Matt Howard, Vice President of Stewardship at the Water Council, says investors need context-based information to understand best practice water usage among investee firms.
Last May, Arizona experienced a period of ‘exceptional drought’ which for a state largely covered by the Sonoran Desert may not come as a shock.
What may be more surprising is that, coinciding with Arizona’s crippling dry spell, City of Mesa county officials approved the development of a US$800 million data centre which would mean a massive increase in demand for water in an already highly stressed region.
It is this kind of corporate demand for rapidly depleting natural resources that has driven the Water Council – a not-for-profit organisation based in the US – to demand higher standards of water stewardship.
Matt Howard, Vice President of Stewardship at the Water Council, says: “Business decisions are made every day in the US that just confound me. Why do we put data centres in the middle of the desert? And it’s not just data centres; there are all types of water-intensive business that when you overlay [their locations] with a map of water stress, you find they are all concentrated at the most stressed points.”
Research from McKinsey finds that by 2030 demand for water will outstrip supply by 40%, which means additional investments of US$1.7 trillion must be found to meet UN Sustainable Development Goal 6, safe and affordable drinking water for all.
The OECD says this is a funding gap of three times current investment levels and represents “only a fraction” of the water agenda. “Projections of global financing needs for water infrastructure range from US$6.7 trillion by 2030 to US$22.6 trillion by 2050.”
This gap creates a huge opportunity for investors looking to align with the UN Sustainable Development Goals, yet attempting to identify which companies are bastions of good water stewardship, and indeed which are not, remains challenging.
Recent data from Sustainalytics, covering more than 4,000 publicly traded companies, found that most companies globally do not report on key water metrics. Only 13% of companies report their water consumption, 28% report their water withdrawal and water withdrawal intensity. Just 3% report on both.
Howard says that even in the cases where companies do release water data, rarely is that information supported by analysis of risk or mitigation plans.
“If you look at the current framework for water reporting which includes the Climate Disclosure Project (CDP), CEO Water Mandate and Global Reporting Initiative (GRI) among others, the emphasis is on reporting data but there is not a lot of context to that data.”
He continues: “When companies report their data, have they fully assessed the associated risks? Have they considered water quality and water usage across all their sites? I don’t get the sense of that the corporation has responded to the context of those water uses and issues. [Water stewardship] then becomes a data dump to a certain extent, and asset managers and investors are telling us that isn’t enough.”
To give more meaning to this “data dump”, the Water Council has devised a way to “improve, report and recognise good corporate water stewardship”.
Known as Water Stewardship Verified (WAVE), the programme complements existing ESG reporting by analysing a company’s water usage taking account of local context to identify risks and sets goals to improve efficiency and sustainability.
After completing the WAVE program, a company should have a corporate water stewardship policy which has been independently verified by SCS Global Services and can be communicated to key stakeholders.
Howard says: “We don’t want to replace CDP or GRI; WAVE is complementary. Investors need to be able to compare what different companies are doing. For that to happen, they need greater analysis that considers local context and the circumstances particular to each organisation because some companies will have bigger risks than others. Some will focus on water conversation, while others need to think about pollution.”
Howard says that while water challenges may vary across businesses and sectors, water stewardship should be consistent, and WAVE provides a single point against which investors can measure standards.
“Whether it’s a large multi-national with multiple sites or a single manufacturer with one site, there is a best practice way to identify and assess water related risk. Once companies go through that process, they may all end up in different spots, but we want to provide reassurance to the company and to the key stakeholders that the organisation follows best practice in terms of understanding and assessing risk,” Howard says.
Lack of leadership
For water stewardship to have credibility, Howard says it must be led by the business’ board.
“Lack of leadership has been one of the biggest barriers to water stewardship. We have seen cases where a single factory facility or farm wants to do a project, but they are not resourced or empowered by leadership.”
Howard also wants companies to communicate their water stewardship effectively to stakeholders.
“At the end of the process, we need public communication and full disclosure. Companies need to talk about the process, what they learnt and what are they going to do about the risks, challenges and opportunities.”
He points to food manufacturer General Mills as a leader in water stewardship. The company’s water policy includes goals to not only reduce its own water usage by 1% a year but engages with its supply chain to improve water stewardship.
“Even if they are not in the sectors most exposed to water, companies are awakening to the idea some water risk in their supply chain somewhere and deal with it now before that crisis strikes later,” Howard says.
The slew of announcements in water stewardship last year is testament to corporates’ wider awakening to the water crisis.
During COP26 last November, Microsoft, which runs 200 data centres worldwide, announced it would reduce the amount of water used in these facilities by 95% in the next two years, which equates to an estimated 5.7 billion litres a year.
Last August, another US corporate behemoth, PepsiCo, declared its ambition to become “net water positive” by 2030 by “replenishing more water than the company uses”.
Informing the investor
While Howard welcomes a greater acknowledgement of water risk, he says it is these types of stewardship promises that should be verified so investors can make informed decisions.
“Companies and their stakeholders are looking for a credible way to step into water stewardship, and WAVE lowers the barriers because it demystifies some the concepts and lays out verifiable best practice.”
However, Howard acknowledges water risk still plays a secondary role to carbon emissions in the list of ESG priorities for many businesses, and the Water Council will have its work cut out delivering its stewardship message.
“Water isn’t taking as seriously as it should be, but it is going to become a pain point for everyone. We continue to spread the message that water stewardship should be central to companies’ and investors’ ESG strategies.”