the marketing finance niterface thirsty planet · 2 thirsty planet – business responses to water...

The MarkeTing Finance inTerFace

How to measure and reduce strategy risk

ThirSTY PLaneT

Business responses to water scarcity

cgMa rePOrT

keY FacTS

40%

0.3%

17%

20k litres

Two-thirds

40%

50%

2030

Percentage of Fortune 1000 companies that said the impact of a water shortage on their business would be ‘severe’ or ‘catastrophic’.1

Percentage of the world’s population already experiencing water shortages that threaten their agriculture, industry and personal health.3

The amount of water needed to produce a kilogram of cotton – enough for a t-shirt and a pair of blue jeans.5

an estimate of the earth's population who will live in water stressed areas by 2025, according to the United nations.

Year by which water demand will outstrip supply globally by 40% under a current business as usual scenario.7

Percentage of global wetlands that have now been lost. Worrying because one-third of the world’s drinking water comes from wetland areas.6

Percentage of the world’s water that is readily available for human use.4

Percentage of Fortune 1000 companies that said they were prepared for such a crisis.2

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introduction 2

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Where did the water go?

The finance professional’s role

Water risk – an issue for companies and investors

how are leading companies dealing with water scarcity?

conclusion

AuthorsThis report has been written by Sandra Rapacioli, Head of Sustainability at CIMA, and Roger Malone, a freelance writer specialising in business and economics

cOnTenTS

Two of the world’s most prestigious accounting bodies, AICPA and CIMA, have formed a joint-venture to establish the Chartered Global Management Accountant (CGMA) designation to elevate the profession of management accounting. The designation recognises the most talented and committed management accountants with the discipline and skill to drive strong business performance.

THIRSTY PLANET – business responses to water scarcity2

inTrOdUcTiOn

Water is a finite resource. As the National Geographic observed, “All the water that will ever be is, right now.” Indeed, water levels are maintained through a process of re-circulation. However, increased demand for water and water quality and distribution issues have led to water scarcity in many parts of the world.

The United Nations estimates that by 2025 two-thirds of the world could face water ‘stress’ situations. Already in China, more than half the cities are struggling to get clean water to their residents and recent water crises have shut down entire regions. As potable water becomes scarcer, even in developed regions, prices will rise and access become threatened.

The challenge of water sustainability is broader than securing access to this resource for businesses or individuals. Water is a vital component of natural ecosystems, essential for plants and animals, as well as the overall health of area economies. Healthy ecosystems are needed to control erosion and water run-off, to provide natural water purification processes and maintain appropriate water flows through a community.

“The invisibility of biodiversity values has often encouraged inefficient use or even destruction of the natural capital that is the foundation of our economies.”

– The Economics of Ecosystems and Biodiversity (TEEB) study (2010)

Water scarcity is not simply a social and environmental issue but an economic one. Water-related issues may quickly change the way we do business. Production methods, customer requirements, investor sensitivities and capacity levels that shift in the wake of constrained water availability could threaten many successful business models. Water-intensive industries like beverages and agriculture are obviously at risk and this is where we find many of the companies leading the discussion and implementation of water sustainability. But even sectors less obviously in danger must consider the potential threat to their models. Ford for example, uses about 4,800 litres of water for each car it makes.

Financial impacts are a critical part of water risk evaluation. It is therefore essential that management accountants understand the business risks and potential impacts on company performance posed by water scarcity. Management accountants have the skills, such as risk management, analytics and forecasting, to help their companies create sustainable business models. They can provide the right information to help decision makers understand the true cost of business so that they utilise resources more efficiently for both the short and long-term.

Water is easily taken for granted. From childhood, we are amazed that the earth’s surface is roughly 70% water. Rain falls for free. We regularly encounter vast, beautiful vistas of river beds, lakes, seascapes and oceans. In developed countries and the more advanced developing countries, turn on a tap and cool, clear water pours into your glass. Yet clean water, like many other natural resources once considered abundant, is in scarce supply. In 20 years time water demand is expected to outstrip supply by 40%.8

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This report explores:

• How water has become a constrained resource.

• What leading businesses are doing today to prepare for water scarcity, including the tools and frameworks available.

• How CGMAs can help companies deal with water scarcity and the key questions they should be asking.

Corporate leaders have a key role to play as we face this challenge, both for the continued survival of their businesses and for the wellbeing of the planet.

Questions financial professionals should ask

• How would short or long-term water shortages impact your company’s operations?

• Has your company traced water inputs, flows and outputs throughout its operations?

• Has your company analysed the water usage and other environmental impacts all along its supply chain?

• Has your company written water management plans for each of its operational centres?

• How would price increases for water or other diminishing natural resources impact operations?

• Is your company exploring the value of water beyond the purchase or procurement price?

THIRSTY PLANET – business responses to water scarcity

Where did The WaTer gO?

The 2030 Water Resources Group, a research organisation supported by the World Bank and private corporations, estimated that under current conditions, by 2030 global demand for water will be 40% higher than reliable supplies. Agriculture is by far the largest water user (70%) but industry (20%) and domestic use (10%) is on the steady rise.

