Businesses see increased water risk but boardrooms slow to act

October 23, 2012 | Department Of Agriculture, Rural Development, USDA, Utilities

LONDON AND NEW YORK (CDP) — There is a sharp rise in company reports of detrimental impacts from drought and other water-related issues yet little change in the number of companies with board-level oversight of water strategies and no increase in the number of corporations providing transparent water-related risk assessments to investors. These are some of the key findings from a global analysis of the largest-listed companies released today by the Carbon Disclosure Project (CDP).

The CDP Global Water Report, prepared by Deloitte, is produced for 470 investors representing $50 trillion in assets and is based on information submitted to CDP by 185 Global 500 companies. The 2012 report reveals that over half of companies (53% up from 38% in 2011) have experienced negative impacts from water-related challenges including water scarcity, flooding, rising compliance costs, regulatory uncertainty and poor water quality in the past five years.

This has likely helped catalyze the growing awareness of water risk, with a jump from 59% to over two thirds (68%) of companies viewing water as a substantial risk to their business. Corporations perceive these risks as real and current, stating that the majority (62%) have the potential to impact their businesses by 2017. Similarly, more companies this year identify commercial opportunity arising from an effective water stewardship strategy (71% up from 63% in 2011), and 79% of the opportunities reported have the potential to generate a substantive change in business now or in the next five years, some with a sales potential of more than €800 million by 2020.

Despite these significant risks and an improvement in awareness of supply chain risk — 71% of respondents are able to state whether or not they are exposed to such risk, up from 62% in 2011 — a third (29%) of respondents remain unable to provide a complete picture of water risks by failing to establish if water threatens their supply chain. This could be linked to the limited number of companies recognizing water as a board level issue. While reported risks and opportunities have risen notably in comparison to 2011 response rates, companies citing board-level oversight of their water-related policies, strategies or plans has increased by just 1% to 58%. Furthermore, the percentage of firms responding to the investor request for water information through CDP remains the same as last year at 60%, while the proportion with concrete targets or goals in areas such as water efficiency and quality improvements has decreased from 57% last year to 55%.

“We look to Global 500 companies for examples of leadership,” says CDP’s chief executive officer Paul Simpson, “While it is encouraging that their awareness of the commercial risks and opportunities associated with water is improving, progress in responding to them is varied and in many cases insufficient. We need to see greater corporate accountability through more transparency, concrete targets and goals and board level oversight of water-related issues.”

An encouraging three quarters (74%) of respondents are taking some form of collective action to develop collaborative solutions to address water-related problems and enjoy shared benefits.

“Global business leaders, especially in Global 500 companies, must understand their business value at risk from water related issues and implement strategic plans to help mitigate these risks. Increased competition for water, a finite and irreplaceable resource, requires prompt action now,” says William Sarni, director and practice leader of Enterprise Water Strategy at Deloitte Consulting LLP, “These companies can set the tone for how smaller business can contribute to making informed water decisions.”

Although more than 100 additional investors have this year asked companies to report their water strategies and use through CDP’s global system, there has been no change in the number of companies disclosing.

“A higher proportion of companies in 2012 identified water as a substantive risk or opportunity compared with the previous year. While we welcome this increased awareness, companies need to improve transparency on their water management strategies. Companies should disclose metrics that show their exposure to water-related risks and opportunities, and that measure the performance of their water management strategy. This will provide important information for investors seeking to manage water-related risks and opportunities in their portfolios,” says Jan Thomsen, Chief Risk Officer at Norges Bank Investment Management (NBIM), manager of the Norwegian Government Pension Fund Global.

Paul Simpson added, “We know that it can take companies some time to catch up with measurement, strategy and action once they identify risk so we expect to see more companies developing water strategies and disclosing next year”.

Of the sectors responding, only 44% of the Energy sector companies requested to provide water information responded, placing the sector as the least transparent for the second year running. Health Care has retained its position as the most responsive in reporting with a 77% response rate.

The CDP Global Water Report 2012 is being launched at the CDP Global Water Forum, which is being broadcast live via the internet from 09.00 EDT. The report and public company responses are available to download at the CDP website.