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November 19, 2009
Carbon Disclosure Project Launches CDP Water Disclosure Initiative
    by Robert Kropp

Seeking to replicate its success in increasing voluntary reporting by companies on carbon emissions, the CDP develops a mechanism for corporate reporting on water use.


Since the Carbon Disclosure Project (CDP) first issued requests to companies for information on greenhouse gas (GHG) emissions in 2003, the number of respondents has grown to nearly 2,500, giving the non-profit organization the largest database on climate change information in the world. Investors have recognized the materiality of corporate climate change disclosure, and at present 475 institutional investors, holding $55 trillion in assets under management, are CDP signatories.

Now, amid rapidly growing concerns among investors and other stakeholders regarding the impacts of water stress and scarcity, the CDP has launched the CDP Water Disclosure, an initiative which seeks to increase reporting on water-related risks and opportunities, especially by companies operating in water-intensive sectors.

According to the Organization for Economic Co-operation and Development (OECD), "By 2030, the number of people living under severe water stress, leaving aside possible impacts of climate change, is expected to rise to 3.9 billion, nearly half of the projected world population." With agricultural consumption of water currently accounting for 70% of water use globally, a projected increase in the world's population to nine billion by 2050 will lead to greatly expanded demand for food.

The impact of climate change on patterns of water availability is expected to be pronounced, as well. In fact, according to the CDP, "It is through water that the impacts of climate change are most likely to be felt, with changing patterns of precipitation and melting glaciers affecting the supply of this critical resource." While the role of business will be critical in addressing problems associated with water availability, the CDP has found that thus far, "awareness and understanding of water-related risks and opportunities is generally limited in the business and investment communities."

Recognizing that investors and business alike require information on corporate water usage in a water-constrained world, the CDP Water Disclosure will request such information from companies using the system established by the CDP for emissions reporting. Its first requests for information on corporate water use will be issued in 2010, and will concentrate on companies in industry sectors identified as water-intensive. The industry sectors to be targeted initially include chemicals, Fast Moving Consumer Goods (FMCGs), food and beverage, mining, paper and forest products, pharmaceuticals, power generation and semiconductor manufacturing.

As part of its launch of the CDP Water Disclosure initiative, the CDP issued a report entitled The case for water disclosure, written for the CDP by Irbaris, a UK-based consultant on issues of carbon, climate change, and clean tech. The report includes a description of a pilot project undertaken by the CDP in 2008.

Marcus Norton, the manager of the new program, told SocialFunds.com, "Several of the companies that we work with wanted help in managing water in their supply chains. The questionnaire we developed was the result of collaboration among experts in the field of water usage and the investors who work with the CDP. It benefits as well from the experience CDP has in preparing inquiries for companies on climate change."

CDPís chief operating officer Paul Simpson said, "Increasingly, institutional investors are asking us, how much focus should be on mitigation, and how much on adaptation? In the realm of climate change, if we reduced global carbon emissions to zero today, the increase in global temperatures would persist for another thirty years. As a result, we have to find ways to adapt to the realities of climate change and water usage."

According to the report, the sample size of the pilot program was deliberately small, and focused on companies in a broad range of industries rather than on those in water-intensive sectors.

Despite the known exposure of the Food & Beverage sector to issues of water scarcity, no companies from the sector responded to the pilot request for information. Norton said, "While many food and beverage companies may not have a huge water footprint in their own operations, the companies in their supply chains certainly do."

Norton gave as an example the effect of a drought in the Pacific Northwest on the operations of Anheuser-Busch. "The barley crop was very poor, which pushed up prices. Furthermore, the company packages its beer in aluminum cans, and the aluminum process is highly energy intensive. The cost of hydropower increases in drought conditions. So in two important ways, water scarcity had a material effect on the company's operations."

Simpson observed, "Our experience at CDP has shown that the first time we ask a question about a potential risk to companies, the response rate is very low. Companies often indicate to us their intention to respond the following year, after they have developed a comprehensive plan to deal with the issue."

The report also found that while many companies have information on their direct water usage, and water management plans for their own plants, not one respondent could provide information on water use by their primary suppliers. Neither did any companies quantify the exposure of their business through the purchase of raw materials.

"While there appears to be a lack of awareness about water usage beyond their own operations, many of the food and beverage companies are involved in water issues," Norton said. "I'm expecting interesting disclosures from those companies next year."

The next step for the CDP Water Disclosure project will occur in 2010, when its requests for information from companies in water-intensive industries are issued. The information that will be requested includes water usage and exposure to water stress, both in companies' own operations and those of their suppliers, as well as water management plans and governance.

Because the companies from which information will be requested are in water-intensive industries, and because the initial recipients of the requests will be selected from the largest companies in the world according to market capitalization, investors should be able to derive significant insight into the investment risks and opportunities associated with corporate water use. The project hopes that the information it gathers "will be used to help drive investment towards sustainable water use."

"We're targeting Global 500 companies because we're looking for impact, and we're looking for leaders," Norton said. "These companies have a wide geographical range of operations, and also have scale."

Simpson said, "Water is a different type of issue from climate change, because of its local impacts. But investors are beginning to ask how water governance affects the operations of companies, and on their investments. There's been an increased level of interest in investment in China, for instance. The melting of the Himalayan ice caps will have significant impacts on investment in China and India."

"We are reaching out to a very large group of investors with whom CDP already has relationships for this project," Simpson concluded, "And we will be seeking to recruit more investors in the coming months."

 

 
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