Unsurprisingly, much of the increased demand will emerge in countries like China and India whose economies are among the world’s fastest growing. In China, water demand is expected to be almost a third greater than available supply by 2030 and in India, demand would double available supply.10 This is particularly worrying because these are the regions that many corporations are relying on for future growth, either as low-cost manufacturing centres or expanding consumer markets. Figure 1 illustrates which areas are most at risk of water scarcity.

So what is causing this water scarcity? We outline some of the key contributory factors:

• Global population growth. The world’s population is growing by roughly 80 million people a year. All these people will need water.

• Changing lifestyles. Along with population growth, changes in lifestyles and eating habits are increasing water consumption per capita. From 2002 to 2007, per capita consumption of beef in China rose almost 25% and globally every 300 grams of beef brought to a family dining table requires 4,500 litres of water to produce.11

• Urbanisation. Urbanisation concentrates large amounts of people in relatively small areas, straining the available local water supplies. In China, where urbanisation is progressing

rapidly, some estimates suggest two-thirds of the cities have less water than they need and about 110 already suffer severe shortages.12

• Industrialisation. Rampant industrialisation is also bringing an increase in demand for water, often in heavily populated areas in developing markets where supplies are already strained. In more developed markets, energy production will lead to a significant increase in demand. Water is used not only in hydroelectric plants and steam turbines but also to cool fossil fuel and nuclear power plants. US energy consumption alone is expected to rise by 50% by 2030, putting further pressure on resources.13 The production of biofuels has also been on the rise, adding to water demand. Between 1,000 and 4,000 litres of water are needed to produce a single litre of biofuel.14

• Increased climate variability. Climate change has also added strain to water supplies. Many areas for example, are experiencing unusually severe droughts. In 2010, southern China endured one of its worst droughts in 50 years, damaging crops, potable water supplies, electricity production and industry in a region considered to be China’s most water-abundant.

• Pollution. Where there is water available, it is often polluted. Nearly a third of the population of developing countries has no access to safe drinking water.15

• Artificially low prices for water. The prices that utilities companies charge for water generally reflect the cost of the infrastructure to store, deliver and treat water and does not include the cost of replenishing and protecting water basins. Also, the price of water has been kept artificially low through government subsidies.16

Water is a finite resource. There are some 1,400 million cubic kilometres on the planet. Most of this is salt water or frozen, leaving only 0.3% available for human consumption. It would be enough to serve the world’s needs, if it were evenly distributed. But it is not. For example, in Malaysia, 100 people share a million cubic metres of water. In India, the figure is 350 and in Israel, 4,000.9

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FigUre 1: Water scarcity by region

Physical water scarcity. More than 75% of river flows are allocated to agriculture, industries or domestic purposes (accounting for recycling of return flows). This definition of scarcity – relating water availability to water demand – implies that dry areas are not necessarily water-scarce, such as Mauritania.

Approaching physical water scarcity. More than 60% of river flows are allocated. These basins will experience physical water scarcity in the near future.

Economic water scarcity. Water resources are abundant relative to water use, with less than 25% of water from rivers withdrawn for human purposes but malnutrition exists. These areas could benefit by development of additional blue and green water but human and financial capacity are limiting.

Little or no water scarcity. Abundant water resources relative to use. Less than 25% of water from rivers is withdrawn for human purposes.

Not estimated

• Massive amounts of wasted water. Tremendous amounts of water are wasted in various ways. Leakages in distribution infrastructure cost water systems between 15% and 30% of their total output on average, while wasteful domestic habits such as leaving the tap running unnecessarily, also add up. A running tap can waste more than six litres of water a minute, according to the UK’s Energy Saving Trust.

Taken together, these factors create a situation in which water availability cannot be taken for granted, either by individuals or companies. The concerns are real. Global demand is growing much faster than the capacity to meet it, shortages could envelop large sections of the world and simply providing large populations with safe water is not assured in many areas.

SOUrce: international Water Management institute


WaTer riSk – an iSSUe FOr cOMPanieS and inveSTOrS

Governments, of course, have a role to play in addressing the changing water environment. In many countries, the utilities that control the flow of water to homes and business are owned by the state and where they are not, they are closely regulated. Governments are also obligated to grasp the bigger picture and understand how ecosystems and supply, usage and waste treatment and many other factors, interact. However, businesses must not wait for governments to react.

What some governments are doingIn most markets, governments are responsible for setting or approving, and regulating the price of water delivered to homes and businesses. Generally, this price has reflected the cost of storage, distribution and treatment and neglects other aspects of valuing water, such as resource depletion and other impacts on the ecosystem. In some regions, particularly those that have faced severe water shortages, public bodies have launched measures to set prices nearer the true value of water.

Water trading. State-controlled water markets have been set up in locations where water supply is particularly scarce, including southern California in the United States and some states in southern Australia. In Australia, considered

one of the most sophisticated water markets, the government estimates that water trading added A$220m to the national economy in 2009 through more efficient use of water, especially in agriculture. The main challenges to effective water trading are high transportation and distribution costs and complicated systems of water rights.

