Access to water is essential to all business operations, but climate change, growing populations, and urbanisation all pose supply risks - How can firms deliver on SDG6's water security aims
It almost goes without saying that clean water is a basic human need. It's essential for virtually every aspect of human health, wellbeing and prosperity, from drinking, hygiene, and health to growing food and producing goods.
But while it is obvious to everyone that water is crucial to life, less appreciated is its importance to business. All companies rely on plentiful, high-quality water to varying degrees, yet too often it is taken for granted, even though for the past eight years a water crisis has been cited as one of the five biggest risks in the World Economic Forum's influential Global Risks Report.
It's a crisis that's not just reserved for the future. We are already seeing water risks play out on the world stage, from devastating floods in India to multi-year droughts in California. Serious pollution events are another major threat, from the Deepwater Horizon oil spill in 2014 to lead contamination in Flint, Michigan and horrific recent accidents at mines in Brazil.
The economic impacts can be severe. For example, the World Business Council for Sustainable Development (WBCSD) estimates that the combination of the heat and low rainfall during the 2018 European heatwave reduced the flow of the Rhine, resulting in a 0.7 per cent curb in economic growth in Germany.
Meanwhile, the impacts of climate change, including sea level rise, are starting to have a profound effect on infrastructure, including road, railways, ports, power plants, and wastewater treatment, as well as food and beverage production, production of drinking water and tourism. Water-related hazards, including floods, storms, and droughts, are responsible for nine out of 10 natural disasters.
These climate impacts are falling on a global water system that is already not fit for purpose. Every day billions of people face daily challenges accessing even the most basic of services, the UN says. "Around 1.8 billion people globally use a source of drinking water that is faecally contaminated," it grimly points out. "Some 2.4 billion people lack access to basic sanitation services, such as toilets or latrines. Water scarcity affects more than 40 per cent of the global population and is projected to rise. More than 80 per cent of wastewater resulting from human activities is discharged into rivers or sea without any treatment, leading to pollution."
The problem looks set to only get worse. The combined effects of growing populations, rising incomes, and expanding cities will see demand for water rise exponentially, while supply becomes more erratic and uncertain, the World Bank predicts. With current population growth and water management practices, the world faces a 40 per cent shortfall between the amount of water that is available and what is required.
Wherever you look, everyone is having to think about water security - Jim Totty, Earth Capital
The battle for freshwater will be more intense in certain regions of the world, warns Jim Totty, managing partner at Earth Capital. "More than 200 river basins cross international boundaries and are political flashpoints," he tells BusinessGreen. "Asia has 60 per cent of the world's population but only 36 per cent of its water, while the Middle East and North Africa have six per cent of the population but just two per cent of the water."
And with 70 per cent of fresh water going to agriculture, feeding a growing population will increase water withdrawals by 15 per cent, while more freshwater will be diverted to provide energy for the growing economy. Yet at the same time, we are depleting our groundwater faster and by 2025, about 1.8 billion people will live in regions with absolute water scarcity.
"Wherever you look, whether it's agriculture, industry or at government level, everyone is having to think about water security," says Totty.
The essential ambitions of SDG6
This is the stark context in which SDG6 - the UN Sustainable Development Goal targeting clean water and sanitation for all - exists.
SDG6 states that by 2030 there should be universal and equitable access to safe and affordable drinking water for all. Sub targets include an end to open defecation, improved water quality by reducing pollution, dumping and release of hazardous chemicals and materials, and more efficient use of water to help deliver a substantial reduction in the number of people suffering from water scarcity.
The goal also aims for better water management at all levels of society, and more international support to help countries develop water harvesting, desalination, water efficiency, wastewater treatment, recycling and reuse technologies. More effort should also be made to protect and restore water-related ecosystems, including mountains, forests, wetlands, rivers, aquifers, and lakes.
It's a hefty to-do list, but a review of the Goal in 2018 found the world is not on track to meet the targets. "Too many people still lack access to safely managed water supplies and sanitation facilities. Water scarcity, flooding and lack of proper wastewater management also hinder social and economic development. Increasing water efficiency and improving water management are critical to balancing the competing and growing water demands from various sectors and users," the High-Level Political Forum on Sustainable Development reported.
