LIQUIDITY RATIO - JSE MAGAZINE

LIQUIDITY RATIO

Water is no longer just an environmental issue – it’s integral to the way companies manage risk

LIQUIDITY RATIO

Good quality water – and a consistent supply thereof – is central to our lives. Even ancient cultures developed sacred ceremonies to protect themselves against the destruction caused by too much or too little of the valuable resource. These days, however, modern multinational companies are not content to philosophise about whether rain will come and the consequences if it doesn’t. As the recent Global Water Report shows, access to water is becoming an integral part of risk analysis, and many firms prefer to confront it sooner rather than later.

Over 10 years ago the CDP (formally known as the Carbon Disclosure Project) launched a public disclosure system so that companies could report on the impact their operations had on climate change. Since then the project has expanded in both scope and the respect it commands from investors.

Cate Lamb, head of the CDP’s water programme, says the project platform has evolved significantly. ‘Our offering to the global marketplace has expanded to cover a wider spectrum of the Earth’s natural capital, specifically water and forests,’ she says. ‘By analysing financial and non-financial risks and opportunities related to water, and then translating them into consistent financial terms, companies can be positioned to make better investment decisions and be better prepared to meet water challenges.’

Some 184 global companies participated in the 2013 survey, including L’Oréal and Unilever. Of those surveyed, 70% said that water risk is a substantial business challenge for them. Of those, almost two-thirds (64%) expected to have to confront water risk issues now or within the next five years.

Lamb says: ‘Water stewardship activities are notably lacking, potentially exposing their company and investors to risks that could be mitigated.’ She says that while most (63%) of the companies surveyed had targets in place for their direct operations (for instance recycling water or reducing water risk), many weren’t looking further than that.

‘Companies that continue with such a narrow focus could be missing potential opportunities and overlooking serious risks,’ she says.

The most common concern for firms was water stress or scarcity. But more complex issues are appearing, such as higher-discharge compliance costs, reputational risk and regulatory uncertainty.

Christine Colvin, senior manager of the freshwater programme at WWF South Africa says: ‘There are four elements of risk. The one is physical risk – either drought or pollution. Then there’s reputational risk and regulatory risk. The physical, the regulatory and the reputational all link into and play into financial risk.’

education-infographic

Noble Energy, an S&P 500 company with oil and natural gas operations in both Africa and the US, said they were concerned that US droughts could result in tougher government regulations, and that scarce water resources could be allocated away from fracking. This would pose a very real threat to their plans to exploit various gas deposits.

Meanwhile, Colvin says regulatory risk is a real challenge in SA. ‘We are going through a process of water reform in the same way we are going through a process of land reform,’ says Colvin. ‘It’s something the commercial agricultural sector is very well aware of. The fact is we have already allocated 98% of the water we have available. The only way to grow new business and new agriculture, particularly BEE ventures with emerging farmers and junior miners, is to reallocate water – to take water away from where it has been and reallocate it elsewhere.

‘That’s how the regulatory risk is playing out, particularly in South Africa,’ she says.

At present, 57% of water usage in SA goes to agriculture. A recent report by the Institute for Security Studies warned that even if current policy reform proposals were implemented, there would still be a great disparity between supply and demand. This could limit growth and hamper the implement-ation of the National Development Plan (NDP). The NDP, in part, proposes that all South Africans have access to clean water in their homes, and to increase the amount of land under irrigation by 33% – all by 2030.

The silver lining of SA’s water-stressed situation is that many companies, manufacturers and farmers are taking proactive steps to understand their water risk. They are developing strategies to withstand the kind of drought currently seen in California.

‘With the awareness of how finely balanced water risk is at the moment within the SA economy, we know that it will be a small nudge that could push us across that tipping point of physical water scarcity, which could then trigger a whole lot of regulatory responses,’ says Colvin.

‘Companies realise that a key issue for them is to be proactive – to make sure that in their supply chains, water risk is taken seriously and is acted upon, and that there are contingency plans in place.’