Water taxes. Some jurisdictions are designing their tax schedules to raise the price of water closer to its true value. Water taxes can cover inputs, such as irrigation (France), or outputs, such as waste water and pollution (Belgium). In 2008, Portugal levied a water tax on users that accounts for the economic and environmental costs of the resource.

Water scarcity can have a huge impact on the bottom line. Not only will the price of water, which has previously been undervalued and kept artificially low through subsidies, rise globally, but business models can be threatened by water shortages, higher commodity prices and other problems linked to resource scarcity. Puma, for example, faced significantly high costs when a severe drought in Russia increased the price of wheat, which was used to feed the cattle that were needed for the leather used in its shoes.

The World Wide Fund for Nature (WWF) has catalogued four areas of risk linked to water scarcity that could have a direct bearing on a company’s success: physical, financial, regulatory and reputational risk, as shown in Figure 2. While some companies may be more at risk in one area or another – for example, a well-known brand would face higher reputational risks than a commodity supplier – they each should be assessed in a company’s water strategy.

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FigUre 2: risks from water scarcity

REGULATORY RISK

New permitting standards

Reduced permit availability

Caps on water use

More stringent wastewater standards

Water allocations

PHYSICAL RISK

Limited water availability, poor quality

Insecure supplies

Drought and other water shortages

Flooding

Wastewater discharges, run-off

Groundwater contamination

Supply chain impacts

REPUTATIONAL RISK

Global recognition of ‘access to clean water as a human right’

Local conflicts/tensions

Lawsuits and other legal action

Advocacy opposition – local/global

FINANCIAL RISK

Increased water prices

Increased energy prices

Water treatment costs

Increased insurance rates

Recovery and remediation costs

Higher raw material and other input prices

Safeguarding a company against these risks is not only important to an organisation's day-to-day operations but also vital to its long-term success. Companies that understand and act on this are more prepared to retain their competitive advantage and to influence the evolving landscape.

SOUrce: The World Wide Fund for nature (WWF), adapted by ciMa


Issues related to water risk are also catching the attention of more and more corporate investors. Investors are beginning to realise that water scarcity will expose businesses to new risks, impacting on profitability and are asking for increased levels of corporate reporting on water.

The Carbon Disclosure Project acts on behalf of over 500 institutional investors with a combined $71 trillion of assets under management. In 2009 it set up a Water Disclosure Project that asks the world’s largest corporations to disclose information on the risks and opportunities they face in relation to water – both in their direct operations and their supply chain. In 2011, it received requests from 354 corporations for its annual water disclosure questionnaire, more than twice the number as the previous year. Companies are clearly realising the importance of providing this sort of disclosure to investors.

Starbucks' environmental reputation strained when accused of wasting waterStarbucks, the US coffeehouse chain that prides itself on its environmentally friendly policies, faced a potentially serious risk to its reputation in 2008. This was when British tabloid The Sun, accused the company of wasting 23 million litres of water a day globally by using ‘dipper wells’ in all its outlets. In a dipper well, cold water is run constantly into a sink to rinse utensils. “That would provide enough daily water for the entire two million-strong population

Ceres, an organisation that leads a coalition of investors, environmental companies and other interest groups working with companies to address sustainability, also developed a water risk management tool in October 2011 that aims to help companies and investors evaluate water risks and opportunities. The tool, developed with close input from 50 investors, will allow investors to benchmark a company’s water management strategy against industry peers and provides detailed definitions of leading practice – see Water tools on page 10 for more information.

Dr Richard Mattison, Chief Executive at Trucost, a company that works with clients on environmental accounting, told CIMA his group is also being approached by more asset managers and institutional investors to help gauge corporate water risk.

“A lot of investment managers and a lot of pension funds are examining these matters more closely. Over time, you’ll start to see a shift of capital moving away from resource inefficient companies toward environmentally efficient companies. It’s part of a trend.”

– Dr Richard Mattison, CEO, Trucost

of drought-hit Namibia in Africa,” The Sun said. In a follow-up story, The Telegraph of London warned, “It (the policy) raises questions about the Seattle-based company’s much-hyped environmental credentials and will embarrass its legion of celebrity patrons.” Initially, Starbucks defended the practice as preventing bacterial growth but later it relented and pledged to phase dipper wells out of its operations.

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hOW are Leading cOMPanieS deaLing WiTh WaTer ScarciTY?

1. Measuring water use and associated risk

Most companies start by trying to understand and quantify the nature of their water-related risk. Calculating a ‘water footprint’ will highlight where your businesses’ big water stresses are, along the entire value chain – see Woolworths and Puma case studies. The next step is to develop a strategic water management plan, which should cover the areas listed below.

2. reducing water consumptionLooking at reducing water usage is often the most obvious first step. One of the concepts that many embrace is the idea of becoming ‘water neutral’ by reducing and offsetting the impacts of water footprints – see Coca-Cola and Thames Gateway case studies.

