Water Stewardship – a matter of business value and risk

Matthew Segur

Net Zero Water Session 1 – Drop for Drop: Net Zero Approaches for Water Quantity and Quality

October 23, 2013

Sustainability

What changed and why now?

•Environmental and

social performance

matters

•You and your supply

chain

Old paradigm New paradigm

•Abundant raw materials

•Cheap energy

•Limitless sink for waste

Sustainability drivers

•Cost savings•Source of innovation•Business continuity•Talent retention

Internal performance

drivers

Value stream drivers

External performance

drivers

•Customer interests and brand value•Value chain transparency•Industry collaboration

•Government regulations•Demand for transparency and sustainability

reporting•Shareholder resolutions•Social license to operate

Sustainability is no longer an option, but a business imperative

Why is sustainability a business opportunity?

•Revenue: new products/services, brand,

brownfields, carbon

•Risk management: transparency and reporting,

supply chain, license to operate

•Reduced operating costs: resource efficiencies;

materials, energy and water

Sustainability is value creation and innovation

The Global Water Condition

Water availability has declined significantly since 1975 and is expected to continue this trend

Extreme Scarcity<500

Scarcity500–1,000

Stress1,000–1,700

Adequate1,700–4,000

Abundant4,000–10,000

Surplus>10,000

Ocean/Inland Water

No Data

Water availability: 2000Water availability: 2025

m3/person/year

Water availability: 1975

Water withdrawals are predicted to increase by 50 percent by 2025

in developing countries, and 18 percent in developed countries.

47% of the population will face water shortagesby 2030

Urbanization requires significant investment in water infrastructure in order to deliver water to individuals and to process the concentrations of wastewater from both individuals and business.

“Over a third of Africa's 1 billion inhabitants currently live in urban areas, but by 2030 that proportion will have risen to a half…the population of some cities is set to swell by up to 85% in the next 15 years.”4

The rate of poverty alleviation is increasing especiallywithin China and India which will increase water consumption from always needing clean fresh water to wanting jacuzzis or private swimming pools.

“By one calculation, there are now more than 1.7 billion members of ‘the consumer class’—nearly half of them in the developing world. China and India alone claim more than 20% of the global consumer class, totaling 362 million, more than in all of Western Europe.”2

As human life expectancy increases and the birth rate continues to rise, human demands on the environment have increased exponentially.

“Freshwater is crucial to human survival and well-being, yet 1.1 billion people have no access to safe water supplies, and 2.4 billion lack access to basic sanitation facilities. It is estimated that two-thirds of the world's population, including 25 African countries, will live in water-stressed areas by the year 2025.”1

Business activity from industrialization to services continues to expand at rapid rate. Expansion of business activity requires significantly more water supply and sanitation.

“Virtually every industrial activity requires water. The likes of power-generation, mining, paper and drinks sectors are particularly water intensive. Non-industrial services, meanwhile, such as tourism and entertainment, can depend heavily on water resources as well.”3

Rapid Population Growth

Expansion of Business Activity Accelerating Rate of Urbanization

Rising Middle Class in Emerging Markets

As the expansion of the global economy progresses, several forces put increased pressure on fresh water and other natural resources

Water issues could have a material impact on city stakeholders – the private sector

Rising demand and limited supply could lead to higher and more volatile energy and water availability

Communities chain could levy taxes or surcharges on embedded water that increase a company’s delivered cost

Direct costs

Increasing regulations and

continuity of supply

Source of innovation

Reporting and product

footprinting

Reputation and Brand Value

Tightening local environmental regulations, particularly around water, could increase suppliers’ costs

Governmental restrictions on water withdrawals threatening water availability

Investors are increasingly demanding greater transparency – and quantification – of water related impacts

Conducting a product footprint (e.g., LCA, carbon footprint, or water footprint) can help companies understand and communicate drivers of environmental impact

Natural resource scarcity (whether energy, water, or any other input) serves as an additional constraint that can spark innovation

New business models may emerge to creatively address water and other environmental challenges

