Investor interest in water-related issues is on the rise with investors such as Norges Bank Investment Management stating that "water scarcity on a global scale represents a financial risk to the fund. Economic growth, industrialization and population growth are driving the increasing demand for water, while factors such as climate change, pollution and regulation are affecting the supply and costs related to water." The chemical industry, being highly water intensive, certainly is exposed to water-related risks. Any efforts to manage these risks and capitalize on opportunities begin with the measurement and appreciation of how water may impact business, followed by the development of strategies to protect the business both now and in the future.
The Carbon Disclosure Project (CDP) (www.cdproject.net), London, an international not-for-profit organization, has worked with large companies around the world for over a decade, helping to accelerate awareness and management of environmental risk. It pioneered the only global system that collects information about corporate behavior on water security and climate change. CDP's water program focuses specifically on mobilizing positive and tangible action on sustainable water management by enabling businesses, investors and policy makers to better understand the corporate risks and opportunities associated with water scarcity and other critical water-related issues.
CDP's goal of enabling better decision-making by providing high quality information on how companies are managing their responses to natural resource constraints has never been more important. Demonstrating the growing significance of water management as an investment issue, the 2012 CDP request for information on water, which was sent to 318 of the world's largest companies listed on the FTSE Global Equity Index Series (the Global 500), was formally supported by 470 investors representing $50 trillion in assets.
CDP received responses from 20 companies in the chemical industry. A total of 36 companies in five chemical sub-sectors were asked to respond — see Table 1. The response rate of just 56% was disappointing given the weight of investor interest in the issue and the increasing proportion of companies across all industries reporting water-related impacts, risks and opportunities.
Analysis of the responses provides some interesting insights into the preparedness of chemical companies in tackling water scarcity:
• Almost two-thirds of chemical industry respondents have experienced water-related negative impacts to their business in the past five years, and the majority of respondents have identified water as a substantial and current risk to their business.
• Encouragingly, the majority of respondents report that water represents a current strategic opportunity to improve their financial and brand performance, with some opportunities having sales potentials of more than €800 million ($1 billion) by 2020.
• Despite this, less than half of respondents have set concrete targets or goals with regard to water-related issues, suggesting that water isn't receiving strategic attention proportionate to its risks and opportunities.
A GROWING AND IMMINENT RISK
Water risk is a prominent issue among chemical industry respondents. Indeed, 65% report suffering water-related adverse business impacts in the past five years — this is significantly higher than the full Global 500 sample average (53%). Impacts include business interruption through the closure of major transport routes and property damage. DuPont's operations, for example, were affected by storm surges and flooding associated with major hurricanes in 2008.
Perhaps as a result of this, 70% of chemical respondents identify water as a substantial risk to their business, either in their direct operations or across their supply chains. Increased water stress/scarcity, and regulation of discharge quality/volumes leading to higher compliance costs are the most frequently reported risks (Figure 1). This perhaps isn't surprising given the inherent nature of the chemical industry and the hazards that some chemicals pose to humans and the environment. For example, DSM states that reputational damage resulting from water-related issues can negatively impact shareholder value and that water-related incidents can lead to severe business interruptions.
Given that the majority of the risks identified are reported to have the potential to impact businesses now or within the next five years, there is clearly an urgent need for companies to develop effective management responses.
Israel Chemicals provides a compelling example of the critical nature of a sustainable supply of water to business continuity. The company depends upon the Dead Sea as a significant source of raw materials, yet due to historic and current extraction practices, the sea's water level is dropping at a rate of around one meter per year. Solutions proposed by the Israeli Government are likely to affect the composition of the sea water and, hence, the quantity of materials the company can produce. It's anticipating "significant expenses" as a result.