3. Understanding the true value

of waterUnderstanding the real value of water and factoring in a fair price helps with financial and strategic planning. It also ensures that the most valuable water sources are invested in and protected. The price of water, which has been undervalued and kept artificially low through subsidies, will inevitably increase. The true value of water goes way beyond what utilities charge to store, deliver and treat it.

It includes the cost of protecting area water supply and assuring that the local community and not just an individual business, has adequate supplies. It also includes costs associated with shortages, flooding linked to climate change and protecting local ecosystems.

Companies are beginning to incorporate these costs and variables into the price of water and how they manage it. Approaches to accounting for the value of water have evolved from a narrow focus on metrics linked to direct operations, to a broader view that considers the impact across the supply chain as well as on local water supplies and ecosystems – see Vittel, Rio Tinto and Puma case studies.

4. engagement and disclosureThe importance of engaging with a range of stakeholders, from suppliers to governments, must not be under-estimated. As investors begin to ask for increased reporting on water, disclosure of water risks, policies and targets is fast becoming a priority – see Coca-Cola, Rio Tinto and Puma case studies.

Overleaf we summarise five of the principal water tools that can help companies deal with the issue of water scarcity.

Compared to carbon management, water risk is a relatively new issue. Strategic responses to water risk have only started to emerge. Businesses and other groups are feeling their way across this new landscape. Many are learning by doing. Nevertheless, leading companies share some common approaches – four of which have been outlined below.


Water tools

Several tools and approaches have recently been developed to help companies measure, manage and report their water use. We outline five of the main tools in circulation. Reflecting the novelty of these issues, these tools include different definitions for corporate water consumption and cover different metrics.

Ceres Aqua Gauge: A framework for 21st century water risk management was developed in October 2011 with close input from 50 investors, companies and public interest groups. The tool allows investors to benchmark a company’s water management strategy against industry peers and provides detailed definitions of leading practice. It also offers a step by step framework to help companies develop stronger, more comprehensive water strategies, including robust stakeholder engagement, governance practices, management and disclosure.

The Global Water Footprint Standard was developed in 2009 by the Water Footprint Network in partnership with corporations, public agencies and private groups. The standard, detailed in a 228 page Water Footprint Assessment Manual, is one of the most comprehensive attempts to date to assess environmental impact from water usage by companies, products and individuals.

The standard offers a two-dimensional matrix. Along one dimension, it looks at water inflows and outflows. The second dimension looks at operational and supply chain footprints. These footprints are divided into direct use – water used in the product or its manufacture – and overhead use – which would include things like toilets and kitchens, or transportation in the supply chain.

Aqueduct Alliance, set up by the US-based World Resources Institute, has developed a database of tools that measure and map water-related risks by giving companies and investors locally specific and actionable information. Their new database includes

water stress maps donated by Coca-Cola (in October 2011) and will soon include in depth basin-level water mapping. Aqueduct uses hydrological modelling of water availability and scientific analysis of water-related risks in river basins worldwide. This project is supported by big businesses including GE, Goldman Sachs and Coca-Cola, who have donated their water risk data and models.

The Global Water Tool, developed by the World Business Council for Sustainable Development in 2007, helps organisations assess water use and availability. It is an online resource that helps companies calculate water consumption and efficiency across a portfolio of facilities across the world.

The Global Reporting Initiative, used by more than 1,800 organisations in 2010 making it one of the most influential set of guidelines in circulation, includes guidelines on reporting water issues. They focus on three aspects of water usage: total water withdrawn by source, water sources affected by the withdrawal and the amount of water recycled and reused. The framework also includes accounting for the quality and destination of water discharge and details of the impact of the discharge on bodies of water and biodiversity.

Many other tools are being developed by international agencies and non-governmental organisations. Because attention has only recently been shone on strategic responses to water scarcity, approaches remain fragmented. But quickly the standards associated with water sustainability will begin to coalesce around effective and relevant approaches to valuing water and measuring an organisation’s impact.

Corporations that join the discussions around these frameworks early, vigorously and sincerely, will not only have a better understanding of the risks and opportunities presented by this changing landscape but will also have the possibility of influencing the solutions that are developed.

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1. Measuring water use and associated risk

Organisations calculate their water footprint to understand where their biggest water dependencies lie and use this to inform strategy. But what is included in a water footprint calculation can vary, for example, it can include direct water use (water used in operations) and/or indirect water use (water used by suppliers or by consumers when they use the products).

Unilever, for example, recognised that after the water used in agriculture, its biggest impacts occur in the consumer use of laundry and personal care products. They estimate that as much of 50% of its water footprint occurs in the consumer use of its products in water scarce countries, for example, when washing clothes or bathing. As a result, the company has focused on designing products that require less water when used by the end user – such as easy rinse formulations – and it is also helping its customers understand the changes they can make to save water. Surf Excel Quick Wash in India aims to save two buckets per wash. In the dry southern states of India, where many people spend more money on water needed for washing than they do on detergents, this product can make a big difference.