There is no shortage of target setting, but the challenge is translating that down to the local level - Emilio Tenuta, Ecolab
Businesses are at risk if we fail to achieve the SDG 6 targets, warns Cate Lamb, director of Water Security at environmental disclosure group CDP. "SDG 6 is the best articulation we have of what water security looks like," she tells BusinessGreen. In other words, meeting the ambitious aims of SDG6 is the surest-fire way for firms to ensure continued access to plentiful fresh water.
The problem, says Tom Williams, director for water at the World Business Council for Business Development, is that water is a global issue but it manifests itself at the local level. "Companies are not getting to grips with how to deal with this and unfortunately, sometimes it takes a crisis to bring action," he says.
Long tail losses and deficient data
Companies reporting on water to the investor-backed CDP disclosure initiative reported $38bn of water-related financial losses in 2018, Lamb says. These losses can have a long tail; the figures were dominated by Japan's Tepco, which is still suffering from the Fukushima nuclear disaster in 2010 and Brazilian mining company Vale, which is still counting the cost of the Sanmarco mining disaster four years ago. Vale's water-related costs will rise still further following the fatal collapse of a dam at its Brumadinho mine at the start of 2019.
Lamb explains that actual losses across the board are likely to be higher, because of the 783 companies that disclosed water impacts, just 200 had data on water-related losses. More companies are aware of the water-related issues now, but there is no standardised approach to identifying and quantifying losses. Some companies report only direct financial losses, such as factory closures, while others account for wider costs such as disaster recovery and measures to make facilities more resilient.
Ecolab, which has created a number of tools to help companies measure and manage their water consumption, says 74 per cent of respondents to its State of Corporate Water Management survey said that water was an increasing priority, and three-quarters had targets on water consumption and treatment.
But almost half of those questioned did not have plans to achieve their targets at a local level. "There is no shortage of target setting, but the challenge is translating that down to the local level," says Emilio Tenuta, vice-president of corporate sustainability.
CDP's Lamb offers a more optimistic take. "We want business growth to be decoupled from water depletion," she says. "Companies represent 70 per cent of water use, and high-impact activities in sectors such as food and drink, mining and energy are undermining our ability to meet SDG 6 targets. The pursuit of water resilience by businesses will help us to achieve the targets."
However, while there are pockets of good practice, just 31 companies made CDP's water management A list of leading performers this year. The result was sharply down on last year's 75, but this is in part because CDP raised the bar "to reflect the urgency of the challenge and the fact that some behaviours have become normalised".
Companies are not doing worse than before, Lamb says, but they are still not doing enough. The number of companies identifying water risks has risen year on year, and the number setting targets on water use has doubled, "but despite that, fresh water withdrawals have also increased", she points out. "We're concerned that there has not been even a modest reduction in water use, either globally or at particular sites where companies have identified specific risks," she adds.
The problem, Lamb says, is that water does not get enough attention in the board room. Fewer than a third of companies (31 per cent) have incentive policies based on water withdrawal and half that amount (15 per cent) have pollution-related incentives. Yet we know that incentives work - Lamb says companies with executive pay policies linked to carbon reduction are nine times as likely to meet their targets as those that don't.
If companies cannot reduce their water use voluntarily, they may face new regulation to make them do so, or a backlash against their operations from local communities. "The risks businesses face are not necessarily hydrological," Lamb says. "The amount of water they abstract may be only a small fraction of the total, but if local communities think your water consumption is too high, then this becomes much more of a reputational and brand value issue. We have seen how local perceptions can lead to companies losing their social - and their actual - licence to operate being taken away."
The risks businesses face are not necessarily hydrological - Cate Lamb, CDP
The most famous examples of reputational damage are the travails of Coca Cola and Pepsi in India, where they have faced sales bans and trader boycotts over claims they were over-exploiting national water resources. "If you operate in the global South, you are compelled to deal with this now," Williams says. "Indian CEOs say this is one of the top three issues that keep them awake at night. This might not be right at the door of CEOs in developed markets, but within the next five years, they're going to have to deal with it."
Water use by companies can be a very sensitive issue, particularly in areas where communities have not been a priority for governments for many years, Lamb says.
Now companies operating in India and other water-stressed markets are having to commit to comprehensive water stewardship to retain their licence to operate.
For many firms, helping to meet the targets of SDG6 requires a new approach to growth and new ways of thinking about water. "Many businesses are founded on the unconscious assumption that they will always have access to the quality and quantity of water they need and we know that is no longer true," Lamb says. "Businesses would do well to test that assumption again and innovate so they can be part of the solution rather than part of the problem."
