Leaving Investors High and Dry? Largest Companies in World Fall Short in Disclosing and Managing Their Growing Water-Scarcity Risks
Despite growing water-scarcity risks in many parts of the world, the vast majority of leading companies in water-intensive industries have weak management and disclosure of water-related risks and opportunities.
This is the conclusion in the first-ever report issued by the Ceres investor coalition, the financial services firm UBS, and financial data provider Bloomberg.
The report evaluates and ranks water disclosure practices of 100 publicly traded companies in eight key sectors exposed to water-related risks. The report shows that many companies are not including material water risks and performance data in their financial filings, nor are they providing local-level water data, particularly in the context of facilities in water-stressed regions.
Moreover, none of the 100 companies are providing comprehensive water data on their supply chains, an especially glaring omission given that the vast majority of many corporations’ water footprint is in the supply chain.
The shortcomings are evident in the report’s final scores. Using a scoring scale of 0 to 100, the three highest scoring companies were UK beverage company Diageo, Swiss mining company Xstrata and U.S. electric power company Pinnacle West (owner of Arizona Public Services) with 43 points, 42 points and 38 points, respectively. Eighty of the 100 companies scored fewer than 30 points.
“Most companies provide basic disclosure on overall water use and water scarcity concerns, but their focus and attention so far is not nearly at the level needed given the enormity of this growing global challenge,” said Mindy S. Lubber, president of Ceres, which published the report, Murky Waters: Corporate Reporting on Water Risk. “Our global economy runs on water and in many parts of the world this finite resource is under threat. Companies must do more to disclose their potential exposure from this issue and their strategies for responding.”
“Water is integral to the global economy. Whether you’re in California or China, clean potable water is an absolute must for sustaining communities and sustaining economic growth,” said Jack Ehnes, chief executive officer of the California State Teachers Retirement System (CalSTRS), the nation’s second largest public pension fund with $134 billion in assets under management. “This report makes clear that companies are not providing investors with the kind of information they need to understand the risks and opportunities posed by water scarcity.”
With analytical support from UBS, the report evaluates the quality, depth and clarity of water risk disclosure in both voluntary and mandatory corporate reporting through June 30, 2009. The data for the report was provided by Bloomberg’s Environmental, Social and Governance (ESG) data and analytics service.
The report assesses companies in eight key sectors: beverage, chemicals, electric power, food, homebuilding, mining, oil and gas and semiconductors.
“We chose sectors where water security concerns are likely to have a material impact on business, whether through regulatory, legal or reputational constraints that in some cases can go so far as to threaten a firm’s very ‘license to operate’,” said Julie Hudson, global head of SRI and Sustainability Research at UBS Investment Bank. “It is clear that any threat to water security could have a significant impact on the bottom-line of such companies.”
The report scored the companies based on five key categories of disclosure: water accounting, risk assessment, direct operations, supply chain and stakeholder engagement. Within each category, sub-elements were divided to produce a final scored assessment based on the depth and clarity of corporate disclosures.
An extra “opportunities” category was created for two of the eight industry groups – chemical firms and homebuilders – which resulted in those sectors being scored on a 0- to 112-point scale. Among the key overall findings:
• The mining sector scored highest overall, followed by the beverage industry. Companies in the homebuilding sector had the lowest overall scores.
• Only 21 companies disclose targets to reduce water use, and even fewer – just 15 companies – had goals to reduce wastewater discharge.
• Only 17 companies report local-level water data and only a handful provide the information in the context of operations in water stressed regions.
For the list of key company scores by sector, go to www.ceres.org
The report comes as rising populations, rapid economic growth in developing countries, climate change and growing regulation are triggering growing water availability concerns in the U.S and abroad. The report cites numerous examples where impacts are already being felt by vulnerable industry sectors, including:
• In 2009, water shortages in California devastated the state’s agricultural industry, leading to an estimated loss of 21,000 jobs and more than $1 billion in revenues.
• During the 2007-08 drought in Georgia, a severe reduction in hydropower generation due to low water levels forced electric power firm Southern Co. to buy $33 million in fossil fuel-based energy.
• Mining company Newmont faced protests by thousands of local residents near its gold mine in Peru due to water concerns that led the company to relinquish access to 3.9 million ounces of gold reserves in 2004.
The report comes at a time of increasing pressure from investors for improved corporate disclosure of environmental, social and governance (ESG) risks that they face. On Jan. 27, in response to investor requests, the U.S. Securities and Exchange Commission issued formal “interpretive guidance” clarifying the type of information that companies should be disclosing regarding material climate change risks and opportunities, including those relating to water-availability risk.
The report builds on the SEC’s guidance with specific recommendations for companies to improve their water-related disclosure. It recommends that companies:
• Include material water risk factors and performance data in their financial filings;
• Provide water performance data broken down to the facility level for operations in water-stressed regions;
• Outline actions and policies for assessing and managing water risks, including quantified targets for reducing wastewater and water use;
• Disclose how they are collaborating with stakeholders and suppliers on water risks, including setting performance goals for key supply chains;
• Outline specific strategies for developing water-related products with strong market potential in a water-constrained world.
The report also recommends that investors:
• Engage the companies they own in water-intensive sectors about how they are assessing and disclosing water risks and related performance information;
• Ask their asset managers to assess and engage companies on water and other ESG risks and opportunities – and make this a stipulation in Requests for Proposals (RFPs) and annual performance reviews;
• Support investor initiatives, such as the Carbon Disclosure Project, the United Nations’ Principles for Responsible Investment’s work with the CEO Water Mandate, to achieve increased water disclosure.
Ceres is a leading coalition of investors, environmental groups and other public interest groups working with companies to address sustainability challenges such as global climate change. For details, visit www.ceres.org or www.incr.com
UBS is a global firm providing financial services to private, corporate, and institutional clients. The BLOOMBERG PROFESSIONAL service provides data on more than 3,500 companies with news, research and analytics.
Category: Green Business