A green economy: What lawyers need to know

Water Scarcity: A Critical Climate Change Challenge for Business

Grayson_Lynn_COLORBy E. Lynn Grayson

 

While reduction of greenhouse gas emissions is the best known, most often debated climate change challenge, water scarcity is emerging as the more significant concern confronting the international environment. A report recently released by Ceres and the Pacific Institute, Water Scarcity & Climate Change: Growing Risks for Business & Investors, details the risks posed by the declining availability of water resources throughout the world.[1] The Ceres/Pacific Institute report concludes that climate change will exacerbate these water risks, especially as the world population grows by an expected 50 million a year. This report supports other recent findings from the Intergovernmental Panel on Climate Change concluding that global warming will lead to changes in all components of the freshwater system and that water and its availability and quantity will be the main pressures on, and issues for, societies and the environment under climate change.[2]

The report stresses the importance and the urgency for business to take action in response to increasing water demand, existing water scarcity and non-sustainable supply issues and declining water quality. According to Ceres, businesses face certain economic risks in failing to address water shortages in a timely and effective manner. Some businesses clearly have grasped the significance of this environmental challenge as emphasized in the recent comments from Nestlé’s Chairman Peter Brabeck-Letmathe. “I am convinced that, under present conditions and with the way water is being managed, we will run out of water long before we run out of fuel.”[3]

This article highlights the work of Ceres and the Pacific Institute and summarizes the report findings. It also details recommendations put forth by Ceres and the Pacific Institute to manage water risks. Lastly, it provides some practical, timely suggestions on actions businesses may wish to consider in addressing water scarcity concerns, present and future.

Ceres/Pacific Institute Report

The report analyzes water-related risks for businesses, both in general and on a sector-by-sector basis. Overall, the report concludes that all businesses face water-related adverse impacts including: 1) water scarcity consequences on business activities, raw material supply, intermediate supply chain and product use in a variety of ways; 2) often overlooked water quality risks may pose significant financial implications for certain industries; 3) water scarcity directly affects power generation creating operational uncertainties in some cases; and 4) physical water resource constraints make companies more susceptible to reputational risks, particularly related to rights to access water and water withdrawal.

Industry sectors face differing water risks based in large part on the “water footprint” of each. The simple definition of “water footprint” is “the total volume of freshwater that is used to produce the goods and services produced by a business.” According to the report, footprinting has dual benefits. It serves not only as a means of determining a company’s basic water use, but also provides a means for comparing and benchmarking water use within industry groups. In this regard, the report identifies risks specific to eight water-intensive industry sectors including: agriculture; apparel; beverage; biotechnology/pharmaceutical; electric power/energy; forest products; high tech; and, metals/mining. For these water-intensive industries, the report details physical, reputational and regulatory risks.

Managing Water Risks

1. Measure the company’s water footprint (i.e., water use and water discharge);

2. Assess the principal regulatory and reputational risks associated with its water footprint and seek to align findings with the company’s energy and climate risk assessments;

3. Engage key stakeholders (e.g., local communities, NGOs, government bodies, suppliers, employees) as a part of the water risk assessment, long-term planning and implementation activities;

4. Integrate water issues into strategic business planning and governance; and,

5. Disclose and communicate water performance and associated risks.

For any company, managing risks necessarily includes responding to issues and concerns identified by shareholders and investors. Similar to other climate change considerations, investors also seem to have a growing interest in potential water scarcity matters prompting Citi, JPMorgan, Merrill Lynch and Morgan Stanley to issue water-focused reports in 2008. 

Beyond shareholder activism, Ceres also recommends investors consider the following actions to better understand the role water-related risks may play in the long term financial viability of a company:

1. Assess companies’ exposure to water risks;

2. Demand more meaningful corporate water disclosure;

3. Encourage companies to incorporate water issues into their climate change strategies; and

4. Emphasize the business opportunity side of the water challenge.

For each of these risks, the report identifies a series of questions shareholders and investors may pose to companies related to the potential concern. These inquiries are designed to solicit insight and data to help shareholders and investors better understand the impact of water risks on a company’s operations, financial performance and long term viability.