Puma has taken a different approach. In 2011 it was the first company to publish environmental impact costs, which included water use. It looked at impacts generated throughout its entire supply chain – from the water needed to cultivate the raw materials to product manufacturing – and found the greatest impact arose from the cultivation of cotton and other activities at the very tip of its supply chain. Woolworths too has examined water practices in its entire supply chain. Indeed for major multinationals the brunt of the impact is often at the very tip of the chain, in the cotton and sugar fields or the iron ore mines.

“80-90% of the impact lies with about 10% or less of the supply chain. And it’s not always the obvious ones, either.”

– Dr Richard Mattison, CEO, Trucost – the company that helped Puma value its environmental impact

SOUTh aFrican reTaiLer WOOLWOrThS eXaMineS WaTer PracTiceS in iTS SUPPLY chain

caSe STUdY

Woolworths Holdings Limited, one of the largest retail chains in South Africa, worked with the German private development agency Deutsche GesellschaftfürInternationaleZusammenarbeit from 2008 to 2010 to examine the water practices in its supply chain. An initial study for 40 suppliers, including produce growers, textile producers and vineyards, found that only 7% disposed of

wastewater legally. In the wake of these findings, Woolworths began working with its suppliers to improve their practices, as well as targeting a 30% reduction in its own consumption. Woolworths is partnering with its suppliers to adopt more environmentally sensitive farming practices and improve crop planning, among other measures.


SPOrTSWear gianT PUMa rePOrTS On envirOnMenTaL PrOFiT and LOSS

caSe STUdY

Global sportswear brand Puma became the first major multinational to issue an environmental profit and loss (P&L) account in early 2011. The project examined the greenhouse gas emissions and water consumption not only of Puma’s core operations – design, logistics, warehousing, retail and administrative services – but all along the supply chain, from raw material production to manufacturing.

“Getting a better understanding of the source of the natural goods and services that Puma relies on and the declining availability of the basic resources required for our business growth will help Puma build a more resilient and sustainable business model and ultimately better manage its impacts on the environment.”

– Jochen Zeitz, Puma CEO and Chairman, who also serves as Chief Sustainable Officer at parent PPR SA

Total environmental impact valued at o94.4m

Puma’s global environmental impact through greenhouse gas emissions and water usage was valued at e94.4m, of which e7.2m was directly linked to the company’s core operations. The bulk, e87.2m, was attributed to the four tiers of Puma’s supply chain:

1) Product manufacturing.

2) Outsourced processes such as printing and embroidering.

3) Raw material processing.

4) Raw material production.

The overall impact was roughly divided equally between greenhouse gas emissions and water consumption. Puma focused on greenhouse gas emissions and water consumption because they have the most significant impact on the environment.

For the valuation, Puma estimated the value of a tonne of carbon dioxide emissions at e66 and water consumption at e0.81 per cubic metre. Values were adjusted by local incomes and water scarcity, with scarcity being the primary driver of value.

Bulk of impact early in supply chain

By far, the greatest water-related environmental impact along Puma’s supply chain was at the furthest point from its core operations. Raw materials production – cultivating and harvesting cotton, cattle ranching and natural rubber production – accounted for 52% of the water consumption identified by the study with an overall impact value of e24.7m.

The environmental impact P&L is the first stage of a three-pronged effort by Puma to examine the environmental, social and economic impact of its operations and supply chain. The final results from the first stage will include performance indicators for areas such as acid rain and smog precursors, volatile organic compounds, waste and land-use change.

The environmental P&L is a significant step forward in efforts to create a sustainable organisation and it builds on other efforts at Puma to safeguard the environment. In 2010, the company introduced its sustainability scorecard, which it used to set targets including a 25% reduction in water use by 2015. It has been working with its closest suppliers, manufacturers of finished products, to reduce environmental impacts. It is also seeking ways to collaborate with companies further down the supply chain to encourage greater efficiencies, for example, by developing new products or using different materials.

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cOca-cOLa gOeS WaTer neUTraL

caSe STUdY

Coca-Cola pledged in 2007 that it would become water neutral in its global operations. At the time, the company was using almost 300 billion litres of water annually to make its drinks. About 40% went directly into its beverages and 60% was consumed along the supply chain, for instance in growing the corn and sugar used in its syrups. About two and half litres of water was needed for every litre of Coke. The effort was encouraged, at least in part, by local complaints and protests, particularly in India, that bottling operations were damaging local water supplies.

The beverage company is focusing on three key aspects of water sustainability: reducing water usage, recycling water and replenishing water supplies. The company has set a target of reducing usage by 20% between 2004 and 2012 through more efficient operations and addressing supply-chain usage, particularly during the cultivation of sugarcane, oranges and corn. By 2008, the company had reduced water usage per litre of product by 9%.

Coca-Cola also aims to recycle all its wastewater and return it to the ecosystem at quality levels capable of sustained aquatic life. The principle measure toward reaching this goal is to assure rigorous wastewater treatment standards at all its operations and those of its bottling partners.

By 2008, 88% of Coca-Cola bottling facilities had achieved the global corporation’s wastewater quality standards, representing about 95% of the company’s global wastewater volume.

