Recently businesses are increasingly paying attention on how water risks are impacting their operations and supply chain. Tools and frameworks have been developed over the last years to quantify "Corporate Water Risks" and to engange businesses in mainstream water management strategies with multiple stakeholders.
Introduction
In the age of climate change and rising uncertainties, businesses are paying increased attention to how environmental risk factors are impacting their supply chain and operations. In regards to globalwater resources it is projected that water demand in the future will rapidly increase with population growth and the industrialisation of emerging economies. It is estimated that by 2030 water withdrawals will increase by 40% worldwide, inherent with population growth (Chartes and Varma, 2010).
Since the Rio Earth Summit in 1992, narratives in the water sector have focused largely on the association of water with the market, democracy and sustainability (Mollinga and Gonhalekar, 2012). Global concepts such as the ‘Integrated Water Resource Management (IWRM)’ have been developed and applied on a large scale. Recently, the pressure of climate change on water resources has gained much attention and is referred to as ‘water security’ (Mollinga and Gonhalekar, 2012; Grey and Sadoff, 2005). Over the last decade the debate in the water sector has shifted from human rights and access to drinking water and sanitation in the context of the Millennium Development Goals, to that of green growth and the role of business in water management (Deutz, 2012). Businesses have only started to address water risk management on a strategic corporate level over the last few years (Lloyd’s, 2010; Pegram et al., 2009; JP Morgan, 2008). Previously, water was instead managed on an operational level and addressed through Corporate Social Responsibility (CSR) campaigns (Lloyd’s, 2010). Water availability and reliability under the conditions of population growth and changing weather patterns are pressuring commercial use of water in industries (Morrison and Gleick, 2004). As with other environmental risks, decisions and strategies to address water risk are not merely based on technical know-how but also are influenced by cultural perceptions, values and beliefs (Allan, 1999). Businesses have increasingly started to engage in mainstream water management and policy, reaching beyond domestic water supply and privatisation.
Types of Corporate Water Risks: a Framework
Water risks are posed on the industrial input and output of business operations. The assessment of water risk towards a business requires data on water use so as to evaluate the water footprint (Morrison and Gleick, 2004). In water footprint analysis, volumetric data on water usage throughout the supply chain and operations is required (Lloyds, 2010).
There are various water resource related risks for corporate companies. Corporate water risks can be summarised in the following categories drawing on the concepts and tools of WWF and DEG (2011), Lloyd's (2010 and JP Morgan (2008):
- Physical Risk: Water quality, quantity and pollution
- Regulatory Risk: laws, water related regulation, pricing of water supply and waste discharge, licenses to operate, water rights, quality standards
- Reputational Risk: cultural religious factors, impact on brand’s image and influence of customer purchasing decisions, public perceptions of the business
- Community Conflict Risk: with whom are these risks shared? Is there competition? Power asymmetry, tensions around access to water or degradation of local water resources
- Financial Risk: what is the return on investments? Higher costs related to supply chain disruption and changes in production process
In order to assess and quantify water risks, businesses are being confronted with a number of different frameworks and tools that have recently been proposed by international organisations. WWF and DEG (2011) published a ‘Water Risk Filter’ tool for assessing potential water risk for businesses. Further water risk and management tools include GEMI – ‘Local Water Tool’; the World Business Council on Sustainability – ‘Ceres Aqua Gauge’ (2010); and the World Research Institute – ‘Aqueduct Alliance’. Most of those tools put a strong emphasis on the issue of water scarcity in developing countries and strongly encourage the need for businesses to address the issue of water risk in their supply chain; ideally through a shared risk approach. Auditing firm Deloitte is currently in the process of developing an online platform for those businesses that share a water basin.
Physical Water Risk
Physical Water Risk relates to the question of how much and what kind of renewable freshwater resources are available in the basin and how much water is withdrawn or discharged by the water users (WWF and DEG, 2011). Water quality is also and indication of physical water risk, as this can directly impact the business supply chain (Ceres, 2009). Businesses may often rely heavily on available freshwater resources for their business operations, particularly in the case of beverage or food production companies. Thus physical water risk is not necessarily a matter of water scarcity alone, but could also involve issues with water quality and even in some cases flooding events (Pegram et al., 2009).
Regulatory Water Risk
Regulatory Water Risk is associated with strong law enforcement and regulations related to water. These include water acts and policies, water pricing and permits (WWF and DEG, 2011; Lloyd’s, 2010) In a region experiencing water scarcity or degrading water quality, the pressure of local communities on the local authorities can be so significant as to influence the allocation of water, stricter water quality standards and water discharge regulations (Ceres, 2009).
Reputational Water Risk
Reputational Water Risk relates to the brand’s image at a local and international level, in how a business is perceived by the public and stakeholders. Depending on the cultural context, the level of constructed knowledge and the influence of the media, ecological symbols and images will always be perceived in different ways by different societies and individuals (Beck, 1999). Further factors influencing the perceptions can be cultural and religious factors, as well as the history and heritage of the particular business (WWF and DEG, 2011). Media can also either destabilise or foster change by visualisation of climatic catastrophes (Beck, 2010). In Western media, climate change has often been portrayed and visualised through images of extreme droughts or flooding events. Increased mass media documentation and visualisation of global environmental change and its impact on the most vulnerable parts of societies in developing countries has increased awareness and concern of global risks in the ‘Western’ world (Beck, 2010).
