10Minutes
on managing water scarcity

March 2012

From risk to
opportunity:
making the most
of a scarce resource
Highlight...
At a glance

Spectrum of corporate water management strategies

Minimal water st
rategy

Selectively st
rong wa
ter st
rat...
01
Balance business
and community
interests

As emerging populations continue to join the middle
class, demand for better ...
02
Private sector helps
shore up water
infrastructure

By 2030, some 4 billion people worldwide—or 47 percent
of the estim...
03
Customers and
investors respond
favorably to good
water management

Figure 3: Global CEOs acknowledge the importance of...
04

04
Monitor and
report water use to
uncover risks and
opportunities

Uniform global guidelines to monitor water risk
Wa...
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Toward a more flexible supply chain

Despite uncertainties...
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How PwC
can help

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water risks and opportunities, please conta...
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Managing water scarcity

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As water availability dwindles and demand grows, companies need to prepare for the consequences. As well as water scarcity, risks include new laws and stakeholder concerns. But there are opportunities to be had too, from forming productive relationships with local communities to reducing costs through increased efficiency. Find out how your company could be making the most of a scarce resource.

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Managing water scarcity

  1. 1. 10Minutes on managing water scarcity March 2012 From risk to opportunity: making the most of a scarce resource Highlights Water is a local resource; businesses must manage water against the backdrop of the local community. The private sector can step in to bridge the water infrastructure gap, especially in emerging markets. Water-related risks have direct, far-reaching financial ramifications. Monitoring and reporting water use can uncover new water-related opportunities. Global demand for water has increased sixfold over the past century, more than double the rate of population growth.1 In fact, heightened energy needs drive almost half the water withdrawals in the US and European Union today.2 Increased food and energy consumption, resulting from higher incomes, is inextricably linked to water. As water availability continues to dwindle, some 55 percent of the world’s population is projected to become dependent on imported food by 2030, according to the World Economic Forum (WEF).3 Navigating the water-energy-food security nexus presents new challenges for business: More than 60 percent of CEOs in the Asia-Pacific region said water security is essential for free trade.4 The confluence of water-related risk for business includes operational risk (resource scarcity), regulatory risk (new laws), and reputational risk (stakeholder concerns). 1 Steve Hoffmann, Planet Water, John Wiley & Sons, 2009. 2 Ceres, The Ceres Aqua Gauge, October 2011. 3 World Economic Forum Water Initiative, The Bubble Is Close to Bursting, January 2009. 4 PwC, 2011 APEC CEO Survey, November 2011. How companies can prepare for the consequences of water scarcity 1. At a minimum, companies must assess their operations and value chains to uncover where they are prone to water scarcity risk, particularly if their suppliers are located in water-stressed areas. Compliance with regulatory requirements is essential to maintaining an operating license within a jurisdiction. 2. Companies with more mature water-risk evaluation programs report water-risk information to their stakeholders, evaluate the impact of water-related risks, and implement corporate-wide water policies to monitor ongoing water risk. 3. Leading companies go further: They incorporate water metrics into their overall business strategy. In the water-stressed Piacenza and Parma regions of Italy, for example, Nestlé Italia worked with tomato suppliers to reduce the amount of water used for irrigation. Using detailed data analysis, Nestlé researchers were able to calculate precisely how much water the tomato farmers should use. The three-year project has cut water use almost in half while increasing tomato quality by 15 percent and doubling overall yield.5 5 SAM and PwC, The Sustainability Yearbook 2011, 2011.
  2. 2. At a glance Spectrum of corporate water management strategies Minimal water st rategy Selectively st rong wa ter st rate gy Mature wa ter st rate gy* Beverage Mining Chemical Utilities Food Homebuilding Oil & Gas * Moving toward a more mature water strategy • Calculate water quantity and quality metrics at all sites. • Disclose water data through sustainability report, Carbon Disclosure Project water questionnaire, and/or separate water-specific report. • Obtain CEO endorsement of formal water policies and commitments. • Evaluate water risk systematically across the entire value chain. • Engage actively with stakeholders, including partnerships with civil society groups and/or membership in water organizations.