The final aspect – and perhaps the most difficult to grasp – is replenishing all the water used in the company’s finished beverages. Coca-Cola calculates the replenishment target as

The company says replenishment is accomplished through more than 250 community water projects worldwide that concentrate on measures such as watershed protection, improved drinking water and sanitation and better water efficiency in agriculture. In 2008, the company estimated that it had replenished almost 29.5 billion litres of water, roughly 22% of its goal.

2. reducing water consumption

Some companies approach water much like greenhouse gases and look to become water neutral. Like carbon neutrality, water neutrality focuses on

measuring and reducing a company’s water usage and offsetting water use that cannot be eliminated. It strives to erase an organisation’s water footprint.

treated wastewater

- =

total volume of water used in making the

beverages (in 2008)

313 billion litres

184 billion litres

129 billion litres


But water neutrality is an elusive target. The Water Footprint Network says in its assessment manual that water neutrality may be more contentious than carbon neutrality, particularly when it comes to calculating water offsets. “The term ‘water neutral’ can be interpreted in different ways, which makes it a bit of a problematic concept,” the manual states. Instead, the network recommends focusing on concrete quantitative reduction targets and other aspects of water sustainability.

William Sarni, Founder and Chief Executive of the environmental consultancy Domani, argues that companies like Coca-Cola risk undermining true progress in their water sustainability efforts by targeting neutrality based on arcane definitions that are not understood and could leave consumers feeling deceived.

“The concept of offsets doesn’t translate well to water. Under the framework of water offsetting, a manufacturing operation can withdraw water in one water basin and replenish it in another. Clearly this isn’t water neutral for the basin that’s tapped, a critical point for people who depend on the basin.”

– William Sarni, CEO, Domani

Coca-Cola, in its 2010 progress assessment, was open about the difficulties in defining a water sustainability target.

“This conservation goal has come to be known as ‘water neutrality.’ Although we freely acknowledge that what it actually takes to be water neutral is an open issue and some question whether a for-profit company’s use of water can ever achieve a balanced and neutral position.”

– Coca-Cola

Uk gOvernMenT MakeS The ThaMeS gaTeWaY deveLOPMenT WaTer neUTraL

caSe STUdY

It is not just private corporations that are striving for water neutrality. The British Government for example, has pledged to make the Thames Gateway development project east of London, water neutral. It plans to offset increased water usage from the development with efficiency measures implemented throughout the region. The massive project envisions the construction of 160,000 new homes by 2016 in an area of low rainfall and higher than average water use. A total of three million new homes are planned by 2020.

“Because demand for water in the Thames Gateway is expected to increase by 8% by 2016, we will need to achieve savings equivalent to half a million baths a day to achieve water neutrality here.”

– The British Government

The government hopes to achieve water neutrality for the project by focusing on four factors. First, the new homes in Thames Gateway will be more water efficient. Second, it will accelerate the installation of new water meters in the area. Third, it will introduce new tariffs to encourage water efficiency. Finally, it will refit homes and businesses in the area with more efficient appliances, such as low-flow shower heads and variable flush toilets. This last measure alone is expected to produce about half the saving needed for water neutrality.

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3. Understanding the true value of water

In the dynamic space of water risk management, new approaches are being tried and tested by companies all the time and leading organisations have started to take a much wider look at water sustainability issues.

These companies have stopped assuming supplies are virtually unlimited as long as the utility bills are paid.

They are taking a broader approach to water sustainability around their own operations. This includes developing a fuller understanding of how communities value local water bodies, whether as recreational sites, cultural icons, a vital source for their own supplies, or some other purpose. It also involves finding ways of creating shared value in the communities in which they operate.

Dr Mattison at Trucost, environmental data experts, told CIMA that these indirect costs – damage to the ecosystems and replenishment needs, for instance – are generally not included in market prices and so most companies neglect them. “The price signals are not adjusted for the long-term impact,” he said.

Mining giant Rio Tinto has moved to a broad strategic view of water security and sustainability following a legacy of ad hoc responses to local crises, such as shortages. The move is particularly relevant to the water-intensive mining industry where some companies are finding operations threatened by problems in securing local water supplies. For the past six years, Rio Tinto has been following a triple-faceted programme – see Rio Tinto case study overleaf.

MineraL WaTer cOMPanY viTTeL inveSTS e980 Per hecTare a Year TO PrOTecT iTS WaTer QUaLiTY

caSe STUdY

French mineral water brand Vittel, a subsidiary of Nestlé, spent more than e16m on a programme in 2005 to safeguard water supplies to its plant in north-eastern France. A portion of this money, e1.14m, went to land acquisitions but the bulk

went toward subsidising area farms through equipment purchases, transitional cash payments and other efforts designed to create more efficient agricultural practices.


Mining Leader riO TinTO FOcUSeS On Three-PrOnged WaTer STraTegY

caSe STUdY

In 2005, Rio Tinto, one of the world’s largest mining and resources companies, began to take a more strategic view of water.

