role of the board in water risk_greenall

44 | Institute of Corporate Directors Issue / Numéro 160 | March / Mars 2012 | 45

Water matters to business. almost every product or service requires water, and

the need to understand and address water access, cost and usability has never been greater. Yet most companies and their boards don’t approach water quality and supply as matters of business significance. as water gains prominence as a strategic business issue requiring fiduciary oversight, what should boards do to ensure that executives are effectively managing their water-related risks?

to answer this question, directors need to first understand:

•the context for water use, demand and availability;•their company’s direct and indirect water

footprint; and•How water use translates into business risk and

opportunity.

Water is an increasingly constrained resourceGlobally, 0.5% of the world’s water is accessible freshwater. Canada has 20% of this amount and is often considered both a water-rich and water-dependent nation. the seeming abundance of water, however, gives rise to a false sense of security. For one, only 7% of Canada’s freshwater is replenishable. Canada is one of the most wasteful nations when it comes to water usage on a per-capita basis (behind new Zealand, the u.s. and Chile). and its replenishable freshwater supply is currently in decline. Given that water’s measurable contribution to the Canadian economy reaches $7.5 to $23 billion per year, this decline should be of great concern.

Combined with increasing consumption and inefficient use of water in industrial process, this supply decline has created a Canadian freshwater supply-demand gap. the gap is further exacerbated by the fact that in seasonal low-flow periods, shortfalls

of replenishable water throughout much of southern Canada are already a reality.

the major uses of water by industry are for process, cooling, condensing and steam. the industry most exposed to water risk is thermal-electric power generation, which requires large volumes of high-quality water for production and cooling. Food and beverage, manufacturing and mining industries are also heavily water-dependent.

Current constraints on, and variability of, water supplies are projected to get worse. Population growth will cause increased demand and competition for water supplies. a changing climate is anticipated to significantly impact water resources, whether through extreme rainfall and flooding events, seasonal shifts in flow regimes, decreased lake levels, saline intrusion into coastal aquifers, or severe droughts.

For business, this unstable water situation means increasing conflicts over water access, apportionment and quality, and heightened potential for business disruption. informed directors should be asking management how water is used and managed within the business. they should also be informed about how management is protecting the company’s interests in the surrounding watershed.

No easy way of assessing water footprintunderstanding how and how much water is used – the corporate “water footprint” – is complicated. Water is a multi-dimensional performance issue. First, the direct water footprint (water use in operations) is often much smaller than the indirect water footprint that results from the use of water in the extended value/production chain. understanding the total embedded (or virtual) value of water across both of these dimensions is critical to understanding a company’s full exposure to water risk.

The Role of the Board in Water Risk With 80% of big firms anticipating water-supply problems, how can directors help?

By ValeRIe ChoRT aND DaVID GReeNall

Deloitte

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second, water withdrawn is not the same as water consumed. recycling or reuse of wastewater for cooling or material washing can reduce the amount of water required. nor is all water the same or of equal value. a company may use green (rainfall) or blue (surface) water, and discharge grey (polluted) water. understanding the complete water footprint requires calculating the type and sum of water consumed across all phases of production.

Finally, and perhaps most difficult to assess, is the sustainability of water use. this requires examining the timing and the extent of water use relative to the quality, availability and extraction limits of local watershed resources. in arid and semi-arid areas, this translates into how and when best to use the scarce water that’s available. Companies should be concerned with understanding the extent of environmental harm to watersheds attributable to their water use. the most serious business risks will arise in situations where a company is abstracting water or generating water pollution in areas where the water needs of the community and/or ecosystem cannot be met.

Five accounting methods and tools exist to help businesses understand their water footprint: the Water Footprint network’s “Water Footprint standard,” life Cycle assessment, the World business Council for sustainable Development “Global Water tool,” the Global environmental management initiative “Water sustainability tool,” and the aqueduct alliance’s “Water risk atlas.” the first four tools focus on tracking water inputs and outputs, although they differ in methodology. as a group, they do not fully address the full water impact of products, services and operations on corporate value chains. they are useful, however in helping companies think about how to operate, innovate and mitigate risk within a water environment.

the Water risk atlas is the first tool to address direct, geographical and sector-specific water risk.

Water risks exist within and beyond the factory gateWater risks are business risks. lack of water, poor quality water or extreme weather events can lead to shortages, business disruption, cost increases, revenue loss, or constraints on growth. asset performance and investments may suffer, and capital replacement costs may be significant. Focusing solely on a company’s monthly water bill means missing the broader operational and strategic implications of water performance.

Water performance can also impact corporate reputation. after all, water management is a core component of sustainability management. Companies that are trying to build their reputations for being socially and environmentally responsible may suffer negative brand impact due to actual or perceived wasteful, inefficient or inequitable use of communal water resources.

