Getting ahead of the “ripple effect” A framework for a water stewardship strategy
Water scarcity creates risks and opportunities. While companies seek to manage and mitigate impacts such as higher water costs, disruption to water-dependent operations, regulatory and pricing changes, and loss of social license to operate, a water stewardship strategy should also help business leaders identify and pursue value-creating initiatives, from cost reduction and innovation to a reputation that creates further opportunities.
Water has been on corporate agendas for decades, but as a line item to be minimized in the cost of goods sold. Ford Motor Company’s Global Water Management Initiative, for example, was launched in 2000 and was originally conceived “as a way to reduce operating costs,” said David Berdish, Ford’s manager of Social Sustainability and the water program’s global leader. However, according to Berdish, “Bill Ford made water a strategic sustainability objective when he became chairman of the board”—a move that kept water on the company’s radar despite its relatively modest operational impact and its low profile, at the time, among the consuming and investing public.
Both the impact and profile of water issues are on the rise as it has become an important resource issue. In Ford’s case, its early focus on water has given it a head start both in helping to control costs and in allowing the company to adapt to increasing water stress in locations such as Chennai (India), Chihuahua (Mexico), and Hermosillo (Mexico).1 Meanwhile, when a 2010 analysis showed that water had become a “material issue” to Ford’s stakeholders,2 leaders could point to the company’s decade-old water program as evidence of their commitment to maintaining and expanding Ford’s water strategy. According to Berdish, the company’s experience with water-saving technologies is also speeding the rate of progress: “Because we understand the technology, we have a heads-up on exactly what kinds of things we should be looking at.” The intended business outcomes include lower operational risk, better stakeholder relations, and a potential competitive advantage.
The case for a water stewardship strategy
Ford is one of a growing number of companies where the specter of global water scarcity—more precisely, increasing competition for the world’s finite freshwater resources—is making water, once all but taken for granted, a vital strategic concern. The documented increasing demand for water, fueled by global population growth and industrial expansion, is placing constraints on water access and use even in some geographies where water has historically been abundant. In addition, risk-aware, environmentally conscious consumers and investors are holding companies increasingly accountable for the economic, environmental, and human consequences of their water use and management practices.
The rising number of investor signatories each year to the Carbon Disclosure Project (CDP) Water Disclosure Global Report attests to the business community’s keen and growing interest in the issue. The inaugural report, released in 2010, was conducted on behalf of 137 institutional investors with assets of $16 trillion.3 In the 2011 report, the number of signatories more than doubled to 354, representing a combined asset value of $43 trillion.4 And the trend is continuing: On the 2012 report, the CDP expects to list 470 signatories representing assets of more than $50 trillion.5
For many of the world’s largest companies, water scarcity is already, or soon will be, an inescapable feature of the business landscape. Many of the emerging markets that multinationals are targeting for growth are in water-stressed countries, such as India, China, and the Middle East, where corporate water practices receive intense public and governmental scrutiny.6 Even companies that continue to operate mainly in water-rich geographies will likely become steadily more vulnerable to water scarcity due to risks incurred by their suppliers and/or customers.
Yet water scarcity has been slow to capture top leadership attention on a par with that accorded to climate change and carbon emissions. Ninety-four percent of Global 500 respondents to the CDP’s 2011 carbon disclosure request said that the board or senior management was responsible for their companies’ climate change programs;7 only 57 percent of Global 500 respondents to the CDP’s 2011 Water Disclosure Survey said the same about their companies’ water-related policies, strategies, and plans.8 “Why water-related issues are given lower priority than climate change issues is unclear,” the CDP report notes, “especially as the majority of reported risks and opportunities are near-term.”9
As The Ripple Effect author Alex Prud’homme puts it, “Every time we use water, there is a series of consequences—[a] ripple effect—that most of us are completely unaware of.”10 With the global business community almost as interconnected as the world’s water resources, the ripple effect of water scarcity is likely to affect companies everywhere, in every sector of the economy. For this reason, an effective water stewardship strategy is a near-universal business imperative.
A framework for a water stewardship strategy
Water scarcity can create both risks and opportunities, both of which should be addressed by a company’s water stewardship strategy. On the risk side, a water stewardship strategy should equip companies to anticipate, manage, and mitigate potential detrimental impacts such as higher water costs, disruption to water-dependent operations, evolving regulatory and pricing changes, and loss of social license to operate. On the opportunity side, a water stewardship strategy should help business leaders identify and pursue value-creating initiatives related to water, such as cutting operational water needs to more effectively manage costs and risks, developing new products and services to meet marketplace demands driven by water scarcity, and publicizing the company’s water stewardship efforts to enhance its reputation and maintain its license to operate.