Businesses can damage their reputation by gaining access to water rights over other less powerful groups such as farmers and or domestic users. Bearing in mind that subsistence farmers are highly dependent on access to water resources; a denied or restricted access could be a major threat to their livelihood. Additionally, the pollution of water resources as a part of the industrial production and operating processes can seriously threaten the good reputation of businesses on both a global and local level. In Kerala, Coca Cola was forced to close their production as result of a conflict over local water resources. Coca Cola was accused of over-extracting groundwater resources and discharging wastewater without treatment. It was claimed that Coca Cola threatened the local farmer’s livelihoods by causing water shortages and pollution (Lambooy, 2011). Eventually Coca Cola lost its license to operate in Kerala, but is still in the process of challenging this ruling (Lambooy, 2011).
Financial and Investment Water Risk
Financial and Investment Water Risk for businesses are not only driven by increased water supply prices but also from financial losses due to supply chain disruption and changes in production process (JP Morgan, 2008). Higher energy and technology costs related to water supply and discharge can also be classified as ‘financial’ water risk (Orr et al. 2009). Investment in water technology and water related disclosure requirements on investors, can be a threat to business (Lloyd’s, 2010). Businesses are interested in ensuring the long-term investment returns (Pegram et al., 2009).
Community Conflict Water Risk is about the access to sufficient water by the different users. Water scarcity and water pollution can fuel local conflicts and is closely linked to reputational water risk to business (Lloyd’s, 2010). The competition over water allocation can not only lead to tensions amongst water users but in some cases to conflicts which can result in protests or even court cases. This may not only threaten the reputation of a business but also water access and allocation permits. As has been discussed briefly in the definition of regulatory water risk, Coca Cola lost their license to operate in Kerala due protests which emerged out of conflict over local water resources (Lambooy, 2011).
Other Water Risks
Water risk can also emerge from the poor management of water resources by under-skilled and inexperienced labour forces, and water supply schemes with insufficient management structures. Furthermore, shared trans-boundary water resources can become the source of a geopolitical water risk (Lloyd’s, 2010).
Shared Water Risks
Inherent in the concept of corporate water risk is the proposed solution of ‘shared water risk’ by major international advocates. The concept of ‘shared water risk’ stresses the importance of linking the private sector and government as well as civil society in order to establish a strategy for solving or improving water scarcity challenges. A shared water risk approach would require the business to go beyond addressing and eradicating its own water risk and taking a more comprehensive approach that involves other stakeholders (Lloyd’s, 2010). WWF (2011) promotes ‘WWF Water Stewardship’ as an approach to change the behavior and performance of businesses in regards to water. This program seeks to include all stakeholders on a voluntarily basis from different political and geographical areas (WWF and DEG, 2011). Another example is the public-private initiative ‘CEO Water Mandate’ which was introduced in 2007 by the UN Global Leadership Forum. It requires businesses to pledge to improve their water management strategies by adopting water efficiency measures in their operations and supply chains (Morrison et al., 2010).
Benefits of the Concept Corporate Water Risks
The concept of water risk to business can offer a new perspective on the water challenges of the future by raising awareness among businesses. It brings the issue on the international and corporate agenda and could potentially be addressed from a top-down corporate strategic level in cooperation with governments and civil society. Lessons learned could be easier shared in the corporate world. Water risk assessment requires businesses to collect data on the water footprint and to account for water in their operations and supply chain which can be basis for water conservation and water saving approaches (Pegram et al, 2009). More data on local water usage and discharge would have to be collected. By making data public available businesses can more easily be hold accountable by other water users. Identifying water risks of businesses can create debate and projects for sharing risk among affected water users. Sharing water risk requires different stakeholders to start a dialogue which can prevent conflict and leaves room for new ideas. It also encourages businesses to think about the long-term impact of their operations on water resources. Engaging all stakeholders and discussing a long-term vision of water demand and supply in a basin can be beneficial to the end users. The dialogues would be even more successful if they take into account other risk factors such as energy and food demand.
Limitations of the Conept of Corporate Water Risks
In regards to the recently developed global water risk assessment tools, it has to be considered that corporate water risk is a highly localized issue. Most of the global water risk assessment tools are too simplistic and do not take into account all water risks or other environmental risks that are linked to the management of water resources. Corporate water risk is not a holistic approach. It fails to capture the complexity and interactions of water with other sectors and stakeholders such as energy and food supply. The assessment of water risk involves taking into account different stakeholders and users of water and has to analyse the complex structure of water regulations, allocations, cultural perceptions, socially constructed knowledge of the environment within the uncertainties of climate change and population growth. Not all factors can be given the same weight in the assessment; the urgency and importance of the factors are highly dependent on each individual case study and is influenced by individual perception of risk.
References
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