Rising public concern about water scarcity as consumers become more familiar with the issue could threaten corporate reputations, even when impacts are several tiers upstream in the supply chain

There is an opportunity to build a company’s brand as a good environmental steward through proactively identifying and addressing supplier’s environmental impacts in China

Stewardship

Physical, regulatory and reputational risks increase with water scarcity

Physical Risk

Temporary non-availability of water disrupts supply chain

Water scarcity drives up input prices (~2%-20%)

Temporary non-availability of water disrupts operations

Increased capital expenditure on water treatment, water extraction, or alternative technologies to circumvent water problems raises costs

Non-availability or scarcity of water required for using product or service limits growth

Regulatory Risk

Intensifying competition for scarce water constrains growth

Suspension or withdrawal of supplier's water license or discharge permits disrupts supply chain

Intensifying competition for scarce water constrains growth

Reallocation to more urgent needs during drought disrupts operations

Suspension or withdrawal of supplier’s water license or discharge permit disrupts operations and/or constrains growth

Non-issuance of water license or restrictions on use of particular products or services due to water intensity raises costs or checks growth

ReputationRisk

Competition with household water demand constrains suppliers' growth

Responsibility "by association" for suppliers' water pollution damages brand or reputation, hinders growth

Increased capital expenditure on wastewater treatment to meet or exceed standards

Competition with household demands, or pollution incidents, damages brand or reputation, hinders growth

Public outcry regarding water intensity of product damages brand, reputation, hinders growth

Impact on financial performance

Lost revenue from disruption of water supply

Higher costs from:

− Supply chain disruption

− Changes in production processes

− Capital expenditure to secure, save, recycle, or treat water

− Regulatory compliance

− Increasing price of consuming or discharging water

Delayed or suppressed growth, potentially impacting share price

Potential higher cost of capital for businesses that rely heavily on fresh water resources

Supply Chain Manufacturing Product Use

Water management to stewardship

Internal OperationsValue Chain

Business PartnersWatershed Stakeholders

• Consistent, high-quality supply can no longer be assumed given increasing drought and flooding

• Managing water as an input must extend beyond the unit cost of water to include business continuity, brand value, and regulatory considerations

• Complex supply chains cross watersheds and contain hidden water-related business risks

• Hidden risks in the supply chain magnify exposure to water risk

• Effectively managing water-related business risk through the value chain is paving the way for innovation and new business opportunities

• Effective long-term water stewardship occurs on the scale of the local watershed in partnership with local communities and NGOs

• Disclosure of water-related efforts allows companies to gain trust, build relationships, and mitigate tensions

• Watershed-level stewardship has strategic value for global business

Water Management

Focused on immediate, direct and indirect business costs of scarcity and efficient use of the

resource

Water Stewardship

Focused on long-term availability of clean water for

stakeholders in impacted watersheds

Companies are at different levels of maturity with respect to addressing water scarcity; stewardship is the most inclusive and

long-term approach.

Elements of water stewardship

FOOTPRINT• Direct operations: Measure water

withdrawals, recycling/reuse, wastewater discharges (quantity

and quality)• Indirect operations: Measure

supplier water use and discharges (quantity and quality)

• Measure water footprint of products

ASSESS RISKS & OPPORTUNITIES• Assess physical/operational,

regulatory, and reputational water-related risks (direct and indirect

operations)• Prioritize risks and develop a

mitigation plan • Evaluate and implement water-related opportunities (direct and

indirect operations)

GOVERN• Oversee water policy, strategy, or

management plan at board level• Develop concrete water-related goals

• Innovate and invest in water technology

• Manage brand and reputation• Establish water management

accountability through public policy and lobbying efforts COLLABORATE

• Identify stakeholder concerns (employees, suppliers, local

communities, governments and regulators, NGOs, other water users

(industry or company-level), customers, investors)