The water programs that we have seen contribute the greatest value address both risks and opportunities with a strategic mix of three basic approaches—preservation, engagement, and innovation. Preservation refers to activities that aim to reduce human impact on global water resources by decreasing water consumption and/or preserving water quality (by, for example, eliminating the release of waterborne pollutants). Engagement refers to water-related activities that involve stakeholders outside the company itself. Innovation can be broadly defined as the creation and/or adoption of new technologies, processes, and/or partnerships to pursue water-related goals. As shown in figure 1, some water-related initiatives are essentially pure plays along one of these dimensions, while other initiatives combine two or all three approaches to address the issue at hand.
Many leadership teams will appreciate the need for a multifaceted water stewardship strategy to address the range and diversity of water scarcity’s business impacts. The growing number and influence of stakeholders with an interest in safeguarding water resources makes engagement a practical necessity.
The concepts of preservation, engagement, and innovation can serve as a framework for developing a water stewardship strategy. By putting engagement and innovation alongside preservation as specific mechanisms for water stewardship, this framework can help leaders brainstorm ways to use all three approaches to effectively address a variety of business demands. The visual cue of overlapping circles can spark ideas for initiatives that incorporate two or all three approaches at once, which can be less evident than actions along a single dimension.
Granted, corporate water programs can and do yield positive results without necessarily pursuing initiatives in all three areas. Many companies, for instance, have been able to reduce water-related costs and risks with programs focused almost exclusively on preservation. The relevance of each approach also varies across companies and industries. A paper mill would likely prioritize preservation, engagement, and innovation quite differently than would a financial services firm. That said, many leadership teams will appreciate the need for a multifaceted water stewardship strategy to address the range and diversity of water scarcity’s business impacts. The growing number and influence of stakeholders with an interest in safeguarding water resources makes engagement a practical necessity. And as companies start to exhaust the complement of well-known, tried-and-true tactics, innovation will likely become more important in setting one’s own water stewardship strategy apart from the rest.
Why call it a water “stewardship” strategy?
“Water stewardship” has become a widely used catchphrase for the proactive adoption of an economically, environmentally, and socially responsible attitude toward water. In this article, the phrase refers to values and practices that aim to safeguard long-term availability of clean water for all stakeholders in a watershed, prompted by recognition of water as an externality with a potentially material business risk.
Water stewardship can be contrasted with the narrower concept of water management, which deals specifically with addressing water scarcity’s immediate direct business costs through more efficient water use. Unlike water management, water stewardship goes beyond the unit cost of water to consider how competition for water might affect business continuity, brand value, and license to operate. In addition, water stewardship emphasizes effective resource sharing as well as efficient resource use. While water management aims primarily to manage risk to a company’s direct operations, water stewardship seeks to engage stakeholders across the value chain, collaborating with suppliers and/or customers (including end users) to help manage their collective risk. Equally important is to work with stakeholders who share the watersheds in which a company operates to develop mutually acceptable approaches to water preservation and distribution.
Several nongovernmental organizations (NGOs), including the CEO Water Mandate and The Alliance for Water Stewardship, have been founded specifically to encourage water stewardship. Water stewardship is also a focus for established NGOs such as The Nature Conservancy, WWF, the World Resources Institute, and the Pacific Institute. Many businesses and governments are working with NGOs such as these to help develop practical, cost-effective water stewardship programs to address water scarcity and its related impacts, such as constraints on economic growth and the public health effects of limited access to clean water. Collaborations like these can be important to a company’s engagement efforts, both because they can give businesses access to an NGO’s water-related knowledge and experience and because they can enhance a company’s credibility in water stewardship.
What do preservation, engagement, and innovation look like in practice? Here’s a deeper dive into how several leading companies are applying these principles to water stewardship—and why.
The rationale for preservation is straightforward: The less water a company needs, the less vulnerable it will be to the risk of water shortages, and the more water remains available for other stakeholders and future use. Many companies’ water programs begin with a focus on preservation, thanks to the potential for many preservation projects to deliver a tangible return on investment. Increasing water efficiency and quality can both help reduce costs and mitigate a number of risks, including risks associated with water-related business disruptions, potential compliance obligations, and pricing. A company can also readily parlay its accomplishments in preservation into reputational gains, particularly if it can communicate substantial improvements in a memorable way.