Direct water risk is often easier to address than indirect risk. Ways that a company can manage its direct risks include improved water efficiency, higher water quality, re-use, recycling, business continuity planning, and water-informed asset and infrastructure design. indirect risks resulting from the state of local river basins or watersheds (and the management thereof) are more difficult to control.

even efficient companies operating in poorly managed watersheds may still be at high

risk. For example, if water-related regulations are non-existent or

poorly enforced, a company will be exposed to the impacts of actions

taken by other agents using the shared resource. to address watershed-governance risks, companies may be required to engage and collaborate with

other stakeholders.

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Investors care about water performanceshareholders are demanding increased management and board attention to water-related risk. interest in corporate water performance is not restricted to socially responsible investors. a growing number of institutional investors (particularly pension funds) and asset managers are starting to incorporate corporate water-risk exposure into their investment due diligence.

the focus to date has been on industry sectors most impacted – or most dependent – on water usage and supply. For companies in these sectors, investors are becoming increasingly concerned that the materiality of water – as defined in strategic and financial terms – is not being adequately appreciated or integrated into corporate decision making. nor do investors believe that sufficient information on water strategy, risk and performance is being disclosed through financial statements, continuous disclosures or voluntary channels such as sustainability reports.

initiatives such as the investor-led CDP Water Disclosure Project (WDP), based in the u.K., have emerged to bridge the corporate-investor information divide. backed by 354 investors representing us$43 trillion in assets, the WDP annual collects data on water use, strategies, and risks and opportunities from the world’s largest publicly traded companies.

significant findings of the 2011 WDP from Canadian firms include:

• 70% have experienced water-related detrimental impacts in the past five years;

• 80% anticipate they will experience water-related risks to direct operations or supply chain in the near future;

• 80% have acted to manage their water resources linked to direct operations, while only 10% have acted on supply-chain and watershed-management water performance;

• 20% are unaware whether their supply chain is exposed to water-related risks that have the potential to generate a substantive change in their business.1

overall, the WDP found that 57% of companies report board-level oversight of water policies, strategies, or plans. Given the proportion of companies identifying current and future water risks, this level of board involvement is insufficient.

Five questions for boards to ask about water riskboard involvement in water strategy and performance is not just consistent with accepted principles of corporate governance and fiduciary oversight; in the context of declining availability, increased demand pressures and climate change, it is essential. in exercising their power and duty to consider the best interest of the corporation, directors must ensure that structures, processes, and rules are in place to ensure that actions of management and employees are consistent with the legitimate interests of the company’s constituencies – including shareholders and stakeholders. these interests include reduction in water-related costs, maximization of efficiencies, reduction of asset and supply-chain vulnerabilities, and maintenance of the environmental health and sustainability of local watersheds and river basins.

to provide effective oversight, directors should ask the following questions of management:

1. How dependent is the company on water? What are its operational and supply-chain risk exposures and coping abilities?

2. What is the materiality of water, in the context of known trends, events, demands, commitments, and uncertainties? What are the anticipated impacts on revenue, expenditures and cash flows, and the company’s financial condition and liquidity? if management does not have these answers, why not?

3. is there a corporate water strategy, and how is it being integrated into operational plans and supply-chain management? What is the cost of this strategy under various scenarios? and how is the strategy being assessed to ensure its effectiveness and that objectives are being achieved?

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1. www.cdproject.net/water.


4. is there a corporate (or product) water target or goal? if there is, can management explain whether these targets or goals are possible to achieve, based on assumptions about future economic conditions and courses of actions?

5. For companies with shared water-resource exposures, what is management doing to engage in and support the effective governance of river basins and watersheds?

boards also should be structured to enable effective oversight of water strategies and performance. Given the cross-functional nature of water impacts on business performance, as a topic it does not fit neatly within the remit of any one board committee. Water is a “committee of the whole” concern. However, given the complexities of the issue, principal

responsibility for oversight of water can and should be delegated to a board committee such as risk, finance or environment/sustainability.

as ben Franklin observed, “When the well is dry, we learn the true value of water.” boards must ensure that management understands the value of water before the corporate well starts running dry.

Valerie Chort is Partner and national Practice leader in the enterprise risk, sustainability & climate change practice at Deloitte. she can be contacted at [email protected].

David Greenall is senior manager of Deloitte’s enterprise risk, sustainability & climate change practice. He can be reached at [email protected].

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This article originally appeared in the Director Journal, a publication of the Institute of Corporate Directors (ICD). Permission has been granted by the ICD to use this article for non-commercial purposes including research, educational materials and online resources. other uses, such as selling or licensing copies, are prohibited.

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role of the board in water risk_greenall

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