CFOs Can Lead Efforts to Manage Water Risk

Not all of the reasons for focusing on water risk are ESG-related. There are also good business reasons to do so.
David McCannJune 4, 2019
CFOs Can Lead Efforts to Manage Water Risk

During the 2019 Ceres Conference, Jack Ehnes, CEO of CalSTRS, one of the nation’s largest pension funds, moderated a discussion during which panelists suggested that CFOs should lead conversations on how to address our world’s biggest threat: climate change.

Among the many risks posed by climate change, water risk doesn’t always get the attention it deserves.

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Many regions are on course to suffer major freshwater deficits over the next two decades. According to a  study led by McKinsey, the world may face a 40% global freshwater shortfall compared with available supplies by 2030. More than one-third of the world’s population — roughly 2.4 billion people — live in water-stressed countries, and that proportion is expected to rise to two-thirds by 2025.

Water scarcity, contamination, and pollution touch every corner of the globe, and the only route we have to mitigate these risks is through collective action from the public and private sectors.

CFOs have the ability to take some critical steps now to ensure their companies reduce their water and climate risks and address the global water crisis in both the short and long term:

Elevate Water as a Leadership Issue

It’s imperative that CFOs and other C-suite executives assess and view water risk as a strategic issue. Water is perhaps the most precious of all our natural resources, and it’s essential for economic growth; no company can operate without it. It can also have the largest short-term, financially catastrophic consequences.

The biggest strategic water risks manifest in lost opportunities to grow and build revenue (see chart below). For example, a bottling company may not be able to expand in a key market due to community competition over limited groundwater, or a mining company must halt its operations or expansion over water pollution concerns.

According to Ceres’ research, at least 50% of the stocks listed in each of the four major U.S. stock indices are in industries with medium-to-high water risk. These include oil and gas, semiconductors, chemicals, food products, beverages, electrical utilities, and mining.

Unfortunately, corporate leadership doesn’t often consider water’s economic value and overlooks the financial risk that ignoring water poses to a company’s well-being and future success.

Water management, together with other environmental, social, and governance (ESG) factors, is at the core of many businesses today and needs to be considered by capital markets players.

Companies without sound measures in place to sustainably manage water use are likely to suffer from revenue risks, higher cost of capital, and inflated insurance premiums.

It is the CFO’s  responsibility to elevate water as an issue that can help enhance a company’s value in the long term if appropriately addressed — or cause irreversible damage if ignored. 

Build and Implement a Corporate Water Management Program

Developing a comprehensive water management program is the first and arguably the most important step in addressing water risk and opportunities on a corporate level. As outlined in Ceres’ Aqua Gauge tool, corporate water risk management should include four key elements: measurement, management, engagement, and disclosure.

The adage “a business can’t manage what it doesn’t measure” certainly holds true for water management. Executives must first understand where water risks lie in their value chain. The Investor Water Toolkit “sector matrix” points different industries to where water risks generally lie — from supply chain and direct operations to product life cycle risks.

With this tool, CFOs and other executives can base their water management strategies on data that reflects both current and projected water-related performance, impacts, and risks. Collecting and analyzing the internal and external data necessary to address water risk is the foundation of any strong water program.

Engage With Shareholders on Water Risks and Management

As CFOs are on the frontlines of engaging with shareholders, they should recognize that investors are increasingly aware of the dire water situation.

At least 115 institutions are working collectively to understand water risks in their portfolios and engage corporations on water issues in Ceres’ Investor Water Hub.

U.S. investors are filing shareholder resolutions asking for water-related disclosure from companies in a broad range of sectors. That’s particularly so for water risks in agriculture supply chains with 84 resolutions targeting food, beverage, lodging, restaurant and textile companies.

Stakeholder engagement can help companies understand their key water-related impacts, identify social-license-to-operate risks and develop innovative solutions to water challenges.

To be most effective, companies should recognize that meaningful stakeholder engagement is a two-way street requiring not only communication of the company’s views, but also the intention to listen and respond to concerns.

Companies should also make meaningful commitments such as publicly recognizing the Human Right to Water and the corporate connections related to that right. Note that on May 29, more than 30% of shareholders asked Chevron to assess its Human Right to Water risks and due diligence process.

Addressing water risk within an organization may seem like a daunting task, but CFOs don’t have to go it alone. While they can play an important role in initiating and leading the conversation on water risk, it’s really up to everyone, from boards and the C-suite to shareholders and employees, to effectively address water risk and opportunities. Many groups, resources and guidance exist to get started.

The greater risk lies in not starting.

Monika Freyman is director, investor engagement, water, at Ceres, a sustainability nonprofit organization that works with large investors.