It is important that these companies survive by becoming more sustainable, rather than closing operations, because they are often a crucial source of jobs and economic development. The 780 companies that responded to CDP's survey employ 36 million people around the world.
According to many experts, the key to sustainable water use for firms is the concept of water stewardship. Companies need to mitigate three key risks, Ecolab's Tenuta explains: the physical risk of having enough water make your products; regulatory risk, as authorities respond to reduced supplies; and reputational risks. "Iconic brands need to demonstrate to their stakeholders that they are taking action and being water stewards," he adds.
The first step is to establish where your company and your facility sits on the water maturity curve. There are four stages, Tenuta explains:
- Untapped - these organisations don't have a water management plan but water issues are getting in the way of doing business
- Linear - these businesses are interested in water conservation but will not take action unless there is a strong business case for doing so
- Exploratory - these companies have mastered water efficiency and conservation and are starting to look at reuse and recycling
- Water Smart - these are the corporations going beyond managing their water use and starting to integrate water management into their product design and manufacturing expansion plans
Stewardship is in part about developing products that can help solve water problems. For example, companies such as Unilever are developing products that can be used without water - what it calls "water-smart products for water-stressed living". These include new products or formulations that work well with less water, such as easy-rinse laundry products. "However, water-efficient products on their own aren't enough when many communities still lack access to a clean, reliable local water supply," the company adds. "That's why we're also investing in new projects and business models that can increase access to water, including the creation of community hygiene and water centres."
Targets are essential for focusing ambition. Drinks producer Pernod Ricard is not just looking to cut its water use per litre of alcohol distilled by 20 per cent from 2010 levels globally, but is also taking extra measures to address water use in water-stressed markets such as Mexico, Argentina, China, Australia, and India, where its ambition is to replenish all the water that it uses by 2030. Heineken's Vision 2030 has similar ambitions.
And, as CDP notes, linking targets to pay can also be an effect motivator for change. German flavours and fragrances group Symrise has linked a tenth of the remuneration for its CEO, CFO, and CSO to sustainability targets in a bid to drive water savings and other improvements.
Such targeted initiatives are crucial because quality and quantitative issues change from one watershed to another. For multinational companies operating in water-stressed areas, a zero-impact approach is now the minimum requirement, says WBCSD's Williams. But targets must be based on local contexts to have any meaning, he adds.
At the same time, it is hard to separate water from other issues addressed by the SDGs. For example, Ibstock, a UK maker of bricks and other building products, gets about half of its water from the mains and the rest from rainfall harvesting and recovered water from its quarries. Its focus is on reducing its use of mains water, not only because it eases water stress but also "because it takes a lot of energy to treat, pump, and distribute water". "[Water] has a big carbon footprint," explains Michael McGowan, the firm's group sustainability manager.
Collaboration is key
You cannot look at water in isolation as a single issue, argues Greet Vanderheyden, senior sustainable development manager at Alpro, the maker of almond and soy milk. "A healthy water ecosystem has a big impact on other SDGs such as Life on Land, Good Health and Wellbeing, and Life Below Water," she explains. "That makes it more complicated because there are trade-offs."
The flipside of having to consider your water issues locally is the need to look beyond your own operations at a watershed level. Even if you make your own operations more water efficient your supply may still be at risk because of what others are doing in the watershed. That makes it vital to collaborate on water issues with other stakeholders.
"Unilateral water management has limitations and may present companies with dilemmas," says Norges Bank Investment Management (NBIM), the Norwegian sovereign wealth fund. "Collective impact assessments and action from various water users in a basin may play an important role to reduce risks and capitalise on opportunities."
Talking to other stakeholders, both public and private, is vital, Williams adds. "However, this is challenging for many businesses because it takes them out of their comfort zone," he warns. "Bringing everyone together to agree on a common objective and the status of a basin takes a lot of time. Companies often want to act quicker than they can and they get frustrated."
Investors are also becoming increasingly interested in water, not just as a business issue but as an investment proposition as well.
"SDG6 focuses the minds of institutional investors on the fact that water will be a key priority in the sustainability revolution that will happen over the next 20 to 40 years," says Earth Capital's Totty.
Water is one of a range of issues on which Norges Bank Investment Management (NBIM) publishes expectations, analyses, and engages with companies. "How companies manage water risks and capitalise on opportunities may drive long-term returns for us as a shareholder," the fund says. "Externalities from unsustainable water use may in itself present a risk to the portfolio's long-term value. We expect companies to incorporate potential water risks in strategic planning, risk management and reporting."