Strategies for water preservation are well known, although the tactics are evolving as new processes and technologies come on the scene. Some of the better-known tactics include on-site wastewater reclamation and reuse (in everything from manufacturing to cooling towers to landscaping); rainwater harvesting (often seen in green building designs); smart systems that deliver only as much water as needed when needed (for purposes such as drip irrigation); and, of course, programs to reduce unintentional water loss (such as fixing leaky water infrastructure).
Rather than taking a scattershot approach, a thoughtful preservation effort should focus investments based on where the company’s value chain is most vulnerable to current and projected water scarcity impacts. A water footprinting evaluation, which measures consumptive and nonconsumptive water use across a company’s value chain and applies analytics, visualization, and risk mapping to interpret the results, can help leaders understand their company’s dependence on water in enough detail to identify important points of vulnerability.
Important as it is, however, preservation alone is rarely enough to deal with the spectrum of issues that water scarcity poses today. Recognizing this, many companies that initially viewed water preservation as their main or only goal are starting to broaden their approach.
“At first, our global manufacturing operations targeted water reductions on a percentage basis: Everyone got a haircut, the same as with other resources such as labor, materials, and energy,” said Ford’s Berdish. “Then, we started to learn about technologies that could do things like make the water coming out of our plants cleaner than when it came in, or let us catch and use runoff from the roof.” The next strategic shift was to add stakeholder engagement, community outreach, and research to the water program’s original focus on operational efficiency. Most recently, Berdish says, the company has been looking to prioritize its water investments to focus on locations that are under greater water stress. “Saving water is a much bigger deal in places like Chennai than it is in Dearborn,” he said. “So now we divvy up the [water program’s] capital based on where it can have the most impact.”
As competition for water grows, so does the number and variety of stakeholders water scarcity touches, along with the possible business consequences of their perceptions and actions. Companies today must navigate an increasingly complex web of relationships to influence water-related impacts that they do not directly control, such as upstream water quality, supply chain risk, potential new regulations, license to operate, and reputation, among others. The need to manage these relationships is what makes engagement, also referred to as “collective action,” at least as important as preservation in a company’s water stewardship strategy.
Engaging with external stakeholders on water can offer enormous advantages over going it alone. It’s often the most effective way, and sometimes the only way, to achieve mutually desirable outcomes that would be beyond any single party’s reach. Stakeholder engagement can also help leaders monitor their company’s broader stakeholder networks for water-related risks and opportunities, as well as afford them opportunities to build relationships that can help them more effectively manage the former and pursue the latter.
Company leaders can seek to engage any of a multitude of stakeholders—communities, governments, NGOs, regulators, investors, customers, suppliers, and even competitors—whose interest in water use and management could affect business outcomes. Crucial steps to effective engagement are to identify relevant stakeholders, determine which of them to approach, and establish strong governance over and accountability for maintaining stakeholder relationships. The nature and goals of these relationships can vary almost infinitely depending on the participants’ individual and collective interests. Representative engagement initiatives include community outreach programs to provide safe drinking water, reclaim water habitats such as rivers and wetlands, or improve the local water infrastructure; joint research on water-saving technologies; partnerships with NGOs on a variety of initiatives; and disclosure of corporate water-related activities in sustainability reports and other venues such as the CDP’s Water Disclosure Global Report.
Spreading ripples: The energy-water nexus and beyond
It takes vast amounts of water to extract, process, and produce many forms of energy, and it takes vast amounts of energy to extract, transport, and treat water. This phenomenon, known as the “energy-water nexus,” means that curbing a company’s energy consumption often entails shrinking its water footprint as well. For companies that focus on energy efficiency for reasons unrelated to water—to manage costs and risks, to reduce carbon emissions, and/or to meet customer demand for energy-efficient products—the energy-water nexus can generate water-saving benefits from energy use reductions that they would have pursued anyway as part of the normal course of business.
As an example, Ecolab, a water, hygiene, and energy technologies and services company, highlights water savings as a selling point for a boiler maintenance system initially developed, in part, to help increase energy efficiency. “When we came out with [the product] in 2005, people were hardly thinking about sustainability at all, let alone water,” says Emilio Tenuta, Ecolab’s vice president of Corporate Sustainability. “Our customers were interested in saving money, so we built them a system that would help their boilers last longer, use less energy, and run more reliably.” As interest in water stewardship grew, Ecolab began to promote the product’s water-saving impacts—a consequence of improved boiler reliability and efficiency—as a benefit. The company also responded to its customers’ emerging need to monitor water use by programming the product’s “smart technology” to track water consumption metrics alongside the basic operational data needed for its core maintenance functions. To dramatize the product’s water-saving potential, Ecolab’s website features an interactive counter that keeps a running tally of expected water savings expressed in units of the user’s choice, including gallons, liters, cubic meters, and people (calculated as 25,295 gallons per person per year).11
Awareness of the energy-water nexus can help leaders formulate an overall resource risk and stewardship strategy that aims to maintain an adequate supply of both water and energy for their businesses. Another potentially important consideration in some industries is the influence of water and energy availability on the production of food and other agricultural resources.
