Multinational companies are feeling the burden of tackling water scarcity, in which a lack of water halts product production, exacerbates other risks and causes revenue shortfalls.
In a Carbon Disclosure Project (CDP) report, “Moving beyond business as usual,” which presents data on the water-related disclosures of 184 global corporations, 70 percent of respondents identified lack of water as a substantive business risk. Some respondents anticipated financial impacts as high as $1 billion. In addition, 64 percent said water-related risks would impact their business now or within the next five years. Emerging nations as well as developed countries are prone to water scarcity, which can arise from droughts, population increases and escalating water use.
Yet the CDP report found most companies do not have a water strategy, instead opting for a “business-as-usual” approach. A CFO has to take issue with water scarcity or their business could suffer, says William Sarni, Deloitte’s director and practice leader for enterprise water strategy as well as a co-author of the report.
Sarni says CFOs have to ask, “If I’m planning on 50 [percent] to 100 percent growth trajectory over the next 10 years, do I have enough water to support that?” Indeed, companies are already feeling the repercussions of not knowing the answer. In one year, the number of near-term substantive water risks reported by companies has increased by 16 percent to 614 risks, according to the report.
The risk has already turned to reality for some companies. Copper and gold producer Barrick Gold experienced a water shortage at one of its mines in Papua New Guinea in 2010, forcing the plant to shut down for two weeks; the loss of revenues was undetermined, according to the CDP.
To manage business disruption, companies need to allocate their water properly so production volumes are capped. If a company is faced with a water shortage that shuts down a manufacturing site for a week, that may seem like just a speed bump with little overall impact. However, if that week turns into a month, it could “disrupt [a company's ability] to operate and impact it financially,” Sarni says.
Companies are starting to recognize water scarcity and are taking precautions by mapping risks, investing in efficient processes in direct operations, engaging their supply chain with water-efficiency programs and using more conservation-oriented products, he explains.
Sarni generally advises C-suite executives to “not pay attention to the price of water but pay attention to how important water is” to the company’s reputation. ”If you just pay attention to the price of water, you may not be paying attention to people’s perceptions of how you’re using the resource,” he says.
Many companies, he says, are addressing water-scarcity issues by focusing on sustainability efforts. Just as companies take pains to reduce their carbon footprint, they can cut their water consumption. Companies can reuse water in some instances or may be able to stop using water at all. “Resource scarcity drives innovation,” Sarni says.
The beverage sector in particular has been “focused and aggressive” in producing the same product volume with less water. Food-and-beverage companies are investing in technology, engaging with producers directly and taking collective action with non-governmental organizations to aid geographic areas hard-hit by low water supplies.
For premium drinks company Diageo, water is used in almost all of its products. Twelve of Diageo’s 119 production sites are in water-stressed areas, with Africa facing the biggest water shortage. However, the company has improved water efficiency in operations in Africa by 32 percent since 2007 because of major investments as well as operational improvements relating to equipment, processes, culture and behavior, according to Diageo’s 2013 annual report.
Business strategies related to water use will have to change at many companies, Sarni says, because some have “no awareness of the issue” at all. In some instances, return on investment calculations will require modification also. Companies that are acknowledging water scarcity are building that risk into investment decisions through “shadow pricing” — an internal price that’s set above the actual price of water, which is done if a company believes a water shortage is a risk to a line of business or project.
Equity investors can play a role in educating companies and raising awareness through communications with investor relations and the CFO, says Sarni. However, CFOs may prefer figuring out to manage this emerging risk before being forced to by shareholders.