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Institutional investors will soon be able to obtain a clearer picture of how the companies they invest in manage their water use.
The Carbon Disclosure Project (CDP), which since 2000 has used corporate data to report on the business risks and opportunities of climate change, recently launched a programme on water use. It poses challenges not encountered when measuring carbon emissions.
The format is modelled on the one the CDP uses for carbon disclosure, in which it acts as an intermediary between investors and companies. On behalf of investors, it asks companies – in this case about 300 large businesses in water-intensive sectors – to fill out a questionnaire.
It plans to publish the report by the fourth quarter of this year. And while water reporting is a new initiative, the CDP has one big advantage – a ready-made list of investors signed up to the carbon disclosure version.
The CDP has 534 signatory investors with about $64,000bn in assets under management and, so far, the CDP Water Disclosure initiative has 137 signatory investors with $16,000bn in assets. “I’d hope that in time the vast majority [of CDP investors] would become signatories,” says Marcus Norton, head of the water initiative at CDP.
For investors that sign up to the water initiative, the motivation will be similar to that of wanting greater disclosure on carbon emissions – the need to understand how resource constraints will affect the companies in which they invest.
In the questionnaire, companies are asked about management and governance of water. Does the business have a water strategy, for example, or management plan with targets for consumption?
Companies can also report on risks and opportunities relating to water use. This might include any physical or regulatory constraints that would negatively affect operations.
Constraints may be experienced not only in terms of quantity – quality of water is also critical, as pollution could prevent companies from using the local supply.
Conversely, there might be opportunities for companies to save money by reducing consumption in their production processes or recycling.
Indirect water use is covered, too, as some companies make products that may not be water-intensive in manufacture but become so in use – shampoos and detergents fall into this category.
Similar questions on physical and regulatory risk cover water use by companies’ suppliers.
In devising the questionnaire, the CDP had to strike a balance, says Mr Norton.
“Water is a new subject to many companies, so we want to make the process as painless as possible and encourage participation,” he says. “But at the same time, we want information that’s relevant to investors.”
Unlike the approach to carbon emissions reporting – in which companies in every sector are approached – the CDP is following a more targeted strategy in this initiative, only approaching businesses for whom water is a material risk to their operations and profitability.
Companies being contacted therefore include those in sectors such as food and beverages, chemicals and pharmaceuticals, mining, paper and semiconductor manufacturing, while those in the financial sector are not being asked to participate.
Moreover, measuring the impact of water use differs significantly from assessing carbon emissions. For a start, carbon and greenhouse gases have a universal form of measurement – a tonne – and their impact is the same whether emitted in London, New York or Delhi.
By contrast the impact of water consumption varies tremendously. “Parts of Scotland are clearly water-abundant so using a gallon will have no negative impact,” explains Mr Norton. “By contrast, using a gallon in parts of the Murray-Darling Basin in Australia will have an impact.
“Measurement is complicated. You can’t just look at global figures – you need to look at the context.”
The science is in its infancy. “With carbon and greenhouse gases, we have the GHG Protocol, which is pretty well established and has a standard approach towards measuring and accounting for greenhouse gas emissions,” says Mr Norton. “We’re not there with water.”
The other variable when it comes to water is quality. Assessments need to account for the quality of water when it is extracted, and the condition in which it is returned to the system.
Accordingly, helping to accelerate standardisation of water reporting is part of CDP’s mission, as is raising awareness of the need for standardisation.
“We’re not seeking to set standards but if we can help to advance thinking, that’s a role we want to take on,” says Mr Norton.
But if assessing the risks and opportunities of water use is more complex than doing the same for greenhouse gases, the incentives are no different.
“The world is going to be water-constrained, just as it is going to be carbon-constrained,” says Mr Norton.
“So there will be pressure on companies from all stakeholders to reduce their water consumption.”