Supply Chain

Companies Swimming in Water Risks

With a drought and other factors having pushed up water prices sharply over the past two years, companies are conserving and working with watershed...
Caroline McDonaldAugust 20, 2012

With at least 60% of the United States now experiencing drought conditions, companies are focusing more than ever on intelligent water usage. They are opting to conserve and to work with their watershed stakeholders to keep costs down and avoid potential compliance and reputational problems.

The price of water has jumped an average of 18% since 2010 and 7% over last year in 30 major cities: the 20 largest ones plus 10 regionally representative ones, according to Circle of Blue, a water research and information organization. Rates have risen highest this year in Chicago, by almost 25%.

Water rates are rising faster than inflation in the United States, not to mention faster than those of most other utility services, including gas, electricity, and telephone, says the Institute of Public Utilities at Michigan State University. Prices for garbage collection and cable television are increasing about as fast as water, the institute says.

“From a CFO perspective, this hits a number of key issues,” says William Sarni, practice leader for enterprise water strategy with Deloitte Consulting. “It can affect financial performance, growth strategies, emerging-market strategy, and supply-chain management. CFOs need to pay attention.”

A specific up-front issue is continuity: ensuring you have enough water to run your business over an extended period of time and managing that issue, notes Sarni. Some companies that are good stewards of water as a resource have seen their brand value enhanced, he says, and the converse also is true. “Reputational risk and brand value are two sides of the same coin, so if you don’t pay attention to it, you risk that it will impact your brand and thus your ability to operate,” says Sarni. Industries that depend on water to produce their product, such as beverage companies, have been out in front of this issue for some time.

To protect themselves, companies must first understand how much water they are using. “Water footprinting is not just direct usage, or how much is being used within a manufacturing or bottling facility,” says Sarni, “but also what’s being used throughout its supply chain.” That is as true for apparel companies that rely on the agricultural sector as it is for food-and-beverage companies. Companies also must pay attention to where they are using water, he notes, emphasizing that the availability of water is very much a local issue.

Companies are now researching how much water they are using within a particular watershed, or a land area where all water that is under it or drains off it goes to the same place. “Every watershed is different,” says Sarni. Only some of them are in areas experiencing water stress or scarcity. Companies should take heed of not only where they have operations but also where members of their supply chain do. While a beverage company, for example, may have a bottling plant in an area that is not experiencing water stress, agricultural and other suppliers may be seeing the opposite. Make it a point to know what suppliers are doing to quantify the risk, he advises.

There are three dimensions to water risk, he notes:

• Physical scarcity — Is water available when and where it is needed?

• Regulatory issues ­— Are regulations changing with respect to water use and pricing, and how might that affect a company and operations going forward?

• Reputational risk — An increasing number of stakeholders in a watershed care how companies are using water. They may be able to influence how a company uses water or even the withdrawal of its license to operate.

As a result of those issues, companies are becoming more efficient in how they use water. “They are reusing and recycling as much water as they can and also engaging with stakeholders within a watershed to collectively manage that resource so there is enough water for everyone to operate,” says Sarni. Stakeholders could be competitors, companies in other industries, government entities, or citizens.

Water is a critical resource in the energy sectors, where it’s needed for cooling nuclear, coal, and gas power plants and for shale gas hydraulic fracturing, for example, and in manufacturing, such as in the production of semiconductors. In fact, there is a link between energy and water conservation. “Companies have now recognized that if they reduce their water use, they also reduce their energy use,” notes Sarni.

However, Andy Bishop, the CFO at Hallador Energy, a Colorado-based coal and petroleum miner, said water shortages have not yet affected the company in a material way.

Indeed, James Pardo, a partner at law firm McDermott Will & Emery, observes that the water shortage is not having much of an overall impact on pricing, productivity, or profits in the oil and gas industry, but if it keeps up it could curtail exploration.

Because of the higher value of water in some areas of the country, such as Texas, some farmers are finding they can make more profit by selling their water to gas and oil companies than using it for agriculture, says Pardo.

While there has been much focus on water issues because of the drought, Sarni points out that there’s a distinction between water scarcity and drought. “You can have water scarcity without having a drought, because some of the factors that come into play are increasing population, increasing economic activity, the rise of the middle class globally, and increased urbanization. All place demands on a finite resource,” he says.

As water becomes scarcer, there will be regulatory changes designed to manage the resource. “Companies need to think about what regulations are in place now and what they could look like in 5 to 10 years, as part of a routine risk-management strategy,” says Sarni.