Making a Difference – Practical Business Recommendations

Without doubt, water scarcity concerns will continue to confront the United States as well as the international environment. As water supplies become increasingly threatened, new focus will be placed upon water conservation in all forms and in overall water quality protective measures. Environmental groups already are seeking to strengthen the Clean Water Act following recent U.S. Supreme Court cases they believe severely limit the protection of waters of the United States. A recent report titled Courting Disaster: How the Supreme Court Has Broken the Clean Water Act and Why Congress Must Fix It.[4] highlights the problems created by recent court rulings and calls for Congress to act quickly in passing the Clean Water Restoration Act. Likewise, EPA has reiterated that clean and safe water is a priority for the Obama administration with the release of EPA Administrator Lisa Jackson’s memo “Improving Water Quality Transparency and Effective Enforcement of Clean Water Act Requirements.”[5] The memo directs stronger Clean Water Act enforcement and seeks greater collaboration between EPA, its regions and outside stakeholders in protecting water quality.

More so now than ever, it is difficult for businesses to independently assess a growing number of challenges associated with our changing environment as well as to maintain operations that comply with a myriad of federal, state and local environmental laws. Businesses must direct increasingly limited resources to environmental concerns that matter most and to those items that are time critical. With these priorities in mind, below are practical, operations-based recommendations for protecting against and responding to potential water scarcity threats now:

1. Assess Water Use in Order to Evaluate Options to Reduce/Reuse/ Recycle Water. Consider completing some version of a water footprint analysis appropriate to your company’s operations. The Water Footprint Network [6] has developed a methodology for water footprinting that addresses direct and indirect water use amounts. An improved understanding of water use may allow for more directed water conservation efforts and even cost savings.

2. Assess Water Supply/Sustainability Issues as Part of Any Environmental Due Diligence Effort. In the same manner companies evaluate environmental compliance issues or the effectiveness of contaminated soil or groundwater remediation, companies must begin to assess the overall viability of existing water supplies as well as the quality of water available for potable and production uses at acquisition targets and new operations. Businesses may wish to consider use of a water sustainability planner to assess water use inventories available from Global Environmental Management Initiative (GEMI) [7].

3. Consider Arrangements for Alternate Water Sources. Businesses routinely make provisions for emergency response capabilities or alternative means of energy to ensure continued operations. These strategies should be extended, as appropriate, to address water scarcity/water quality matters as well as to provide interim relief in situations where existing resources prove unreliable.

4. Incorporate Water Use Strategy Considerations Into Existing Environmental Programs. Given the increased focus of the investment community on climate change and related considerations like water scarcity, it is only a matter of time before companies receive inquiries about water metrics and water conservation initiatives in place to address such concerns. Companies should evaluate adding water-related considerations to existing environmental programs, including some baseline understanding of water use and supply viability, so as to allow for improved communications to shareholders, investors and other interested parties, if the need arises.

Conclusion

Ceres and the Pacific Institute accurately conclude that by and large businesses are unaware of water-related risks and how climate change will exacerbate these water concerns. For many businesses the report may serve as a wake up call that the era of cheap, easy access to water is ending. While water shortages already are critical in some parts of the world, including the U.S., most companies will have the luxury of evaluating water conservation alternatives and water supply viability plans in the absence of real time water scarcity burdens. Companies should take advantage of any opportunity to determine how best to minimize its water footprint, ensure the sustainability of its water supply and to understand the impact its operation has on available water resources in the community.

Assessing water usage and planning for long term water needs must become a priority objective for all businesses. Water is one of our most critical natural resources and, unlike others, there is no substitute for water.

[1]  Water Scarcity and Climate Change: Growing Risks for Business and Investors, Ceres and Pacific Institute, Jason Morrison, Mari Morikawa, Michael Murphy and Peter Schulte (February 2009).

[2] “Climate Change and Water,” Technical Paper VI of the Intergovernmental Panel on Climate Change, IPCC Secretariat, Geneva (June 2008).

[3] “A Water Warning: Peter Brabeck-Letmathe, Chairman of Nestlé, Argues that Water Shortage Is An Even More Urgent Problem Than Climate Change,” The Economist, November 19, 2008.

[4] Courting Disaster: How the Supreme Court Has Broken the Clean Water Act and Why Congress Must Fix It, Clean Water Action, Earth-justice, Environment America, National Wildlife Federation, Natural Resources Defense Council, Sierra Club and Southern Environmental Law Center (April 2009). The report is available at http://www.nwf.org/nwfwebadmin/binaryVault/Courting-Disaster-4-2009.pdf

[5] EPA Memorandum “Improving Water Quality Transparency and Effective Enforcement of Clean Water Act Requirements,” Lisa P. Jackson, July 2, 2009.

[6] Water Footprint Network is a non-profit entity working to promote greater water stewardship through the advancement of water footprinting. See http://www.waterfootprint.org

[7] GEMI is a collection of corporations aiming to promote best practices in global environmental health and safety. See http://www.gemi.org