Skip to main content

Constructing a Sustainable Future: The Crucial Role of Water Stewardship

Posted on June 12, 2024

Laura Coll
Laura Coll
Analyst, ESG Research Industrials

Key Insights:

  • The construction sector's heavy reliance on water makes it highly vulnerable to water scarcity issues, which are worsening due to climate change.
  • 43% of companies in the construction value chain lack a formal program for managing water-related risks, whereas 75% of construction materials companies have established such programs.
  • Leading construction companies are implementing water recycling, conservation, and risk management initiatives to address water-related challenges, highlighting the sector's growing focus on sustainability.

 

In March 2024, construction across Belagavi City in Karnataka, India ground to a halt.1 The problem? A severe water shortage forced government officials to cut water supply to construction projects until the local reservoirs filled up again. It’s an increasingly familiar challenge for companies in the construction value chain. As climate change intensifies, so do droughts and dry spells across the world. Construction companies have a high dependence on water, making them particularly vulnerable to such water scarcity issues.

As part of the recent enhancements to Morningstar Sustainalytics’ ESG Risk Ratings, analyzing water risk exposure and management has become crucial. Previously, water risks for companies, including those in the construction sector, were evaluated under the material ESG issue (MEI) of resource use. Now, they are assessed through a separate MEI categorized as water use – own operations. This update addresses companies’ water risk throughout the value chain – from resource extraction and transportation to manufacturing and end use.It also introduces new management indicators to capture water stewardship commitments and initiatives in more detail. 

The goal of this enhancement is to provide better insights into the credibility and strength of companies' water stewardship commitments and initiatives. It also reflects the increased focus on water issues, as evidenced in corporate disclosures.

Water Risks Within the Construction Value Chain

Construction materials companies rely heavily on water through various stages of their production processes. For example, water is used in the extraction of materials, such as sand, stone, clay, brick, limestone, and gypsum, as well as in the processing and manufacturing of final products, such as cement.The production of cement, the key ingredient in concrete, requires significant amounts of water for cooling kilns, power generators and exhaust gases. This production process currently accounts for almost 10% of global industrial water use.Cement companies operate globally wherever construction activities occur. This includes areas facing significant water scarcity due to major droughts, such as parts of Latin America, Southern Europe, Africa, Asia, the Middle East, Australia, and the United States.5

Similarly, building products companies rely on water for multiple manufacturing processes, including cooling equipment, such as glass melting and ceramic firing furnaces, as well as cleaning and processing. Water is also vital for certain building product components, such as ceramics used in flooring, siding and sanitary ware. Other processes, such as polishing precision glass and lenses, require a consistent supply of high-quality freshwater.

The construction process for residential buildings and larger infrastructure projects includes key water-intensive processes, which are particularly relevant to non-residential construction and homebuilding companies. These processes include wet trades, tool washing, groundwork, dust suppression, and moist curing. Construction projects can affect local hydrology, leading to water shortages or sedimentation near project sites. 

Water-related risks, however, are not limited to scarcity. They extend to other physical climate change risks as well, such as flooding, which can restrict access to watersheds due to ecosystem degradation or inadequate infrastructure. 

Climate change impacts may prompt regulatory authorities to impose restrictions on the ability of companies to withdraw the water they need, potentially limiting their production capacity. Companies in the construction sector typically obtain water resources from public supplies, primarily sourced from groundwater, rivers, and lakes, which are heavily regulated by governments. As such, some regions have adopted increasingly stringent regulations on water usage. This is particularly relevant in China, where over half of all global cement was produced in 2023.Companies that are not aligned with regulatory requirements, for instance, by exceeding usage limits, could see heightened compliance costs that result in financial penalties or the loss of water permits.

Evaluating the Commitment to Water Stewardship

In recent years, the construction sector has faced a growing number of water-related challenges. But alongside these challenges, companies now have access to a wider range of effective techniques and systems to address them.