“For more than a decade we at Rio Tinto have sought to improve our water performance and to be a responsible water manager. Since 2005, we have adopted a more strategic approach that accounts for the social, environmental and economic aspects of water management.”

– Tom Albanese, CEO, Rio Tinto and Water Report (2009)

Three elements of water strategy

The water strategy Rio Tinto developed in 2005 features three key elements: improving water performance, accounting for the value of water and engaging with others on water issues.

Improving water performance is often the first and most obvious step as companies tackle water issues. At Rio Tinto, improved water performance is expected to lead to reduced operating costs and less environmental and social impact from its operations. The company has developed a number of programmes to drive improved water performance. Three in particular stand out:

1) A water standard that sets minimum water management expectations for all operations within the group.

2) In 2003, Rio Tinto set a five-year water target of reducing freshwater use per tonne of product by 10%.

3) A water risk review was deployed in 2005 and has been conducted at dozens of operations throughout the company.

Accounting for the value of water takes water management to the next level of sophistication and complexity. Rio Tinto conducted an 18 month study with representatives from industry, agriculture and conservation groups to explore various methods being used to put a true value on water. Part of the

work identified a framework to help consider the level of risk and opportunity associated with water issues. Risks could include factors like an operation's impact on a stream that has substantial recreational value for the community, while value, for instance could be benefits brought to the environment if a mine uses modern water-saving techniques.

In addition, some of the company’s operations have tested different approaches to valuing water. In one example, Rio Tinto Alcan’s operations in Weipa in North Queensland, Australia, created a hierarchy of value for water taken from various local sources and used the analysis to establish extraction priorities.

“These projects are helping us to understand the different values of water and how these values can be incorporated into decision making and management approaches. Putting a dollar value on the services that ecosystems provide is not easy, with current economic models incapable of adequately reflecting the true value of natural capital in business decisions.”

– Rio Tinto and Water Report (2009)

Engaging with others on water issues offers multi-faceted benefits for Rio Tinto. By being part of the conversation with other businesses, government agencies, non-government organisations, community groups and others, Rio Tinto has the opportunity to understand better the myriad concerns about water sustainability and to incorporate this knowledge into its operations and strategy.

A strategic business issue

Summing up Rio Tinto’s effort, Elaine Dorward-King, Head of Health, Safety and Environment, said in the Rio Tinto Review, “I always emphasise that water is not just an environmental issue but is a strategic business issue. This means we should be looking a decade ahead, while at the same time working to make sure that we are implementing the strategy at all our operations.”

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As the risks and opportunities of water scarcity become more widely accepted, we expect that more businesses will be following the path blazed by Puma, Rio Tinto and other leaders in the field. By placing a true value of water, companies create a better understanding of what is being threatened and what needs to be protected.

“Water is essentially the ramification of a changing climate and the issues are here and now. I would expect that the operating models will shift over time because of this.”

– Dr Richard Mattison, CEO, Trucost

4. engagement and disclosureMost businesses cannot manage all their water risks alone. Given the complexities around water scarcity and the political and social implications of water, engaging with other businesses, government agencies, NGOs and communities is necessary. For Rio Tinto, engagement is a key part of their water strategy. This dialogue helps the company understand the wide range of issues around water and incorporate this knowledge into operations and strategy.

As investors and other stakeholders begin to ask for increased reporting on water, disclosure of water strategies and progress against targets is becoming more important. But companies still have some way to go. In 2010 Ceres reviewed corporate reporting on water risk. It found that most companies are providing basic disclosure on overall water use and water scarcity risks, with mining and beverages at the forefront. However, more can be done and it wrote in its Water Disclosures Report:

“Overall governance and disclosure by the 100 companies falls well short of what investors expect and need. For example, only six of the 100 companies reported any water risks or performance data in their financial filings. Only 17 companies reported local level water data and only a handful provided this information in the context of operations in water-stressed regions. No companies are providing comprehensive data on their suppliers’ water performance – an especially glaring omission when one considers that a vast majority of many corporations’ water footprint is in the supply chain.”

Questions financial professionals should ask

• How would short or long term water shortages impact your company’s operations?

• Has your company traced water inputs, flows and outputs throughout its operations?

• Has your company analysed the water usage and other environmental impacts all along its supply chain?

• Has your company written water management plans for each of its operational centres?

• How would price increases for water or other diminishing natural resources impact operations?

• Is your company exploring the value of water beyond the purchase or procurement price?


The FinanciaL PrOFeSSiOnaL’S rOLe

All companies rely on water to operate, so water scarcity is a significant factor that holds the potential to damage or destroy many business models. Businesses need to start using water more efficiently to minimise their exposure to both immediate risks and future water scarcity. As part of this effort, management accountants must understand the business risks and potential impact on company performance posed by water and other natural resource shortages.

Timberland puts sustainability management under cFOTimberland, the global footwear and outdoor clothing company, in June 2011 created the position of Vice President for corporate responsibility reporting directly to the company’s CFO, a move that was hailed by sustainability blogs as a significant step forward.

