Brabeck-Letmathe said. 

One example is the case of India. ‘We blame the government, which has not prepared for it,’ says Cecilia Tortajada, senior research fellow at the Institute of Water Policy at the National University of Singapore. ‘Farmers do not get long-term funding support as well as technical assistance, like they would get in other countries.’

Better water management systems, including funding and improved infrastructure, as well as a stronger focus on education could help.

‘Governments do not prioritise water infrastructure, such as waste water management vital to keeping rivers clean, in their infrastructure investment projects. Water is also typically not priced in a manner that reflects its true value,’ Brabeck-Letmathe said. ‘This creates a lack of financial incentive to implement the investment and practices needed for efficient management. In many cases, water is often seen as a very low cost or even free resource, leading to widespread waste.’

Pearl Liu, journalist