Could a business shipwreck promote water auditing?
Published 5th July 2012
Norges Bank Investment Management (the Norwegian sovereign wealth fund) held a seminar on managing and reporting water-related risks at Singapore International Water Week on Wednesday. The fund owns, on average, 1% of every major quoted company in the world. That gives it a lot of leverage to change the way businesses operate, and it is working with other funds to use that influence to change the way they understand water. Quite rightly, the fund seems to have realised that water-related risks are probably a more significant issue for companies based in the Asia Pacific region than they are for European companies, but Asia Pacific is a long way behind Europe in terms of identifying potential issues and addressing them. The idea of the seminar was to change this state of affairs.
The central problem of water risk remains, however: how do you measure water risk in such a way that it can enable investors to act on it? Volumetric water measurements don’t say very much. Nor does information about water usage in water-stressed areas say anything that is helpful: the company could be using seawater, reclaimed water or brackish groundwater as its raw water source.
Furthermore, all this information about location, usage and water quality does not mean much if it doesn’t have a financial value associated with it.
Probably the only sensible way of assessing corporate water risk is to work on a plant-by-plant basis, using a tool like Veolia’s Water Impact Index. This suggests that the water impact of a plant is a function of the local water scarcity multiplied by the quality and quantity of water taken out of nature, less the quality and quantity of water returned to nature. You could then multiply this water impact by the value of the plant’s production to get a financial value of the risk, and aggregate it across a company’s portfolio of production facilities to come up with an aggregate financial exposure to water risk.
This methodology would be clear for investors to understand, and would enable them to take informed decisions about water risk. It would also give companies the basis for undertaking a cost-benefit analysis ahead of upgrading their water systems.
I put the idea forward at the seminar, and it seemed reasonably well received on an intellectual level. I am not so sure whether it made financial sense, however. I asked the final panel of the day – which comprised representatives of corporations who actively report their water risks – how much money they would be prepared to pay to calculate their water risks, and the answer was not encouraging.
A proper audit of influent water quality and quantity as well as effluent water quality and quantity at each production location would probably cost $1 million for a $50 billion company. The challenge is to convince big companies that this is money well spent.
Just as the wreck of the Titanic was a great advertisement for shipping insurance, one feels that water risk would be an easier sell if a company were to be put out of business because it had mismanaged water during an extreme drought.
I doubt we will have to wait long.