The business case against letting the well run dry

Do you believe climate change is a problem needing urgent attention? Have extreme weather events got you thinking about the personal or professional risks you face? Are you interested in how the global population will be fed in the future? Concerned about the mass migration of people in search for a better life? Worried about the outlook of energy production? If you answered yes to any of these questions, then you may also want to consider the vital element connecting all of the above: water.

Water management and stewardship: always the bridesmaid

Water permeates all aspects of society and the economy[i], and through its links to food,[ii] energy[iii] and security[iv] poor water stewardship poses very material structural risks on a global, regional and local level. Nine of the top ten risks in the World Economic Forum’s Global Risks Report 2019 are effectively about water[v] and it is paramount for the achievement of most Sustainable Development Goals.[vi] You may have heard that “if climate change is the shark, water is its teeth”. Still, despite knowledge of water’s critical role in sustaining the environment and society, it is hugely overshadowed by climate change, judging by media coverage as well as the level of meaningful political and corporate action.

Sustainalytics recently concluded a three-year thematic project on water including both cross-sectoral research and targeted engagement, and our experiences confirm this picture. Since 2016, when we started the initiative with an analysis benchmarking water management and disclosure within the food and beverage, garment and mining sectors,[vii] we have seen some change. However, a lot has also stayed the same. Our studies and dialogues indicate that while companies do acknowledge water as a potentially material topic, it doesn’t seem to make it to the top of the agenda but is rather destined to remain the bridesmaid to other issues stealing the limelight. Accordingly, the corresponding management responses and reporting are lagging. Our updated benchmarking published in June 2019 in cooperation with AP7 found that, based on public disclosure, corporate water management has not improved in the past two years. In fact, it has deteriorated.

Corporate water reporting paints a bleak picture

We are particularly concerned about assessed companies’ water intensity. Seventy-five percent of companies disclosed consistently increasing water use intensity over the last three years or did not provide any related information. Furthermore, 35 percent now show inferior performance compared to the first benchmarking exercise. This is not a sustainable way to conduct business in an operating environment where water will be an increasingly scarce and precious commodity, while being difficult, expensive or impossible to substitute in many essential processes. Moreover, of the 299 companies we analysed, 70 and 45 percent respectively received the poorest possible score on water pollution and water use goals, whereas 30 percent did not report on board-level responsibility and 23 percent did not report on water policies.

These findings confirm improvements around company water use and reporting are much needed. Companies would benefit from urgently assessing the macro-level water-related implications that pose potentially material risks to their intended business strategy. Equally important is mapping out where local restrictions relating to water access or quality may require operational adjustments and/or capital expenditure. If companies plan to continue with business-as-usual as our findings appear to suggest, they may be in for a very unpleasant and expensive surprise.

Silver linings: Underreporting and engagement impact

An optimist could also see some glimmers of hope. Firstly, we uncovered a notable improvement in board-level responsibility for water management and/or sustainability compared to 2017, with 65 of the benchmarked companies taking strides in the right direction. A strong commitment from the top is a crucial catalyst for companies to integrate ESG considerations in their business strategy and day-to-day operations. This trend can therefore contribute to process improvements and ultimately to positive impacts at the watershed level.

Secondly, while we were disappointed to see that water-related reporting did not match either the seriousness of the challenge or investors’ information needs,[viii] we have reason to believe there is more happening in corporate water management than is being reported. As part of this project, Sustainalytics coordinated engagement with selected companies on behalf of and in cooperation with six investors[ix] between 2017 and 2019. During this stage it became obvious that companies have completed many more risk mitigation and water stewardship measures than their disclosures would imply. This shows that companies could benefit from giving external stakeholders a fuller picture of their efforts by enhancing their water reporting. It also underscores the benefit investors can accrue through engagement, particularly regarding information that is not easily available in the public domain.

The engagement stage generated a third encouraging finding connected to the benchmarking. Of the 299 companies assessed, we engaged 17 of them in the two years between benchmarking studies, and when comparing the engagement companies’ 2019 results to the larger group, we saw a significant difference. Overall, only 30 percent of the whole universe performed better in 2019 compared to 2017, however, 65 percent of the companies in the engagement group showed improvement.[x] Similarly, where the engagement companies’ collective average score improved by 14 percent during the interim period, the average score for the universe deteriorated by 2 percent. The relatively small number of engagement companies might not be considered statistically significant, but this exercise nevertheless provides some evidence that investors’ active ownership measures can contribute to concrete impacts at the company level.

Engagement makes waves

Our engagement with target companies was aimed at conveying investor concerns regarding the identified shortcomings in water risk management, obtaining information and reassurances on the corresponding operational and strategic responses as appropriate to each company, and using the leverage that investors have to effect positive change at the company and issue level. We also spoke with five companies (found in our first benchmarking to be sector leaders) to gain insights on practical solutions that could be shared with their less advanced peers and to encourage the leading actors to continue raising standards on the ground and across the sector.

Sustainalytics’ approach to engagement is built on trust and mutual respect. We take pride in understanding and reflecting on company-specific circumstances as well as the bigger picture, and through constructive dialogue supporting and pushing for appropriate action. These discussions do not always end with a complete meeting of the minds and companies agreeing to all investor requests, but they are invariably informative and inspiring. The water engagement provided a rewarding opportunity to address these challenges with companies in very diverse stages of developing their strategic response to water risks and opportunities. We believe that such exchanges will continue to bear fruit years after the active dialogue has ended, bringing benefits to companies, investors and, potentially, affected communities. The benchmarking results suggest this is not only an optimistic view, but that engagement can indeed generate concrete results.

Will the blue be in vogue soon?

Water is a material risk. Action is urgently needed but progress painfully slow. As our recent blog post demonstrates, the impact of water challenges is already being felt at the local level, with projections indicating continued pressure on already strained resources. Sooner or later, wherever you live and whatever your business or investment strategy, problems with water access and quality will affect you – either directly or indirectly. Still, water continues to be overshadowed. As a resource, it’s not as appreciated in the market as oil, and is not an ingrained part of the public discourse like carbon emissions. Nonetheless, issues connected to water will continue to cause conflicts, threaten food security, disrupt electricity production[xi] and force populations to relocate. Fortunately, water will also carry on providing life, protecting health and facilitating development.

Investors can play a crucial role in ensuring water issues get the attention and backing they require, but their potential has so far been underutilized. There are many ways for investors to make their leverage count, with company engagement being just one example. Regardless, it is important to move from siloed thinking to a holistic approach: to succeed, water-related governance and solutions must involve trans-boundary, cross-sector and multi-stakeholder cooperation and be mindful of both the local and global context. As always, the prevention of irreversible water crises is cheaper than the cure, but the window for action does not last forever. We cannot afford to wait until the well runs dry before we understand the value of water.