Water Risks To U.S. Companies Are Becoming More Acute

This contributed column is sponsored by Business Facilities LiveXchange.

Posted by Heidi Schwartz

Water security risks are increasing and will significantly impact business continuity if left unaddressed, according to the CDP U.S. Water Report 2013, prepared by Deloitte.  Even as water risks become more acute, the majority of Standard & Poor’s 500 index (S&P 500) companies facing water risks lack strategic plans to adequately address these risks.

CDP U.S. Water Report 2013 is based on information provided by 145 companies listed on the S&P 5001at the request of 530 institutional investors representing $57 trillion in assets to disclose through CDP, formerly known as the Carbon Disclosure Project, providers of the only global environmental disclosure system. The CDP U.S. Water Report 2013 was launched at the CDP U.S. Water Forum on November 18, 2013.

More water-related risks are identified, impacting business continuity
While the number of U.S. companies participating in CDP’s water program this year2 increased 4 percent to 145 from 2012, risks reported increased 16 percent. The majority (58 percent) of the 523 risks reported are expected to be felt now or within the next five years.  Furthermore, nearly half (46 percent) of the companies analyzed have already experienced detrimental impacts related to water, with costs as high as $400 million and projected impacts as great as $1 billion.

Deloitte Consulting LLP’s water stewardship engagement structure.

Most businesses appear to lack strategic responses to water-related risks
Board-level oversight of water-related issues has increased 13 percent from 2012, but is still relatively low at 32 percent. This compares unfavorably to findings of the recently released CDP Global Water Report 2013, which analyzed 180 of the largest global companies listed on the FTSE Global 500 Equity Index and found that 58 percent have board-level oversight of water-related issues.

While 94 percent of the S&P 500 respondents can identify which, if any, of their operations are located in water-stressed regions, 43 percent do not know if key inputs or raw materials come from regions subject to water-related risk – potentially leading to business interruption.

Companies are overlooking risks within their value chain
There was a significant increase (23 percent) in the proportion of companies setting concrete, quantifiable water-related targets or goals, but unfortunately the majority of these companies focus solely on water management within direct operations such as usage reduction, efficiency or compliance.  Companies that continue to focus on direct water risks only could be missing business opportunities and overlooking substantive risks within their value chain that could be mitigated.

Companies with robust water stewardship strategies typically have comprehensive knowledge of water use across their value chain and are aware of the current and projected impact that water-related issues have on their business. Most importantly, they have appropriate plans and processes in place that give adequate consideration to priorities of the local watershed in which they operate.

Cate Lamb, head of CDP’s water program, says, “U.S. companies are improving their ability to identify the wide variety of risks that water presents them.  However, their response to these risks lacks strategic direction and clearly demands some catch up on the part of the corporation.

“If businesses are to become truly resilient to the growing threat that water poses, they must develop a comprehensive understanding of their relationship with water and strive for stewardship.  Those that fail to develop a holistic water stewardship strategy may struggle to maintain the strong financial returns expected by their investors.”

Will Sarni, leader of Deloitte’s enterprise water strategy practice, said, “The shift from awareness of water risks to quantifying the ‘business value at risk’ from water scarcity and quality is gaining traction. Companies now need to quantify potential business value at risk from water and integrate water availability into business growth strategies – a focus on ‘water as a license to grow mindset’.

“Effective water stewardship strategies should also include identification of opportunities to create strategic advantage.  Companies cannot address water-related risks alone, and must therefore develop a proactive approach to water stewardship with a focus on external engagement to mitigate water-related risks, increase resiliency and identify business opportunities.”

Lamb added, “In 2014, CDP will trial the world’s first public water scoring methodology on a confidential basis with Global 500 companies, as listed on the FTSE Global 500 Equity Index.  A wide range of stakeholders will be consulted throughout 2014 to test and refine the methodology, which will be fully implemented across all respondents in 2015.  The resultant water scores will be a key component in driving improved disclosure and corporate water stewardship.  For investors and other stakeholders, scores will highlight how prepared a company is in the face of rising water challenges.  The markets will favor companies that lead a collaborative approach to safeguard water as a vital shared resource and contribute to sustainable revenue generation.”

1 These companies were selected from the largest publicly listed companies by market capitalization at the time of the analysis (Q4 2012) based on the Standard & Poor’s 500 Index (S&P 500).  345 S&P 500 companies were invited to respond to CDP’s 2013 water questionnaire because they are considered to have the greatest potential to impact, or be impacted by, water resource issues.  148 of the 345 companies responded and the analysis in the report is based on the 145 responses submitted by August 9, 2013.

2 Prior to the deadline of August 9, 2013.