A significant enhancement to Sustainalytics’ ESG Risk Ratings is the inclusion of a water stewardship indicator within the new water use – own operations MEI. This indicator evaluates the strength and credibility of a company's commitment to water stewardship. Additionally, we have increased the weighting of the water risk management indicator to better reflect a company's efforts in managing its physical, regulatory, and reputational water-related risks within its operations. 

Furthermore, we now place greater emphasis on companies' voluntary reporting of corporate water accounting metrics. This helps to more accurately assess a company's water-related risks and its impacts on the environment and society, particularly if the reporting aligns with established guidelines such as the CDP Water Security report

How Construction Industry Leaders Are Taking Action on Water-Related Risks

Saint-Gobain, the world’s largest light construction products manufacturer, has implemented water recycling initiatives to prevent the warm water derived from its cooling processes from polluting any nearby surface rivers. Cooling water is considered a physical pollutant because it may not contain sufficient amounts of dissolved oxygen to support aquatic species.7 These closed water circuit systems enabled the company to reuse about 85% of its water in 2022. 

Cement manufacturer Holcim has taken a similar approach. The company reportedly decreased its freshwater usage by 11% in 2022 at sites located in high water risk areas, which amounted to 76% of its sites.8 The company discloses the strategic advantages of using water efficiently, including significant reductions in its operating costs and preserving freshwater. Its water reduction initiatives, such as water harvesting and recycling, enabled the company to save USD 2.3 million at one of its Bangladesh cement plants alone.

Construction services provider HOCHTIEF has established a water conservation plan for all projects located in water stressed regions. For instance, its highway projects in the U.S. include water conservation initiatives, such as the use of concrete delivery trucks with their own washing processes, and the reuse of polymer slurry water from drilling operations. Moreover, the company is installing rainwater harvesting systems at its own sites.

Water-Related Risk Management Across the Construction Value-Chain

Currently, 43% of companies in the construction value chain lack a formal program for managing water-related risks (see Figure 1 below). Construction materials companies, though, appear to be leading the way, as 75% of them have established such a program. 

For example, Heidelberg Materials, a cement and aggregates manufacturer, takes a consistent approach to identifying its water risks. It uses tools such as the World Resources Institute’s (WRI) Aqueduct, WWF Water Risk Filter and IPCC Climate Change Projections as part of its enterprise risk management framework, which it has implemented at all its facilities, encompassing 3,000 cement production sites. These tools enable users to quantify the substantive financial and strategic impact of water risks. For instance, the WWF Water Risk Filter assesses three types of water-related business risks – physical, regulatory and reputational — that can result in financial impacts, such as revenue loss or increased operational costs.9

Non-residential construction companies, meanwhile, are lagging behind slightly on this issue. This does not mean that these companies do not have initiatives on water management. Half of them are simply not yet integrating water scarcity issues into their risk assessments or contemplating it in their business strategies – or at least, they are not reporting on it.

Figure 1. Strength of Water Risk Management Programs in the Construction Sector (%)

Source: Morningstar Sustainalytics. For informational purposes only. 
Note: Data for this analysis was retrieved in May 2024 from Sustainalytics’ Ratings+ Universe. 

Lastly, another interesting factor to analyze is the regional differences among construction companies in their water risk management. Europe appears to be the most advanced region, while over half of the companies in Asia-Pacific and Latin America do not disclose any programs, according to our data.

Figure 2. Strength of Water Risk Management Programs by Region (%)

Source: Morningstar Sustainalytics. For informational purposes only. 
Note: Data for this analysis was retrieved in May 2024 from Sustainalytics’ Ratings+ Universe. 

Europe has implemented the most ambitious climate and environmental policies. This includes the European Green Deal and the Energy Performance of Buildings Directive, which aim to boost the energy efficiency of the EU’s building stock.10 Thus, its regulatory environment is likely to be a driver of these results. In contrast, none of the 20 companies headquartered in China, many of which are cement manufacturers, disclose related programs. This is a critical factor, considering that over half of the global supply of cement is derived from China.

