Companies and investors need to go local
The growing scarcity of freshwater resources is a risk to the economic, social, and environmental well-being of populations worldwide, and a material issue for companies. Corporate-wide water strategies are essential, but because water security challenges are experienced at the local level, and water basin conditions are unique, there is no one-size-fits-all solution for companies to implement. Ensuring a long-term sustainable freshwater supply for all basin users is a complex challenge requiring collaboration between various stakeholders, including communities, authorities, and companies.
A facility-level risk reduction analysis would focus on securing water supply by increasing internal efficiencies, increasing water reuse and recycling, and therefore withdrawing less water. Further facility-level risk reduction could also focus on securing water at the source of the supply and reducing reliance on a municipal water source by creating on-site water storage or drilling company-owned and operated groundwater wells. However, water storage and seeking alternative water sources within the same basin are narrowly focused on a single facility in the short-term, which could negatively impact other water users in the basin, with the potential to cause reputational damage to the company.
What should investors do to encourage companies to decrease operational and reputational risk? How can a company ensure stable local water supplies? Essentially, both top-down leadership, as well as facility-specific responses, are needed. High-level commitments, accompanied by time-bound goals and targets, will drive resources to the challenge; however, bottom-up inputs will ensure the facility-specific response is appropriate for the location. Leading companies are increasingly using beyond-the-fence line or basin-level approaches. These advanced approaches can improve water security for all basin users, thereby reducing reputational risk for the company and increasing physical supply over the long term. Integrated water resources management is also one of the targets underpinning Sustainable Development Goal (SDG) 6 on clean water and sanitation and was addressed in Sustainalytics’ first thematic water engagement, which concluded in 2019. This engagement utilized company dialogue and research which, showed that while companies acknowledge the collaboration and basin-level efforts to be the most efficient and cost-effective ways to tackle water risks, these remain areas where management responses have yet to be fully actualized. While basin-level approaches are win-win, integrated measures have proven difficult thus far.
Sustainalytics’ thematic engagements are focused on material issues and aim for impact beyond individual companies. We help investors manage reputational risk and increase corporate accountability through proactive, professional, and constructive engagement. Our Localized Water Management thematic engagement that commenced in 2020 builds on the findings from the first water engagement, focuses on 19 companies (so far) that rely on water from the Tiete Basin (Brazil) or the Integrated Vaal River System (South Africa). Both basins supply large urban centers with wastewater challenges (Sao Paulo and Johannesburg, respectively) and host many corporate and agricultural activities. Both basins have faced water shortages and are projected to become increasingly water-stressed due to climate change impacts and socio-economic growth. This engagement is unique because the companies share a geographic region and are all dependent on a shared resource. During the three-year engagement, we intend to improve companies’ awareness of the materiality of water as a business risk, emphasize the importance and benefits of localized water management, encourage appropriate management responses, and create opportunities for collaboration between companies to generate tangible basin-level impacts. We also aim to strengthen the role of investors as pertinent stakeholders in integrated responses to water crises.
Water is more than a key input into products and processes. It is a critical resource for the health and well-being of every community around the world. While this investor engagement aims to positively influence corporate water stewardship, we are simultaneously supporting companies to contribute to achieving SDGs. Our discussion points address all six targets of SDG 6 – Clean Water and Sanitation. In addition to the topics that are of most direct relevance and self-interest to the companies, water quality and water efficiency (targets 6.3 and 6.4), we address local community’s access to drinking water, sanitation, and hygiene (targets 6.1 and 6.2), integrated water resources management (target 6.5) and protection and restoration of water-related ecosystems (target 6.6). The engagement also has links to SDG 9 – Industry, Innovation and Infrastructure, SDG 12 – Responsible Consumption and Production and SDG 13 – Climate Action. Progress at a company and basin level can have profound impacts on communities and help to solve the water crisis.
Through active ownership, investors can play an active role in supporting solutions to the global water crisis, encouraging companies to secure water supply while contributing to achieving SDG 6. Investors cannot fix the water crisis independently; however, demonstrating concern for water as a material issue and a societal good can accelerate change, providing a step on the long road to integrated and lasting responses on basin level and beyond.