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January 24, 2012
Ceres Aqua Gauge Helps Investors and Companies Manage Water Risk
    by Robert Kropp

As population growth and climate change make water risk management an issue for investors and companies to address without delay, the Ceres Aqua Gauge provides a framework for evaluating corporate strategies.

The case for sustainable water management by corporations can be advanced by means of a couple of forecasts. By 2050, the global population is expected to reach nine billion people. And by 2020, some four hundred million people will be joining the middle class; as Graham Sinclair of AfricaSIF, the African sustainable investment forum, told recently, "There's a good chance they're going to follow the same consumption patterns as what they see on TV and elsewhere around the world."

Add to those forecasts the effects of climate change—extreme weather events in increasing numbers, rising sea levels in coastal areas and drought elsewhere—and the availability of water resources presents as an impending crisis that needs to be addressed by corporations and other stakeholders now.

"The conversations I'm having say that we're going to blow past two degrees Celsius," Sinclair said. "Water-stressed areas have to start thinking about adaptation. Adaptation says that the climate will change, so start leading people to higher ground."

Until recently, few resources existed that sustainable investors and other key stakeholders could use to effectively evaluate the water management practices of corporations. The CDP Water Disclosure of the Carbon Disclosure Project (CDP) did not issue its first report on corporate water use until 2010, when 137 institutional investors with $16 trillion in assets under management requested water use information from 302 companies listed in the in the FTSE Global 500.

"Water is a current, not a future, corporate issue," CDP Water's inaugural report stated.

Still, while voluntary reporting by 302 major corporations from water-intensive industries is significant, the snapshot provided by the information in the report may be too small for investors seeking to address water risks across their portfolios. To help provide guidance for those investors—as well as companies themselves—Ceres introduced the Ceres Aqua Gauge, a framework and tool for assessing corporate water risk management, in October.

In the foreword to a report issued in conjunction with the Aqua Gauge, Mindy Lubber of Ceres wrote, "Population pressures and climate change exacerbate water risks and their accompanying bottom-line impacts. Some companies are taking action to recognize and act on these risks, but many are not."

Along with Ceres, report authors include the IRRC Institute (IRRCi) and the World Business Council for Sustainable Development (WBCSD).

Ceres describes the Aqua Gauge as "a flexible Excel-based tool that allows investors to scorecard a company's water management activities against detailed definitions of leading practice." Portfolio managers and analysts, governance specialists, and environmental, social, and corporate governance (ESG) data providers are among those in the investment value chain who can benefit from a tool that allows them to assess a comprehensive set of corporate-level water management practices.

For companies, the Aqua Gauge provides opportunities for internal self-assessment, benchmarking against competitors, and business strategy development. The tool can also help companies clarify water risk management for their investors, and engage with companies in their supply chains.

In a webinar held last week, Jon Lukomnik, Executive Director of the IRRC Institute, said, "For large institutional investors, inexorable forces can be mispriced if they are long-term and in particular if they are unpredictable as to timing. Many risks, particularly those which are not traditional financial risks but which can affect the real economy and the real world, have those features, water being one of them."

"What happens is an event occurs, and it metastasizes how an investor or an analyst thinks about how these things will affect people, companies, and investors. For instance we recently experienced flooding in Thailand," Lukomnik continued. "It affected the computer parts supply chain. That in turn led a whole host of companies to announce that they expect to see lower revenues for the fourth quarter of last year and through 2012."

"For a diversified long-term investor, such events may be unpredictable but they're also inevitable," he said.

Another example addressed by Lukomnik in the webinar is China, where the $62 billion South-North Water Diversion Project is underway. The project aims to divert six trillion gallons of water each year from the Yangtze River in the south of the country to Beijing and other large cities in the north.

Lukomnik noted that China plans to spend $600 billion on major water infrastructure projects by 2020, and that water input costs are expected to increase by as much as 500% in as little as three years.

"The issue for investors is, what do you do?" Lukomnik asked. "As we learned from the financial crisis, you can't diversify systemic risk if you don't manage it. If you don't mitigate it builds within the system until you have a problem."

He continued, "The Water Gauge gives companies a way to manage risk, but it gives investors a way to see how well those companies are managing the risks, to build a portfolio that is more robust against the water risk."

Report co-author Brooke Barton, Senior Manager of Water Programs at Ceres, said, "Managing water risk is a daunting task. It comes down to the question of how to gather data to take strategic action. To date there hasn't been an overarching framework to advance strategic water management across a company's value chain."

The framework of the Aqua Gauge, Barton said, consists of four key pillars: supply chain management, a source water protection plan, a valuation of water, and the human right to water.

One water-intensive company that has formulated a source water protection plan is Coca-Cola. At the webinar, Greg Koch, the Director of Global Water Stewardship at the company, emphasized the local nature of water issues, pointing out that Coca-Cola produces its food and beverage products at localities throughout the world.

The company's source water protection plan seeks to ensure the sustainability of its water supplies, protect product quality and safety, and maintain its social license to operate through engagement with communities.

"We have to secure our water resources, but also work with the community, with civil society and government, to address the broader issues in that water basin," Koch said. "The health of that community, hence the health of our business, is directly tied to that."


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