Water Risk in Supply Chains Draws Investor Scrutiny

Jonas Kron is worried about water. The investment adviser at Trillium Asset Management, a $900 million fund manager that focuses on environmentally sustainable investment, fears the world’s dwindling supply of fresh water is hurting the companies he has invested in. For most of the year, Kron has led a shareholder challenge to J. M. Smucker, the strawberry jam maker that also owns Folgers coffee. Kron says the company hasn't demonstrated it's prepared for the market changes that are sure to come as climate change reduces the size of the world’s coffee growing area. The conversation has been difficult in part because corporate leaders still seem unaware they need to factor water risk into their financial projections, says Kron. "We're not talking about charity here," says Kron. "These are investors seeking to have the company address the risks in its supply chain."

Smucker’s says it’s hedging against potential increases in raw material prices, but Mother Nature, Kron points out, can defeat any hedge. “At a certain point, you need to deal with the fundamental, underlying fact that these are crops grown with soil, sunlight, and water, and you can’t escape the laws of nature.”

Most companies act as if the water they have today will be there tomorrow, says Brooke Barton, who runs water programs at Ceres, an environmental group in Boston that worked with Trillium and others to create an online checklist aimed at helping investors and companies assess efforts to manage water risk. With the world’s population expected to grow to 10 billion by the end of the century from 7 billion today, and the need for fresh water increasing twice as fast as a larger middle class emerges in the developing world, the competition for scarce water resources is unprecedented. "Water is something that should be keeping CEOs up at night," says Barton.

Coca-Cola Inc. has been collecting data on water for years, and its models can predict water stress in some basins through the year 2095. Working with the World Resources Institute, an environmental think tank in Washington its helped (with partners including Bloomberg.com parent Bloomberg LP) create an online tool called Aqueduct that lets companies assess the water risk of placing a factory or a business in a particular location. At its launch in October, the site showed only a low-resolution map of water stress across the globe. Early next year it expects to show comprehensive data from four river basins: China’s Yellow River, Australia's Murray-Darling; the Colorado in the U.S. and the Orange-Senqu in Southern Africa.

"It's not just running out of the water you need to run your plant," says Rob Kimball, Program Coordinator for WRI's Aqueduct program. "It can show up in your supply chain - no water for crops or for shipping your products or for the power plants you rely on. If you're not ahead of this, you are going to get surprised."

Local partners - farmers, local governments, neighbors and other companies using the same water - need to understand how water's used - and what the risks to it are, a lesson Coca-Cola learned the hard way. In 2004, a Coke bottling plant in India’s Kerala state was shut by local authorities for using too much water. Wells into the local aquifer were running dry, leaving farmers with nothing to irrigate their crops. Coke was blamed for depleting the area’s water table and local elders ordered the plant shut. Though Coke convinced a court in a two-year trial that drought was to blame for the dry wells, and Coke’s own water was actually drawn from a different aquifer, the bottling plant is still shut. “We won every court case to the supreme court, but that had no influence,” says Joe Rozza, Coke’s director of water sustainability.

Coke had been gathering data on water stress for years, but the Kerala case prompted the company to rethink its water strategy and factor in local farmers, towns, nearby factories and local government leaders. "We lost the public perception battle," says Coke spokeswoman Lisa Manley. Now the company requires every one of its plants to assess its water risk, share that information with the local community and create a water protection plan.

As the Aqueduct maps come on line, Coke hopes its data will help ease the global water crunch. “When companies look at water resource management or community water partnerships most of them relegate that to Corporate Social Responsibility, more of window dressing,” says Rozza. “So when a big brand says I am having a hard time making the business case to my company to think about water, we can say we’ve done it before and here’s how.”

Diageo, the maker of Johnny Walker whiskey and Guinness stout says it's successfully reduced water use to battle droughts, rapidly growing populations, and a growing demand for fresh water to grow the hops and grain it buys from farmers, brew, distill and cool its beers and liquors and make and clean the bottles it fills. “No water, no beer,” says Roberta Barbieri, the company’s Global Environmental Programs Manager. Breweries in Kenya and Ghana have had to halt production when water ran low. In Scotland, water shortages and rising pollution blocked the expansion of the Cameronbridge distillery, named Scotland’s most polluting industrial site in 2005 by the Scottish Environment Protection Agency. A $100-million investment cut wastewater discharge by 30 percent, and used distilling byproducts to make biogas for a steam boiler, instead of dumping them into the Firth of Forth. “It was important for us to demonstrate to the authorities that we were using water sustainably,” says Michael Alexander, Diageo’s head of environmental policy.

The need to understand water risk is creating business opportunities for consultants including auditing firm Deloitte, which is developing an online platform with the International Business Leaders Forum to help companies who share a water basin work out joint solutions to water stress. “We are essentially reinventing the water industry,” says Will Sarni, head of Deloitte’s sustainability consulting practice

Trillium’s Kron is betting that more companies will eventually realize they need to factor climate change and water risk into their bottom line. Smuckers dismissed his call to account for the risk to its sources of coffee, even as the motion won support from owners of 30% of voting shares at this year’s annual meeting. Kron notes that companies actively dealing with carbon emissions are outperforming their peers. “It will be real interesting to see if a similar relationship will be observed between water management performance and stock value. Come and talk to me in a year.”

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