Toward a Future of Enhanced Water Risk Management in Construction

Although many companies in the construction sector have not yet prioritized water risk in their business strategies, we expect this to change in the coming years. This shift is driven by the growing recognition of water as a critical global resource across various industries. 

To address the complexities of managing water risk, Sustainalytics has enhanced its ESG Risk Ratings by introducing a dedicated assessment of water risks. This thorough evaluation, supported by analyses of corporate commitments and initiatives, offers a more focused assessment of how construction companies measure, monitor, and mitigate their physical, regulatory, and reputational water-related risks.


 

References

  1. Times of India. "Water Crisis Hits Construction in B'gavi." March 20, 2024. https://timesofindia.indiatimes.com/city/hubballi/water-crisis-in-belagavi-impact-on-construction-work/articleshow/108630462.cms   
  2. Construction Products Association. “Water Efficiency: The Contribution of Construction Products.” 2015. https://www.constructionproducts.org.uk/media/87904/water_efficiency_report.pdf 
  3. Summit Materials. “Water Conservation in the Building Materials Industry.” May 15, 2022. https://summit-materials.com/water-conservation-in-the-building-materials-industry/ 
  4. Portland Cement Association. Cement & Concrete. Accessed: June 12, 2024. https://www.cement.org/cement-concrete#:~:text=Even%20construction%20professionals%20sometimes%20incorrectly,like%20mass%20known%20as%20concrete
  5. Kuzma, S., Sacoccia, L. Marlena, C. 2023. “25 Countries, Housing One-quarter of the Population, Face Extremely High Water Stress.” August 16, 2023. https://www.wri.org/insights/highest-water-stressed-countries 
  6.  Statista. Major Countries in Worldwide Cement Production in 2023. Accessed: June 12, 2024. https://www.statista.com/statistics/267364/world-cement-production-by-country/
  7.  CDP. “Saint-Gobain - Water Security 2023.” 2023. https://www.saint-gobain.com/sites/saint-gobain.com/files/media/document/SG%20Water%20response-vdef.pdf 
  8. CDP. “Holcim Ltd. - Water Security 2023.” 2023. https://www.holcim.com/sites/holcim/files/2024-02/cdp-water-security-response-2023.pdf
  9. WWF. WWF Water Risk Filter Suite. Accessed: June 12, 2024. https://riskfilter.org/water/home 
  10. European Environment Agency. “State of Europe’s Environment.” May 23, 2024. https://www.eea.europa.eu/en/topics/at-a-glance/state-of-europes-environment#:~:text=Europe%20is%20the%20continent%20with,EU's%20European%20Green%20Deal%20umbrella    


Recent Content

GLP-1 Medications for Cosmetic Weight Loss and Diabetes | Sustainalytics

Why Looks Could Kill: An ESG Perspective on GLP-1 Medications for Cosmetic Weight Loss and Diabetes

GLP-1 medications' proven efficacy for weight loss caused global demand for these treatments to soar. While the heightened demand is promising for biopharmaceutical companies, it also introduces an array of ESG challenges that this article explores.

Cementing a Sustainable Future: Raw Materials Risk Management in the Construction Materials Industry

Explore trends in raw material use in construction, focusing on scarcity, environmental impact, and decarbonization. Learn about key risks and management strategies to address future challenges in the industry.

Semiconductor Fabs and Raw Materials: Strategies to Manage the Growing Risk of Supply Bottlenecks

The widespread adoption of computing applications, such as autonomous vehicles, artificial intelligence and 5G communication technology, is significantly boosting demand for semiconductors. This article looks at the underlying factors contributing to the semiconductor industry's resource strain and strategies to managing this growing risk.

Turning the Tide: Understanding Water Risks in the Oil and Gas Sector

Turning the Tide: Understanding Water Risks in the Oil and Gas Sector

Explore how climate change impacts water resources, posing risks to the oil and gas industry. Discover Morningstar Sustainalytics' new ESG Risk Ratings and strategies for sustainable water management.