In 2012, the WWF released the Water Risk Filter, an international online tool that helps companies confidentially analyse their operations and global supply chain. It aids in identifying water risks and hot spots. Specific information is provided depending on what is grown, for instance, and based on the specific catchment area where the company operates.

education-pull-quote

‘Companies that continue with such a narrow focus could be missing potential opportunities and overlooking risks​’

CATE LAMB, WATER PROGRAMME HEAD, CDP

By no means the only tool of its kind, the Water Risk filter has already attracted broad participation, with 1 600 companies in SA alone making use of this free service. ‘You would enter information for a particular mine or a particular farm or a supplier in a particular place, because it incorporates information about where they are in the catchment,’ says Colvin. 

‘It will give you an indication of whether the bulk of your water risk lies within your own operation and whether those are linked to quantity or quality issues. If you’re already doing absolute best practice to manage water risk at your mine or on your farm, it will then give you an indication that your water risk actually lies in the basin and is a shared risk with your neighbours.’

Two years ago Marks & Spencer used the project to analyse the water risk among their global suppliers. It identified Ceres, from which it sources stone fruit such as nectarines, peaches and apricots, as a hot spot. ‘A less noble company might have then thought, “Let’s get peaches somewhere else”, but Marks & Spencer decided to then look at how they could reduce water risk in that area,’ says Colvin.

Further research followed to find out there were any inefficiencies from the suppliers, and the results were surprising. ‘Our farmers were actually doing amazingly well. The global water footprint for one nectarine is 140l, the water footprint for the nectarines that are produced in the Ceres area is 33l, so these guys are working so efficiently with very high-tech computerised drip irrigation systems, getting way more crops per drop out of the local resources than in other areas of the world.

‘But there was still shared water risk in the catchment – the growing need from urban users and potential pollution in the catchment.’

The answer for these producers, who also supply retailers such as Woolworths, is to get involved in collective action to preserve the water supply in the entire catchment area.

Another company regularly identified as a leader in water stewardship is SABMiller. ‘I would go as far as to say that – not only within SA but globally – SAB plays a real lead in terms of talking about water risk, disclosing issues of water risk and really trying to turn things around in the catchments where they have a footprint,’ says Colvin.

The hops used in SAB beers are sourced from two tiny catchments areas near George in the Outeniqua mountains, where conditions are just right to match the kind of European climate that hops usually thrive in. SAB’s water disclosure shows that an estimated 155l of water goes into making a single litre of beer in their SA operations. However, instead of shying away from their water-use statistics, the brewery has entered into partnerships with various groups, including WWF and the Deutsche Gesellschaft für Internationale Zusammenarbeit to develop water projects that will benefit the entire catchment area, including many farmers who are not SAB suppliers.

Their interventions are not necessarily high-tech. A hydrological model of the area found that if alien vegetation continued to spread in the headwaters, run-off from rivers could decline as much as 40%. Government already had an alien vegetation removal project under its Working for Water programme. However, the scale of the problem they’re fighting is so extreme (an estimated 20 million hectares of alien vegetation urgently needs to be removed) that the state has also launched the Land User Incentive Scheme.

The latter pairs private funding from companies with government poverty alleviation funding, and has the added bonus of employing people from the local communities to clear alien vegetation.

WWF is working with the Danish Hydrological Institute to develop a version of the Water Risk Filter that is solely focused on SA. ‘At the moment the Water Risk Filter is a global tool. So you can compare a site in SA with a site in Brazil, [or] with a site in China,’ says Colvin.

‘We are going to downscale the tool using SA data sets, because we have fantastic national data that is at a much finer resolution than the data sets used for the global tool,’ she says.

The hope is that even though SA companies and producers are facing a tough environment – both physically and in terms of regulation – they’ll be able to identify and manage their risk in a way that makes them world leaders.

By Susan Comrie
Image: Fredrik Broden/reneerhyner.com