  3. 3. 01 Balance business and community interests As emerging populations continue to join the middle class, demand for better food and improved infrastructure is on the rise, creating unprecedented pressure on the world’s water supply. China and India, where much of the growth is expected to occur in the coming decades, are home to a third of the world’s population. However, those two countries account for a scant 10 percent of global water supply.6 Meanwhile, a majority of suppliers to certain water-intensive industries like apparel, footwear, and semi-conductors are located in the water-stressed Asia-Pacific region. Water is a local resource . . . Worldwide, agriculture consumes 70 percent of the world’s water, while industrial use accounts for 22 percent.7 In industrialized countries, however, where more efficient irrigation minimizes the amount of water required for agriculture, industrial use accounts for closer to 60 percent of total water use.8 Thus, water is very much a local resource—in terms of both availability and use. As the high cost of transporting a heavy resource like water makes moving it prohibitive, companies must consider their water needs and business interests against the backdrop of the community in which they operate. Figure 1: Percentage of population not connected to sanitation systems 2000 2030 9% 6% 41% 35% 56% Total worldwide population not connected to sanitation systems: 4.3 billion 53% Total worldwide population not connected to sanitation systems: 5.4 billion . . . so response to water scarcity must be local In many developing regions, the bulk of the wastewater currently goes untreated. Access to sanitation systems is spotty and will continue to be, as illustrated by the 2030 estimate in Figure 1. The consequences are far-reaching. For example, Cambodia, Indonesia, Vietnam, and the Philippines collectively lose about $9 billion a year—or OECD member countries Brazil, Russia, India, China Rest of the world Source: OECD Environmental Outlook to 2030 6 John Grimond, “For Want of a Drink,” The Economist, May 22, 2010. 7 Ibid. 8 United Nations, World Water Development Report, 2003. a combined 2 percent of GDP—due to water-borne diseases resulting from poor sanitation.9 To expand local access to drinking water and sanitation, Coca-Cola has introduced wastewater treatment systems in some of the emerging-market locations where it operates.10 . . . and take the long view In an effort to counter ongoing water shortages at its production facility near Puebla, Mexico, Volkswagen partnered with a local university and a Mexican conservation organization to reforest nearby mountains; the vegetation was essential to groundwater replenishment within the overall ecosystem. In addition to planting 300,000 native trees, the project called for landscaping the mountains to better retain rainwater and ensure that it penetrated deeper soil layers. Now, the region can count on an additional 1.3 million cubic meters of water annually. By taking the long view beyond water supply for its own production, Volkswagen helped prevent water rationing and rising water prices in the local community.11 Doing so allowed the automaker to foster stability within the local community, an important consideration when doing business in water-scarce jurisdictions. In fact, water scarcity is among the top 10 trends that will affect global security over the next several decades, according to the United States Joint Forces Command.12 9 United Nations Environment Program, Towards a Green Economy, 2011. 10 Lorna Thorpe, “Coca-Cola: Replenishing Water in the Drinks Industry,” The Guardian, May 26, 2011. 11 World Business Council for Sustainable Development, Responding to the Biodiversity Challenge, October 2010. 12 United States Joint Forces Command, The Joint Operating Environment 2010, 2010.
  4. 4. 02 Private sector helps shore up water infrastructure By 2030, some 4 billion people worldwide—or 47 percent of the estimated population—are projected to experience severe water stress, as illustrated by Figure 2. In fact, by the 2030s, almost two-thirds of the world’s population will live in cities, straining both water and sanitation infrastructure.13 In the developing world, the private sector has stepped in to bridge the infrastructure gap: Between 2000 and 2007, the number of people served by private water operators in emerging markets almost doubled, from 94 million to more than 160 million. In many of these countries, such as China, Algeria, Malaysia, and Colombia, public-private partnerships (PPPs) are a viable option.14 Public-private partnerships part of wider reform Figure 2: World population living in areas of severe water stress, 2030 (millions of people) OECD member countries 525 Brazil, Russia, India, China Best suited to large-scale infrastructure assets with ongoing maintenance requirements, PPPs are increasingly used by developing countries to secure additional capital, better manage risk, improve operational efficiency, and enhance quality of service. A public-private partnership in northern India, for example, provided water to some 90,000 new consumers over a 5-year period.15 The bulk of the more recent PPP contracts have been awarded to local private water companies, many of whom developed their expertise by partnering with international operators.16 And the most successful PPPs in emerging markets have been implemented within an overall framework of wider reform within the water sector. Other success factors need to be in place: realistic price and completion targets, a collaborative working relationship between the public and private sectors, and transparency during contract negotiation and implementation. Participation by international financial institutions can ensure accountability, especially in emerging markets where governance is still nascent.17 Working with local communities Collaboration is typically the best approach in emerging markets: Working with local non-governmental organizations (NGOs) as well as with businesses that have operations in the region, Sasol, a diversified petrochemical company, invests in water infrastructure as well as water-saving technology research. South Africa-based Sasol—which relies on the Vaal River for its operations outside Johannesburg—has a 40 percent share in the $350 million Vaal River Eastern Subsystem pipeline project that supplies water for its operations.18 In India, where agriculture accounts for 85 percent of total water use, PepsiCo worked with local rice farmers to reduce water use by 5.5 million cubic meters in 2009. The company provided farmers with equipment and technical help to implement water-conserving measures, which also resulted in a reduction in greenhouse gas emissions of more than 70 percent.19 2,319 Rest of the world 1,057 Source: OECD Environmental Outlook to 2030 13 United States Joint Forces Command, The Joint Operating Environment 2010, 2010. 