With water demand set to exceed supply by 40% within 15 years, businesses and CFOs are realising that this issue also carries a significant financial risk beyond the human cost
This article was first published in the September 2015 China edition of Accounting and Business magazine.
Recent years have seen water make waves across the globe – catastrophic droughts in North Korea, Thailand’s devastating floods of 2011 and 2012, and gruesome images of dead pigs bobbing along China’s Huangpu river, their bloated carcasses contaminating reserves destined for Shanghai. Increasingly, businesses are taking note: water access is no longer misunderstood as a purely humanitarian issue; it carries significant financial risk – as well as several opportunities.
To contextualise the issue, the most recent edition of the World Economic Forum’s Global Risk Report ranks water crises as number one in terms of impact over the next decade. It is predicted that demand for freshwater will exceed supply by over 40% by 2030, at which point UN-Water estimates that 47% of the global population will be living in areas of high water stress. Of course, those areas won’t just be home to individuals; they’ll inevitably be places of business and manufacturing. Simply put, no matter whether global conglomerate or local cooperative, the implications of water security are non-discriminatory and potentially extremely costly – in all senses of the word. Thanks to its relatively low operating costs, shifting demographics and relative abundance of key natural resources, Asia is particularly vulnerable.
Natural resource accountancy has been on the agenda for some time. Most are well versed in depleting fossil fuels, greenhouse gases, carbon offsetting and the like. But water? That some 70% of the planet is covered in the stuff is grossly misleading in terms of the quantity – and quality – of usable H2O. The issue is freshwater – our rivers and streams, and above all their finite source, groundwater: reserves hidden beneath the Earth’s surface in soil and rock cavities. Part of the planet’s endless hydrological cycle, these aquifers naturally replenish from the surface. But when extraction overtakes organic replenishment, input becomes contaminated, or reserves become displaced, then problems arise.
Cate Lamb, head of water at Carbon Disclosure Project (CDP), explains: ‘For many years, water has been viewed as cheap, readily available and abundant. What adds a certain level of complexity is that unlike fossil fuels, for which there are many alternatives and technologies in constant development, there really is no alternative for water.’
An international not-for-profit entity, CDP was launched with carbon in mind. Working with stakeholders spanning communities and governments, it incentivises companies large and small to measure and disclose environmental information. This data is used by international financiers to inform investment decisions, and predict risk.
The organisation first turned its attention to water in 2009, and in 2010, it received disclosures from some 150 companies. Headed by Lamb, the programme has grown exponentially: 1,064 companies responded to last year’s water questionnaire, details of which have recently been shared by CDP. The findings are used by investors collectively managing more than US$63 trillion. High stakes indeed.
A hot global topic rightly working its way up CFOs’ agendas, Asia faces a unique set of challenges with regard to water security. Take China: home to 20% of the world’s population, it accounts for just 7% of the global fresh water supply. Coupled with the country’s rapid urbanisation, economic expansion and ongoing industrialisation, this imbalance becomes a real cause for alarm.
Amongst Asia’s thirstiest industries are beverage manufacturers, agriculture, chemical and pharmaceutical, and perhaps most notorious of all both in terms of consumption and pollution, fashion. However, as Gary Sharkey, global sustainability network director at PwC, observes, such industries represent just the tip of the iceberg.
‘You can’t look at water use without considering energy. Steel, chemical, heavy manufacturing – yes, they all use a lot of water, but also a lot of energy. Energy itself is one of the greatest water users in many economies. So as CFOs are now trying to understand their water use, a lot of that relates to the water supply chain.’
Though highly vulnerable to issues of water security, supply chains can also create opportunities for businesses looking to clean up their act. ‘In a lot of cases, businesses’ most direct means of engaging is with their customers and suppliers,’ Sharkey explains. ‘The supply chain is where you see a lot of water risk coming up. It links to the UN’s Principles of Responsible Investment. We’re seeing investors calling out retail companies for not adequately (a) investing or (b) engaging with their supply chain to give them the tools and knowledge upstream, and help them address the risks.’
Both PwC and, in particular, CDP work closely with governments and policymakers on devising, implementing and enforcing water regulations. And, as a handful of companies have discovered, governments across the board are taking water very seriously indeed. Take gold mining company Barrick Gold Corp: with no adequate means of containing and treating contaminated groundwater at their Pascua facility in Chile, the group was refused a licence to operate in the area. ‘A wonderful example of a stranded asset,’ explains Lamb.
Though encouraging, for many regions a tightening of regulations comes too late. Clean, quality water is already in short supply. Tellingly, some 22% of Global 500 companies who responded to CDP’s most recent water questionnaire anticipate worsening water security » will constrain growth. ‘Take Unilever,’ says Lamb. ‘It’s viewing emerging markets as burgeoning places for its products and services, but these also represent locations where water supply is becoming more scarce – particularly in the APAC region. As a result, consumers in these areas who would typically buy Unilever products are now having to make decisions as to which daily chores receive their small allocation of water. That’s likely to have an impact on Unilever. In response, it’s creating more waterless products; those that require less water for use.’
Unilever’s response touches on another important element of water stewardship: local communities. For Hannah Routh, director of sustainability and climate change at PwC in Hong Kong, the societal value of water is just as important as its financial worth: ‘Businesses have lobbyists and marketing departments, five-year strategies and so on – they’re more likely to be asking for the water they need – or grabbing the water they need – whereas communities are less likely to have that, and are therefore more likely to be affected by water scarcity. CFOs should take the initiative to internalise the externalities; that is, the value of the water they use – not the dollar value that they pay, but the societal value.’
In order to be effective, water stewardship calls for a collaborative approach. ‘Collective action is absolutely necessary,’ stresses Lamb. At a river basin level, tools such as the UN Global Compact Water Action Hub allow companies to identify others sharing the same water source. ‘Identifying and coordinating partnerships on the ground is often one of the barriers to action,’ Lamb explains. ‘Acting alone, there’s a real risk these companies become a clean fish in a dirty pond. If a company upstream can get away with polluting the freshwater resources that the company downstream relies on, that implies additional costs or risks for the latter. It’s in the best interests of companies collectively to establish a level playing field within their basin.’
Water security, it would seem, makes for risky business. However, one need only look to Singapore to appreciate how these potential vulnerabilities can translate to opportunity. ‘For decades, Singapore purchased all its freshwater from Malaysia, but it’s unwise to be totally reliant on external countries or companies for this fundamental resource,’ says Sharkey.
‘So it invested heavily; it gave tax benefits and tax breaks for the application of water-efficient technologies; it encouraged local businesses and universities; and invested in local research and development programs to support desalination and water-efficient technologies, as well as water meters. It turned extreme water stress into a source of growth, resulting in new business models and technologies. There’s certainly an opportunity both in Asia and beyond to make the same sort of strategic investments.’
For CFOs, water accountancy can be a daunting prospect. Routh says: ‘In places like China where very few water meters are in place, most businesses have trouble telling you how much water they’re actually using, and have little data for how much they’ll have in two, five or ten years. The issue is mainly being driven by the NGOs and, as a result, companies are more exposed. [In terms of investment], that leads to better decisions being made, not only on the financial side, but also for a variety of indicators, including water.’
The tide is turning: water matters. The resounding message to CFOs is to be aware of the risks, be active in water basin communities and, above all, keep account of this most remarkable and vital resource.
With thanks to Roger Burritt, professor of accounting and sustainability at Macquarie University, and Katherine Christ, senior research assistant at Macquarie University.
Frances Arnold, journalist