“Most sustainability actions of firms are basically dollars and cents decisions – energy savings, cost reduction, waste reduction, supplier behaviour, building management, transportation efficiency and the like. Accounting systems essentially similar to financial accounting and control systems have to be set up. Why not create these systems within the finance department, where the expertise for such systems resides?”

– Doc’s Green Blog, 11 July 2011

Management accountants have the skills to help their companies create sustainable business models. They can provide the right information to help decision makers understand the true cost of business so they utilise resources more efficiently. They can also apply financial and commercial rigour and ‘speak the language’ of business, supporting the integration of sustainability across the organisation. When a financial value is attributed to a company’s environmental impact, senior managers start to listen.

Water management offers short-term opportunities to create efficiencies in a company’s own operations, as well as the potential for driving down costs along the supply chain. Management accountants can provide cost leadership in this area. They can also help ensure that today’s business decisions will continue to deliver long-term value. Using risk management, analytics and forecasting capabilities, the CGMA can help identify and mitigate business risks posed by water shortages and identify opportunities.

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cOncLUSiOn

Yet of all the water that surrounds us, less than 1% is fresh and vital to our needs. While supply has remained steady for millennia, in recent decades human demand has soared dramatically. Natural distribution is uneven and often is at odds with our needs as individuals, communities and businesses. Many corporations globally have begun to recognise the risk of water scarcity as a significant factor that could change their business. Water-intensive businesses such as mining and beverages are mobilising to conserve and protect this resource but a glance at the supply chains of many other industries where plants or livestock comprise a key raw material shows that virtually no company can ignore the risk.

Companies however can manage the risk. They can even discover opportunities to strengthen their competitive advantage through safeguarding supplies, developing water-efficient production processes or developing products and services that target water scarcity. In addition, lessons learned managing water effectively can be transferred to other natural resources that are dwindling, such as timber, certain metals and other commodities and of course, fossil fuels. They can also maintain the value of their corporate reputation, their good standing in the community and their ‘licence to operate’ by engaging effectively with interested stakeholders and by transparent disclosure of their water-related impacts and sustainable practices.

A first step is to recognise the true value of water, which goes beyond what utilities companies charge to pump the resource to homes, offices and factories. The true value includes protecting area water supplies and assuring that the local community – and not just an individual business – has adequate supplies. It takes into account the costs that would be associated with shortages and outages, as well as flooding linked climate change and altered run-off patterns.

A handful of companies are going beyond rhetoric about corporate social responsibility and looking into strategic answers to this problem. The field is new and challenging but looking through the corporate suites shows that finance professional are best placed to help their companies weigh the implications and opportunities presented by water scarcity. They alone have the required expertise in risk management, analytics and forecasting, among other areas, that will bring credibility and fact-based analysis into the discussion.

Acknowledgments The authors would like to thank the following people for their valuable input:

Gillian Lees, CIMA Naomi Smith, CIMA Kenneth Witt, AICPA Paul Parks, AICPA Dr Jeremy Osborn, The Prince’s Accounting for Sustainability project

Water has no substitute. It makes the earth unique among all the known planets in our solar system and beyond. It is the cradle of life and essential for our continued existence. We have today all the water we will ever have.


Footnotes1 Water Worries: Update #2, Edward M. Kershner

and Michael Geraghty, Citigroup Global Markets, 20 May 2009

2 Water Worries: Update #2, Edward M. Kershner and Michael Geraghty, Citigroup Global Markets, 20 May 2009

3 International Year of Freshwater 2003 Fact Sheet, December 2002, United Nations

4 http://waterfacts.net/html/water.html

5 The Impact of Cotton on Freshwater Resources and Ecosystems, WWF, May 1999

6 www.earth-touch.com

7 Charting Our Water Future: Economic frameworks to inform decision-making, 2009, 2030 Water Resources Group

8 Charting Our Water Future: Economic frameworks to inform decision-making, 2009, 2030 Water Resources Group

9 Dimensions of need: an atlas for food and agriculture, Agriculture and Consumer Protection Department, US, 1996 http://www.fao.org/docrep/u8480e/u8480e0c.htm

10 Charting Our Water Future: Economic Frameworks to Inform Decision Making, 2009, 2030 Water Resources Group

11 Water footprints of nations: water use by people as a function of their consumption pattern, AY Hoekstra and AK Chapagain, 2005

12 The Ministry of Water Resources the People’s Republic of China, http://www.mwr.gov.cn/english/cpws.html

13 Enough water to go around?, Nature, 19th March 2008 http://www.nature.com/news/2008/080318/full/news.2008.678.html

14 http://www.worldometers.info/water/

15 Dimensions of need: an atlas for food and agriculture, Agriculture and Consumer Protection Department, US, 1996 http://www.fao.org/docrep/u8480e/u8480e0c.htm

16 Improving water distribution by preventing leaks, IBM http://www-31.ibm.com/ibm/cn/crl/en/projects/innocenter.shtml#1

17 http://www-31.ibm.com/ibm/cn/crl/en/projects/innocenter.shtml

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