Of the many goals a company can pursue through engagement, managing supply chain risk and maintaining license to operate may be two of the most important. Approaches for engaging suppliers in water risk management can range from requiring suppliers to meet certain water efficiency requirements to working closely with individual suppliers (and sometimes customers) to reduce the supply chain’s total water risk exposure.
As in other risk areas, it’s important to look beyond the obvious when identifying potential vulnerabilities associated with water scarcity. Risk from water stress can arise for reasons other than an actual water shortage; policies, politics, and funding can also create water stress in water-rich, developed countries where few might expect it to be a problem. In one high-rainfall country, for example, many businesses depend almost entirely on their local municipal water supply due to geological challenges in extracting water from the environment. When one city realized that its local businesses’ water consumption levels would disqualify it from receiving national economic development funds, officials solved the problem by cutting off the water supply to the city’s businesses—a risk that few, if any, of the affected companies had remotely expected.
Engagement can be even more important in securing a company’s license to operate, which, especially in water-stressed regions, may stand or fall with the company’s impact on the area’s water resources. Critical stakeholders here include communities, businesses, and other parties occupying the watersheds in which the company operates (i.e., whose water supply comes from the same geographic source[s]). Governments and/or regulators with jurisdiction over such watersheds are also important constituents. Through communication, negotiation, outreach, and similar tactics, a company can both demonstrate its goodwill toward the watershed’s other stakeholders and gain a valuable voice in decisions on water allocation and use.
While license to operate is sometimes portrayed mainly as a reputational issue, the “license” being sought can also be quite literal, and engagement can be pivotal in securing its issuance. When Intel wanted to build a semiconductor fabrication plant in Chandler, Arizona—whose arid climate might seem ill-suited for the highly water-intensive chip-making process—the company “reached out to the community of Chandler early on, identifying the needs of the city and investing in infrastructure improvements accordingly,” notes a report by the US Environmental Protection Agency (EPA).12 Working with city officials, Intel developed a water efficiency program that today recycles up to 75 percent of the water used by Intel’s Chandler-area “fabs.” A cornerstone of the program, jointly designed and built by Intel and the city, is a groundwater recharging system that has treated and reinjected more than 3.5 billion gallons of water into the local aquifer since starting operations in 1996.13 Intel’s collaboration with Chandler to safeguard the city’s water supply has helped contain costs and manage the risk of water-related business disruptions and has also smoothed the company’s path to expansion. “Because Intel was well within the government’s environmental thresholds for the site, [its newest fabrication plant] didn’t even require a new water-use permit,” reported Wired magazine just after Intel opened its third Chandler-area fab in 2008.14
At first glance, innovation in water stewardship may seem relevant only to companies that deal directly in water-related products and/or services. Counterintuitively, perhaps, companies whose business is not viewed as water-intensive can also benefit from an explicit focus on innovation in water stewardship. Opportunities for water-related innovation, particularly if a company’s core competencies lie elsewhere, can be easy to miss unless someone is actively looking for them. Nor must a company be in a water-related business to benefit from water-related innovations. A primary objective of Ford’s water-focused research partnership with the Georgia Institute of Technology in Atlanta, for instance, is “to see how the research can inform product development,” says Ford’s Berdish. And while water scarcity and visual computing technology may appear worlds apart, Intel’s interactive “Water Wars” simulation, codeveloped with Sandia National Laboratories, has allowed the company to showcase new developments in its 3-D imagery, modeling, and simulations capabilities while simultaneously engaging stakeholders on water conservation issues.15
Even if a company lacks the in-house capabilities to develop water-related innovations on its own, it can work with other organizations that can innovate on its behalf. That’s the route several large bottling companies took when, separately, they approached Ecolab to brainstorm ideas for water conservation.