14 Phillipe Marin, Public-Private Partnerships for Urban Water Facilities, The World Bank, 2009. 15 Asian Development Bank, Every Drop Counts, 2011. 16 Phillipe Marin, Ada Karina Izaguirre, and Alexander Danilenko, “Water Operators from Emerging Markets,” Gridlines, June 2010. 17 Phillipe Marin, Public-Private Partnerships for Urban Water Facilities, The World Bank, 2009. 18 Carbon Disclosure Project, CDP Water Disclosure 2010 Global Report, 2010. 19 World Business Council for Sustainable Development, Responding to the Biodiversity Challenge, October 2010.
  5. 5. 03 Customers and investors respond favorably to good water management Figure 3: Global CEOs acknowledge the importance of environmental and corporate responsibility practices 49% Percentage of global CEOs who say consumers will factor a company’s environmental and corporate responsibility practices into purchasing decisions 54% Percentage of global CEOs who say businesses will factor a supplier’s environmental and corporate responsibility practices into purchasing decisions 64% Percentage of global CEOs who say their innovation strategy will include developing products or services that are environmentally friendly Source: PwC’s 14th Annual Global CEO Survey, 2011 Customers respond favorably to environmentally responsible companies: Approximately half the respondents to PwC’s 14th Annual Global CEO Survey said consumers preferred environmentally and socially responsible products, as illustrated in Figure 3. Conversely, almost two-thirds of the CEOs surveyed said an important part of their innovation strategy includes developing environmentally friendly products or services. And more than half said they would consider a supplier’s environmental and corporate responsibility practices when making their own procurement decisions (see Figure 3).20 Investors do the same: More than 350 institutional investors collectively managing $43 trillion in assets backed the 2011 Carbon Disclosure Project (CDP) water survey, which sought data from some 400 of the world’s largest companies.21 Identifying water-related opportunities More than 60 percent of the 190 respondents to the CDP Water Disclosure Global Report 2011 identified waterrelated opportunities: cost reductions associated with increased water efficiency, revenue from new waterrelated products or services, and improved brand value. Of those opportunities, 79 percent are expected to show results within the next five years.22 Cisco Systems, for example, already saves some $1 million annually, having eliminated a water-intensive step in the manufacture of its printed circuit boards. The telecommunications equipment maker collaborated with its assembly partners to implement a new, watersaving soldering process while maintaining overall product quality.23 20 PwC, 14th Annual Global CEO Survey, 2011. 21 Carbon Disclosure Project, CDP Water Disclosure Global Report 2011, 2011. 22 Ibid. 23 Ibid. According to the CDP survey, 59 percent of companies report exposure to water-related risk; a third have experienced financial consequences as high as $200 million. Indeed, water-related risks have direct, farreaching financial ramifications in three categories: 1. Operational risks: Drought and flooding can halt operations while driving up prices throughout the supply chain. Meanwhile, water pollution can erode product quality, necessitating higher water-treatment costs. These operational disruptions directly affect revenues and profits. 2. Regulatory risks: New regulations can raise prices, modify water rights and allocations, and tighten waterquality standards. As a result, companies could face increased compliance costs, water-treatment costs, and litigation costs. They may have to supplement their existing water sources. 3. Reputational risks: When business operations adversely affect marine ecosystems or local communities’ access to clean water, public opinion can result in loss of brand equity with customers and investors. In that situation, a company faces the multiple challenges—and high costs—of restoring its reputation and coping with reduced market share and tarnished creditworthiness. By monitoring water use, companies can better manage the associated risks, as CCP Composites did. Partnering with local authorities, the US chemical company rehabilitated a local wetland in Houston instead of rebuilding its own stormwater infrastructure. Not only did the rehabilitation restore the local ecosystem, it also eliminated the cost of CCP’s stormwater infrastructure maintenance.24 24 World Business Council for Sustainable Development, Responding to the Biodiversity Challenge, October 2010.
