Accounting Basics

 

 

Problem Statement

Water as a natural resource is facing many challenges at the local, regional, and global levels. Human water use is increasingly having negative impacts on human health, economic growth, the environment, and geopolitical stability. Rising demands for fresh water stem from a variety of factors, including population growth; industrial activities; increasing standards of living, particularly in emerging economies; and the effects of climate change. Current patterns of human water use are unsustainable; 5-to-25 percent of global freshwater use exceeds long-term accessible supplies, requiring overdraft of groundwater supplies or engineered water transfers (Millennium Ecosystem Assessment 2005). In specific regions, such as North Africa and the Middle East, up to one-third of all water use is unsustainable (Millennium Ecosystem Assessment 2005). Additional water stress is projected in Asia, which supports more than half the world’s population with only 36% of the world’s freshwater resources. If current trends continue, 1.8 billion people will be living in countries or regions with water scarcity by 2025, and two-thirds of the world population could be subject to water stress (UN News Centre 2009).

In recent years, concerns of growing water scarcity, lack of access to water to meet basic human needs, damaged ecosystems, human health issues, and the implications of climate change on the hydrologic cycle have brought water to the forefront as a strategic concern for companies around the world. Companies are realizing they are no longer able to easily access relatively cheap and clean water and that they must more closely consider limited supplies and the implications of their water use and discharge on watersheds, ecosystems, and communities. Further, pronounced water scarcity in key geographic regions, along with heightened expectations among important stakeholders including consumers and investors, has created a compelling business case for companies to actively pursue corporate water stewardship as a strategy that drives down water-related impacts and the subsequent business risks.

Companies’ ability to measure and account for their water use and wastewater discharges throughout the value chain is a critical component in their risk assessment and mitigation efforts, as well as their broader ambitions to become responsible water stewards. Effective water accounting allows companies to determine the impacts of their direct and indirect water use and discharges on communities and ecosystems, evaluate material water-related risks, track the effects of changes in their water management practices, and credibly report their trends and impacts to key stakeholders. Water accounting also allows consumers, civil society groups, and the investment community to compare different companies’ water risks and impacts in order to inform their actions and decision making. In sum, the ability to effectively account for corporate water use and impacts is essential in helping companies drive improvement and become aligned with external stakeholders’ expectations, as well as their efforts to advance sustainable water management.

However, collecting and disseminating meaningful water-related information is a complicated and difficult undertaking. As this analysis will demonstrate, corporate water accounting methods and tools have been under development for the past decade, yet there is near universal agreement that current methods—though a good start—are inadequate and need to be refined.

 

Corporate water accounting in context

Comprehensive corporate water accounting requires a number of different types of data and assessments in order to derive meaningful information. However, in order to contribute to improved corporate management practices and ultimately the sustainable management of water resources, corporate water accounting must also work in unity with a number of other components. While companies have direct control over some of these aspects, they have limited ability to influence others. That said, understanding this broader context—and how water accounting fits into it—is essential for companies seeking to reduce and mitigate water-related risks. Key components of this broader framework are:

  • External Water Resource Context and Data: A foundational component of this framework is the real-world characteristics and conditions of the watersheds, ecosystems, communities, government, and economy in which businesses exist.
  • Corporate Water Accounting: Accounting allows companies to measure and understand the water systems in which their business and suppliers operate, as well as the volume, timing, location, and impacts of their water use and discharge. This provides a basis from which to plan strategically, assess management practices, track performance over time, and communicate with stakeholders.
  • Public Disclosure and Stakeholder Feedback: Once corporate water use and impacts are accounted for, companies disclose quantitative and qualitative information to affected communities, investors, consumers, civil society, and other stakeholders. This allows stakeholders to evaluate companies’ approaches to reducing impacts and addressing risk and to hold companies accountable for their management practices. Stakeholder feedback in turn helps companies identify and prioritize material issues and improve the processes through which they mitigate negative impacts and thereby address water-related business risks.
  • Corporate Water Management and Stewardship: Accounting is intended to inform more responsible and efficient corporate management responses successfully address negative impacts on ecosystems and communities, the company may be considered a good steward of water resources.
  • Stakeholder Water Practices and Strategies: Corporate water stewardship alone cannot ensure sustainable water management within a region. This component is comprised of all the players (i.e., communities, policymakers, water managers, and other stakeholders) that must take action in order to move toward sustainable water management of a locality or watershed.
  • Sustainable Water Management: When companies and other stakeholders in a watershed are effectively and collectively implementing responsible water practices and managers prioritize needs (i.e., industrial, agricultural, municipal, and environmental) based on resource availability and account for long-term risks (e.g., population growth and climate change), the system is positioned to reach a sustainable state—the overarching goal of corporate water stewardship and water management in general.

While the primary focus of this analysis is on the water accounting component of this framework, we will touch upon some of these components described above. Specifically, we will consider the degree to which current water accounting methods and tools are positioned to address external stakeholders’ water-related information needs. We will also touch upon the emergence of corporate water stewardship approaches targeted at addressing water impacts, and evaluate the state of water resource data that currently hampers the evolution of water accounting practice.

Figure 1: The role of water accounting in advancing sustainable water management


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