Water is now a physical and reputational/brand risk - and opportunity - for your company. Though not new to the beverage sector, water has now emerged as a critical business issue in a wide range industry sectors.  By Will Sarni

I want to start with why investors care about your water risk because for publicly traded companies they represent one of your most important stakeholders.

First some background. During the past two months the Securities and Exchange Commission (SEC) issued guidance on risk from climate change to publicly traded companies and CERES, with support from UBS Investment Research and Bloomberg LP, released the report titled, “Murky Waters? Corporate Reporting on Water Risk - A Benchmarking Study of 100 Companies”.  While seemingly unrelated these two documents highlight the importance of water as a business risk and opportunity.

The SEC guidance, while focusing on material risk from climate change, underscores the increased risk from water scarcity. The SEC highlighted the following for companies (selected comments):

• While many companies voluntarily report information on their carbon footprint (and efforts to mitigate this footprint) the SEC may require disclosure of this information.
• A company may need to disclose information the extent to which the public’s perception could result in adverse financial consequences.
• Companies need to consider the risk from pending legislation and regulation of climate change.
• Companies should also disclose the opportunities that new climate change legislation and/or regulation could provide.

None of this is surprising. However, one of the most striking comments from the SEC is: “Changes in the availability or quality of water...can have material effects on companies.” Material effects mean both physical and reputational/brand risk.

The CERES report is focused on water risk and reporting and as such clearly lays out the nature of this risk and recommendations for companies and investors.

• “Include material water risk factors and performance data in financial filings;

• Provide data broken down to the facility level for operations in water-stressed regions, and disclose the percentage of facilities operating in areas of water-stress;

• Outline actions and policies for assessing and managing water risks, including quantified targets for reducing wastewater and water use;

• Disclose how they are collaborating with stakeholders and suppliers on water risks, including setting performance goals for key supply chains; and

• Outline strategies for developing water-related products with strong market potential in a water-constrained world.”

The report recommends that investors:

• “Engage the companies they own in water-intensive sectors about how they are assessing and disclosing water risks and related performance information;

• Ask their asset managers to assess and engage companies on water and other ESG risks and opportunities – and make this a stipulation in requests for proposals (RFPs) and annual performance reviews; and

• Support investor and corporate initiatives, such as the Carbon Disclosure Project, and the United Nations’ Principles for Responsible Investment’s work with the CEO Water Mandate, to achieve increased water disclosure.”

What to do?

What does this mean and what actions should companies take now? How a company manages physical and reputational/brand water risk requires companies develop a water strategy, which is fully integrated into their overall sustainability program (energy, carbon, material use and social performance)

Specifically, a corporate water strategy will include the following elements:

1. Determine your enterprise-wide water footprint (direct use and supply chain) and, if appropriate, evaluate the embedded water in key products (this is, essentially, “embedded risk”);
2. Identify and engage key stakeholders (investors, employees, suppliers, consumers, global NGO’s, community organizations, etc.) on water stewardship;
3. Identify ways to reduce water use (direct and supply chain);
4. Consider local water "offset projects" in collaboration with local and global NGOs (strongly recommend projects within the watershed);
5. "Re-value" water beyond the current cost of water (current water costs do not reflect the real value of water);
6. Determine physical, regulatory and perception/brand risks with direct and indirect water use; and
7. Be transparent in communicating your goals and performance.

These steps are not executed in series. In fact you will want to start mapping out an overall approach with several of these elements running concurrently.

While the physical risk from water (availability and business disruption) is easily understood (not necessarily easily quantified), there is the key issue of how water represents a very real risk and opportunity for your reputation/brand. This “embedded risk” to your company will be discussed further in my next SLM blog.

Will Sarni is CEO of sustainability consulting firm DOMANI. Will has over 30 years of experience and has worked with high-profile companies such as Alcoa, BASF, Cisco, DIAGEO, and NTT DATA in developing and implementing cost-effective sustainability strategies. He is a member of the Environmental Compliance Committee of the Chicago Climate Exchange and the Conference Board. Read Will's blog here.