Water Scoring: Managing the Risk of Having Big Fish Stuck in Polluted Ponds

This year's number one sustainability risk is - water.

According to the latest World Economic Forum's Global Risk Report, the adverse impacts of water crises could even surpass the impacts of climate change. The effects can already be felt across industry sectors and society at large: in line with the narrative from the WEF, a recent study by CDP found that two-thirds of the world's largest companies are now reporting exposure to water risks - with 22% anticipating that this could limit the growth of their business. The recent droughts in the United States that have made international headlines, simply add to the growing evidence of a fundamental problem: the exhaustion and mismanagement of water resources is translating into soaring levels of water stress across the globe. Failure to address the problem will come with a high price tag.

The near future could see conflicts over water between companies and the communities in which they operate. Left to escalate, businesses' entire license to operate could be at risk. Despite this growing pressure, there are currently no adequate means to evaluate, quantify and benchmark corporate performance (or failure) on water management.

The harsh reality is that the "business as usual" approaches to water management will no longer suffice. In most cases, companies should - and actually can - play a constructive role in addressing water problems: the multinational food and beverage company Nestlé recently set aside roughly US$19 million to improve wastewater treatment facilities at its plants and strengthened their water quality requirements. The aim according to the company is to treat the water they discharge effectively. The results have seen the company's factory in the water-stressed state of Jalisco, Mexico, save up to 1.6 million liters of water a day - an equivalent of the daily consumption of 6400 people in the area.

Other recent developments point at the emergence of corporate water management. Investors are beginning to recognize the true value at risk - therefore increasing their expectations on corporate water management exponentially. One of the strongest water advocates is the Norwegian pension fund, Norges Bank Investment Management, with assets valued at over US$800 billion. Today, the pension fund expects companies to demonstrate clear strategies for water and climate change management. The public sector is following suit with the EU looking to set policy requirements for companies to disclose specific environmental criteria, including water, as part of their mainstream reporting to investors.

Steps are being taken into the right direction. Nonetheless, without a proper understanding of water risks, businesses face the danger of setting targets that fail to address their key exposures or simply misdirecting their risk mitigation strategies: Coca-Cola did not have enough insights to the real state of play of its water use and was forced to close a bottling plant in Northern India after local farmers accused it for wasting too much water. The example of Coca-Cola shows how water related risk can generate substantial negative impacts on their business, their operations and their revenue. The need for comprehensive methods to evaluate corporate water risk has never been more important.

A key authority in corporate environmental reporting and scoring, CDP has noted the imperative to extend their reach to water. To ensure a robust introduction of corporate water scoring and associated benchmarking, CDP has partnered with South Pole Group to evaluate the water management practices of companies operating in the most water dependent industry sectors.

The aim of the partnership is ambitious: delivering the first ever global benchmark for corporate water management by scoring companies based on their results. The added layer of scoring to conventional reporting will provide objective feedback to responding companies as well as valuable metrics for investors. By being able to meaningfully address key exposures and better direct risk mitigation strategies, companies can ensure sustainable growth while considering stakeholder needs and maintaining their license to operate. Going forward, pioneering companies will be able to reduce the value at risk from water stress and capitalize on opportunities such as cost savings or increased revenues. Smart water management can in other words offer operational, strategic or market opportunities.

As the new Sustainable Development Goals (SDGs) are about to be adopted in September, the private sector has an opportunity to lead in the preservation one of our planet's most valuable resources. In the long run, the global economy will favor companies that take the role of water stewards and embrace a pro-active approach to water management. From pushing for water efficient ways to wash clothes to piloting an application that increases water productivity within the supply chain, the solutions and the will to act are out there.