“These companies were already doing a lot of things, but they needed to do even more to meet their water goals,” said Ecolab’s Tenuta. “That forced everyone to think in unconventional ways.” As a result of these discussions, Ecolab developed a new line of conveyor belt lubricants that decreases the amount of water needed for bottling and canning operations. “Going in, no one thought that using a ‘dry’ lubricant for conveyor belts would reduce water use by much, but it does,” Tenuta said. Besides reduced water consumption, the product’s benefits can include higher throughput rates and a safer and healthier work environment, which can yield operational savings that “dwarf the initial savings on the water bill,” as one user put it.16
Innovative approaches to collaboration can also be useful in a water stewardship strategy. Coca-Cola FEMSA, The Coca-Cola Company’s largest bottling partner in Latin America, is addressing long-term water quality and access risks by investing in 32 water funds, a novel financing mechanism that pools and invests capital from downstream water users to finance conservation initiatives upstream. These funds, which manage some $27 million in investments from corporations, utilities, and other water users, pay for both direct conservation projects such as reforestation and programs to ease land conversion pressure by helping rural residents start small businesses.17 For Coca-Cola FEMSA and other water users, investments in water funds are a cost-avoidance strategy: By helping to preserve and strengthen the “green infrastructure” needed for healthy rivers, investors expect to spend less on water treatment plants and other “gray infrastructure” to combat future losses in water quality and quantity that would otherwise likely result.18
Charting a course
The issues faced by Ford, Intel, Ecolab, and The Coca-Cola Company, and the ways they have chosen to address them, suggest the value of preservation, engagement, and innovation as components of an integrated water stewardship strategy. To make appropriate use of these approaches, leaders can examine water scarcity’s business impacts from multiple perspectives: regulatory, social, economic, and operational. Suggested steps to take include:
Quantify the “real” value of water to the business. Water often generates more enterprise value than is reflected in its cost, even considering the cost of the energy used to extract, transport, and treat it. To understand what water is “really” worth to a company, leaders should look beyond its literal price to the role water plays in creating value throughout the business. Questions to ask include: What would happen if we don’t have water? What if we fail to comply with water-related regulations? What if stakeholders view our use of water as irresponsible, even if we comply with necessary regulations? What if the supply chain is crippled by a lack of access to water? How might water scarcity affect our global growth strategy, either directly or by limiting our access to energy?
Understand the energy-water nexus and its potential business implications. A company’s water stewardship strategy should be embedded in a broader resource risk mitigation strategy that considers the effects of interrelationships among resources. Specific questions to ask regarding the energy-water nexus include: How might water scarcity affect my immediate access to energy and my long-term energy strategy? How does water scarcity influence the feasibility of using biofuels? Companies in certain industries, such as beverage, food, and apparel, should also explore the possible impacts of energy and water scarcity on global food production and the agricultural supply chain.
Increase focus on engagement and innovation. Preservation initiatives, though not always easy to execute, are often the most obvious—and therefore the least differentiating from a competitive standpoint. A water stewardship strategy that incorporates engagement and innovation can not only help a company address issues that preservation alone cannot, but also help it gain a distinctive reputation for water stewardship in the marketplace.
Look for opportunities in the overlaps. While preservation, engagement, and innovation can yield desirable outcomes in themselves, initiatives that combine two or three of these approaches can be equally valuable, and they are often harder to recognize than pure plays. The ability to find or create opportunities in the areas of overlap can help a company further set its water stewardship strategy apart from those of its peers.
Make a public commitment to water stewardship. To help maintain a consistent focus, leaders may find it useful to develop and publicly communicate a formal statement of the water stewardship strategy’s vision and goals. The statement can be very short—Intel’s water policy, for instance, weighs in at just under one page19—but it should commit the company to specific standards of conduct related to water and be endorsed by management and the board. Once developed and publicized, the statement can serve the dual purpose of communicating the water stewardship strategy to the public and giving leaders a common frame of reference on which to base their water-related decisions.
Practice “radical transparency” about water. Increasingly, stakeholders are coming to appreciate the value of water and what could happen if a business doesn’t have it. As a result, the expectation of transparency, as evidenced by the CDP’s water disclosure program, is likely to grow over time. Companies should consider disclosing their water-related risks, opportunities, goals, and progress as soon as leaders feel reasonably comfortable doing so. Even for companies with less-mature water programs, the risk of releasing a not-entirely flattering water disclosure should be weighed against the risk of being perceived as having something to hide—which, if the history of corporate carbon disclosures is any guide, may be growing with every passing year.
Water scarcity is emerging as a major issue for businesses of every kind. Companies face risks and opportunities driven by an inexorably rising demand for the world’s water resources. The time is fast approaching when water stewardship strategies could be as integral to enterprise value as carbon strategies are today. Until then, competitive advantage will likely accrue to companies that take steps to understand and proactively address water scarcity’s potential impacts—before they have no choice.