Hedging against nature

The Carbon Disclosure Project (CDP) is now turning its attention to one of the world’s most important resources—water.

CDP Water Disclosure is a global program from the Carbon Disclosure Project (CDP) which measures just how well corporations are handling water-related risks. Nearly 200 companies took part in the second annual survey, responding to a questionnaire sent to firms identified as operating in water-stressed locations or industry sectors.

The impetus for the survey came from investors, says program head Marcus Norton. “They recognized there wasn’t the data out there to enable investors to make a sensible risk assessment. There was a real gap in the market,” he says.

Fifty-nine percent of companies surveyed reported exposure to water-related risks such as flooding and scarcity. More than one-third of companies said they had already experienced some water-related business impacts.

“The recent floods inThailand cost the Japanese car manufacturers a combined $500 million,” Norton says. “They have operations in Thailand and a lot of the components they use in North America and Europe come from that region as well.”

Supply chain issues were also a concern for clothing giant H&M, which reported a 30% drop in profits in 2011 largely due to a doubling in the price of cotton over the preceding 12 months. “That was due partly to increased demand from China, but largely due to supply shocks caused by drought and flood in cotton-producing areas,” Norton explains.

Water also presents opportunities for many corporations. More than 60% of survey respondents pointed to water-related commercial opportunities, such as revenue from water-related goods and services, and cost reductions from increased water efficiency.

For example, Puma has set water-use reduction targets that include its suppliers’ water use. And Colgate-Palmolive improved the cleaning process at a plant in South Africa, saving 388,000 litres of water per year.

In its response to the questionnaire, Canadian energy company Suncor Energy said it had developed a water management plan to reuse and recycle more water within its oil sands operations.

“This would eliminate the risk uncertainty around regulations to return treated water to the natural environment.”

Institutional investors use the information in the report to engage companies on water issues. Norges Bank Investment Management (NBIM), which manages Norway’s sovereign wealth fund, is one of the leaders in this area, calling on companies to take a longterm approach to the issue of water and to commit to sustainable water management.

“NBIM has made a commitment to assess how over 400 companies in their portfolio are exposed to and managing water-related risks,” says Brooke Barton, senior manager of water programs at Ceres, a U.S.-based investor coalition. Last year, Ceres released its own report on water, including a tool for investors to assess how companies are managing water.

“Investors are benefitting from an increasing amount of water related disclosure,” she says.

At the advisor level, Norton raises the example of an investment manager in South Africa whose parents are farmers in a water-stressed region of the country. “One of the first things he looks at when making an investment decision is whether he has a good understanding of the company’s water resources. If he doesn’t, he simply won’t invest.”

It’s clearmany companies simply don’t understand their exposure to water-related risks. In its response to the questionnaire, Canadian pipeline company Enbridge stated it doesn’t use water in its processes and consequently doesn’t measure water use.

That’s a common response, says Norton. “They often forget about supply chains. That’s one of the areas where companies are weakest. ”Only 26% of companies surveyed are actively monitoring water-related risks in their supply chain, the survey found.

Still, CDP isn’t scoring companies on their water policies—yet—and isn’t looking to “catch anyone out,” Norton says.

“Carbon and climate change have been high on the agenda for a number of years and water is just starting to appear above the parapet,” he says.

“Our short-term goal is raising awareness. In the longer term, we want to make meaningful reporting on water a standard practice globally.”

Doug Watt is an Ottawa-based finance writer and editor.