  6. 6. 04 04 Monitor and report water use to uncover risks and opportunities Uniform global guidelines to monitor water risk Water use creates externalities: The impact of water use has consequences to third parties that don’t apply to the business using the water. As a result, businesses had no incentive for pricing water use in years past. That changed as shareholders began calling for increased transparency into a company’s externalities, making businesses more accountable for the related costs. Today, the business community and NGOs alike are working to establish standard metrics for water-related performance disclosure. The challenge lies with reporting these metrics in a context that is relevant to stakeholders, many of whom are interested in comparing water-related metrics across companies and industries. A uniform framework that builds on leading practices will allow relevance, consistency, and transparency. Figure 4: Puma’s water-intensive supply chain 2010 Water use . . . by value chain . . . by region 2% 4% 8% 9% 52% 37% 88% Tier 1 supplier Europe, Middle East, Africa Tier 2 supplier Americas Tier 3 supplier Asia Pacific Tier 4 supplier Note: Puma’s own operations account for 0.001% of its total water consumption. Source: Puma 2010 Environmental Profit and Loss Statement Global guidelines for disclosing quantitative and qualitative metrics addressing water scarcity, consumption, and quality are currently under development by the CEO Water Mandate, a United Nations public-private initiative of business leaders and NGOs. PwC is working closely with the CEO Water Mandate to develop these guidelines. Water disclosure guidelines represent the first step toward implementing the governance structures, policies, and performance standards required to manage water-related risks and opportunities. Scenario planning can then uncover the impacts of climate change on water scarcity, allowing businesses to plan for the future. Ultimately, corporate water management must be viewed within the context of an organization’s overall business strategy to best manage the various interdependencies within the water-energy-food security nexus. Debuting the environmental P&L statement One way to understand these interdependencies is the environmental profit and loss (P&L) statement. In 2011, Puma released its first environmental P&L statement, disclosing the value of the impact of water consumption— alongside greenhouse gas emissions, air pollution, land use, and waste disposal—within the company’s operations and supply chain. The first company to embark on an environmental P&L, Puma measured and modeled water use through its entire supply chain, all the way to the producers of its raw materials, as illustrated by Figure 4. Many of Puma’s suppliers are in Asia, and the bulk of its water use—88 percent—occurs in Asia. The company’s overall supplychain water impact totaled €47 million (approximately $62 million) in 2010. With clear insight into both its own operations and its supply chain, Puma is now better equipped to embed environmental issues into overall business strategy. For example, water scarcity can factor into future procurement decisions. Jochen Zeitz, chairman of Puma and chief sustainability officer at parent company PPR, says the Puma environmental P&L statement is a tool that allows the company to see the full impact of its supply chain—and thus identify new opportunities to enhance the sustainability of Puma’s products, which will ultimately reduce the company’s overall environmental impact. Companies can uncover water-related risks and opportunities by monitoring and reporting water use, as proven by those who have already done so. And have effectively reduced costs, increased revenues, and enhanced brand value.
  7. 7. Upcoming 10Minutes Upcoming 10Minutes topics CEO Agenda 2012 Toward a more flexible supply chain Despite uncertainties—whether economic, regulatory or other—CEOs are taking deliberate steps to stretch in markets they believe are most important for their future. 10Minutes distills the findings from PwC’s survey of more than 1,250 CEOs around the world as the CEOs’ agenda for 2012. Volatility has become a fact of life in today’s business landscape. Yet, after years of global expansion, many companies’ supply chains are brittle, unable to respond to frequent fluctuations in demand and supply. This 10Minutes explores the strategies companies can deploy to make their supply chains more agile and adaptable. Growing by understanding the consumer better Businesses now realize that consumers do not necessarily rely solely on rational analysis when they make decisions. Rather, many factors like emotions play a significant role. This 10Minutes focuses on how businesses can use behavioral economic principles to better understand their customers—particularly relevant now, when companies are making big bets on customer-centric growth strategies.
  8. 8. How PwC can help How PwC can help To have a deeper discussion about managing water risks and opportunities, please contact: Kathy Nieland US Leader, Sustainable Business Solutions +1 504 558 8228 kathy.nieland@us.pwc.com Tell us how you like 10Minutes and what topics you would like to hear more about. Just send an email to: 10Minutes@us.pwc.com. Download and experience the 10Minutes series with enhanced multimedia on your iPad. Look for “PwC 10Minutes” in the iTunes App store. Lauren Kelley Koopman Director, Sustainable Business Solutions +1 646 471 5328 lauren.k.koopman@us.pwc.com To have a deeper discussion about water infrastructure, please contact: Richard Abadie Global Leader, Capital Projects & Infrastructure +44 20 7213 3225 richard.abadie@uk.pwc.com John Gibbs Leader, Global Water Public-Private Partnerships +44 20 7212 3800 john.gibbs@uk.pwc.com Peter Raymond US Leader, Capital Projects & Infrastructure +1 703 918 1580 peter.d.raymond@us.pwc.com This publication is printed on Domtar Cougar stock, containing 10% post consumer waste fiber. It is Forest Stewardship Council™ (FSC®) certified, and a premier member of the Domtar EarthChoice family. © 2012 PwC. All rights reserved. “PwC” and “PwC US” refer to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. 10Minutes® is a trademark of PwC US. LA-12-0011
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