• Engage internal and external stakeholders on water-related issues

DISCLOSE• Disclose water-related information to

stakeholders• Publish water-related analysis in

financial reports• Audit/assure water-related data

• Be transparent in reporting

Water Stewardship

A step forward in one category improves water stewardship performance

Another view of stewardship

Preservation

Collective Action Innovation

Community outreach

programs to provide safe

drinking water

Technology to record water consumption

metrics

Watershed protection -

Water infrastructure repair

Water technology

funds

Benefits of water stewardship

• A comprehensive view of corporate water use can have significant financial impact (e.g., reduced potential for supply disruptions, capital costs to secure, process, and discharge water, and compliance issues)

• These benefits can be leveraged in the supply chain and in direct operations

• Historically, water management practices have focused on securing water supplies, and managing waste discharges

• Identifying reuse and recycling opportunities can reduce costs and diversify supply, mitigating risk in direct operations

• Sound water stewardship can align corporate and environmental goals

• Avoiding negative consumer perceptions can lead to increased revenues

• Water is a local issue and misuse of water resources can lead to regulatory or consumer conflict

• Considering operational and local community needs can maintain this license in the supply chain and direct operations, and support business continuity and brand value

Brand ValueBusiness Continuity

Innovation

Responding to water-related risks can mitigate risk and identify opportunities across a company’s value chain

License to Operate

Operational

Regulatory

Reputational

Risk Mitigated

Corporate Action

Collective action

Companies have engaged in innovative partnerships around water to protect and enhance their reputations

Coca-Cola WWF alliance goals and progress

Conserve 7 key watersheds

Improve operational water

efficiency

Reduce energy and carbon emissions

Reduce supply chain water use

Inspire a global movement

Working with governments

to change water

management practices

Halfway to achieving 20%

water efficiency

improvement by 2012

Energy and emissions

growth slowing but

absolute reductions will

be difficult

Working with growers to define and implement sustainable

farming

Participation in the CEO

Water Mandate

Brand value, operational resiliency and license to operate

Funding, heightened awareness, expanded

influence

PepsiCo – human right to water and value chain

Supply Chain Collaboration

In India, PepsiCo educated farmers on “direct seeding”, which reduces water use by as

much as 30 percent and saved more than 5 billion liters of water in 2009

PepsiCo Agrees to Policy Respecting Human Right to Water May 2009

PepsiCo is the first publicly traded, multinational corporation to create a policy in

support of the human right to water.In 2003, PepsiCo’s water-use license was revoked in Pudussery, India, because of claims that its bottling plants there were

over-consuming and depleting community groundwater, which is in conflict with the

Human Right to Water.

Other companies have found that partnering with local suppliers and communities can generate “shared value” between business and society

CORPORATE SHARED VALUE

(CSV)

Policies and operating practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions in the

communities in which it operates

Nestlé's supplier partnerships Diageo’s Water of Life program

The goal: Aspires to extend access to clean water to 1 million new people in Africa every year through 2015

Community involvement: Positive contributor to the stewardship of water resources through watershed protection and sustainable water management

Direct operations: Improving water efficiency and decreasing water pollution across bottling facilities and engaging directly with suppliers in water-stressed countries to encourage sustainable agriculture practices

Collective action: Working with others to accelerate progress on the water/sanitation Millennium Development Goals

The goal: Obtain a reliable supply of premium coffee for Nespresso by helping farmers break the cycle of low productivity, poor quality, and environmental degradation that limits production volumes

Working with growers: Provides advice on farming practices, guarantees bank loans, and helps secure inputs

Establishing local facilities: Measures coffee quality at point of purchase and pays premium directly to growers, cutting out the middle man

Conclusions

• Water risks and opportunities should be viewed differently than other resources (e.g., carbon)– Water is a shared resource– Water is local; it is not fungible – Water has economic, environmental and social dimensions, all of which must be

considered

• Water can have value well beyond its price, and that value varies by industry sector– For some companies it has reputational risk and corresponding brand value – For others it has regulatory risk and as such it is managed as a compliance issue– For many, it may be a combination of both

• Water stewardship requires collaboration with internal and external parties; building a water strategy is beyond risk management and includes engagement with multiple stakeholder groups

Point of view

Developing a comprehensive water stewardship strategy can position companies to effectively manage water-related

risks while also identifying key opportunities.