We expect companies to incorporate potential water risks in strategic planning, risk management and reporting - Norges Bank Investment Management
Traditional water funds run by asset managers such as Pictet and Impax focus on solutions providers such as Danaher, a maker of purification systems, utilities such as Severn Trent and Veolia Environment, and Ecolab, which has a smart Smart Water Navigator tool to help companies monitor and reduce their water use.
There are also exchange-traded funds (ETF) such as the Guggenheim S&P Global Water Index, which includes 50 companies that are expected to benefit from rising water demand, the PowerShares Water Resource Portfolio ETF, which focuses on US mid-cap and small-cap firms focused on water treatment and conservation. Meanwhile the PowerShares Global Water Portfolio includes companies with a similar focus but a higher market capitalisation and tracks the Nasdaq OMX Global Water Index.
The rising investor interest means companies must be prepared for their water strategies to be in the spotlight.
But in the future, investors will also need a better understanding of the role they play in managing water risks, and will have to be more transparent and accountable for enabling better performance across the economy. "Banks control two thirds of the world's money but at the moment, there is no requirement for them to work to improve water security," Lamb points out.
However, regulators in a number of countries are set to change that. China's financial regulator, for example, is moving to mandate more environmental disclosure by financial investors, while the European Union's High-Level Expert Group on Sustainable Finance is developing a taxonomy that would see finance groups having to disclose how they integrate environmental, social and governance (ESG) issues - including water - into their investment processes.
"Banks and other players are seeing the writing on the wall and if they act it could put pressure on the biggest companies to act, which would feed down through supply chains, so that throughout the system, there was a move to demonstrate improved water management and increased transparency," says Lamb.
CDP is playing its part by moving to align its water questionnaire with the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations, via the introduction of the concept of transition risks. This means that in future, CDP will ask firms how their business strategy is aligned to SDG6 and what are they doing to meet their targets.
"We will see a transformation in the way companies see themselves - they will look at entire systems and the role that their activities have to play across the system," predicts Lamb. For example, in the agricultural sector, retailers will be really important in changing the behaviour of food and beverage producers, and ultimately individual farmers.
"The retail sector is a $28tr industry that sits at the top of the agricultural food chain and it has the potential to drive huge improvements in meat production and crop growing around the world," she says. "But from a disclosure, transparency and performance perspective, it's not good enough."
A torrent of opportunity
There are huge opportunities in addressing water risks, says Totty, whose Earth Capital fund invests in a range of water-focused companies. Propelair, for example, makes toilets that use air pressure to reduce the amount of water consumed per flush from five to 10 litres to just 1.5 litres. Another company it invests in, Arvia, has developed an energy-efficient filtration system that removes micro-pollutants from water.
Others are working on ways to reduce water consumption and land degradation by producing everything from salmon and prawns to tomatoes and lettuce using "indoor farms". "We have a long way to go but the fact that ESG funds are outperforming their non-ESG peers will help attract more capital into the water sector - and it caters for a range of investor requirements," Totty says. "If you want utility-type returns, you can invest in UK water companies, if you want infrastructure returns you can put your money into hydro-electric schemes and you can find VC-type returns from picking new technologies and services."
It has taken companies a while to see through the fog of risks, but they are now waking up to the opportunities that are out there. - Tom Williams, WBCSD
There are also growing opportunities in circular water management, which companies such as DuPont are exploiting, but companies are only just waking up to the opportunity, says Williams. "It has taken companies a while to see through the fog of risks, but they are now waking up to the opportunities that are out there."
Ultimately, says Lamb, "the business community has to stop looking at this as a water problem and start dealing with it as a business problem". Decisions on raw material and resource use depend on a company's growth strategy, which is not taken at a factory or a farm level, but in the board room. "Once those decisions have been taken, everyone works in train with those decisions," she adds. "Failing to address water risks at the strategic level clearly exposes companies to potentially huge financial losses."
Water is essential not only to life, but to business. With the strain on global water supplies only set to rise, and climate change expected to dramatically shift the way water is distributed globally, often via sudden, violent and destructive events, we can no longer afford to take the resource for granted. The aims of SDG6 may seem almost impossible ambitious, but delivering on them will be vital for ensuring every other aspect of the low-carbon and sustainable development story flourishes.
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