The Business Case for Investing in Sustainable Water Management

Questioning the business incentive for action

One critique against a private sector role in advancing sustainable water management suggests that companies do not have an economic incentive to engage and therefore cannot be relied upon to fulfill this role (Hall and Lobina 2012). This argument suggests that company efforts to mitigate adverse impacts caused by their operations or to advance sustainable water management more generally by, for example, investing in improving the water-use efficiency of other actors or facilitating aquifer recharge schemes, are simply “greenwash.” That is, they are pursued to create the appearance of a responsible business for public relations gains, but they lack a good-faith effort to advance the public interest. The PSIRU article, referring to a Coca-Cola project aimed at recharging aquifers in India, states:

“Although increasing recharge of aquifers is a genuine way of reducing local water stress, these initiatives are not sustainable ways of delivering it. The companies do not have any direct economic incentive to fund such recharges—the economic return is a public relations gain from being seen to act responsibly. In effect, the incentive for water efficiency is created entirely by public campaigns against the abstractions, and by general public and political pressure for greater environmental responsibility.” (Hall and Lobina 2012)

This argument rightly implies that corporate initiatives driven purely by public relations motives cannot be relied upon as a long-term solution to water sustainability challenges. There is no evidence to suggest that companies will behave in this manner consistently and reliably over the long term. However, this argument also suggests that corporate water sustainability efforts are driven solely by the desire to be perceived as responsible, despite growing evidence to the contrary (see CDP 2012). It overlooks the wide range of water-related business risks that create strong economic incentives for companies to invest in more sustainable water management throughout their supply chains and in the watersheds in which they operate as a means of promoting water security and long-term business viability (Pegram et al. 2009, Hepworth 2012, Ceres 2009, Larson et al. 2012). Moreover, it has been shown that real economic advantages can result from improving water-use efficiency or reducing the volume of wastewater produced that must then be treated (Ceres 2009).

Lastly, this argument does not consider the obvious fact that public relations gains, especially for global consumer-facing brands, are of direct economic value to companies. Companies with a good reputation among the general public are more likely to attract sustainability-minded consumers and investors. This PR element certainly does not eliminate the potential for greenwashing, but it undermines the notion that we cannot rely on companies to maintain policies and practices that improve their reputation substantially. Again, the imperative here is not to discourage these practices, but to enhance our ability to differentiate between legitimate, positive actions and greenwash, so that we can reward companies enacting meaningful change.

Unsustainable water conditions and business risk

But do companies really have an interest in robust water governance and sustainable water management, apart from the public relations gains?

A large and growing body of research says yes—they do. Water-related business risks are driven as much, if not more, by unsustainable watershed conditions beyond a company’s fence-lines, such as water scarcity or pollution, as they are by the company’s water-related performance (Pegram et al. 2009, Larson et al. 2012, Morrison et al. 2010). Case in point: An ultra water-efficient factory located in a region of severe water shortage or facing other water-related challenges can still face significant water risk. In 2012, 53% of Global 500 companies responding to CDP Water Disclosure reported that they have experienced detrimental water-related impacts in the last five years, while 68% identified water as a risk to their business (CDP 2012).

These data points reflect trends and real incidents that are changing how companies view their water management strategies—internal efforts to drive operational efficiencies are no longer seen as an endgame of sustainability performance. The external basin conditions and contexts, where water risk ultimately resides, necessitate a more long-term view. It is this new awareness, along with the reality that a business’s water-related challenges can be fully addressed only through external engagement beyond the factory fence-line, that is being captured under the emerging paradigm of “water stewardship” (Hepworth and Orr 2013).

A lack of water in the most basic sense limits the amount of water a company can use and therefore the amount of goods it can produce. For example, in 2011, Gap Inc. cut its annual profit forecast by 22% because of production limitations driven by water shortages in Texas, India, Pakistan, and Brazil (Larson et al. 2012). Water scarcity also has secondary impacts on business, with significant implications, for example, on the production of energy on which industry relies. In 2001, energy production in São Paulo, Brazil, was highly constrained as a result of both severe drought and government energy tariff policies (CLSA 2006). To prevent blackouts, the government imposed quotas aimed at reducing energy consumption by 10%–35%. Many industries based in Brazil’s southeast were plagued by reductions in operational capacity, production delays, or increased production costs (CLSA 2006). Additionally, for many industries, degraded ambient water quality increases the level of treatment, and therefore cost, required to purify water to appropriate levels for industrial production (JPMorgan 2008).

Societal expectations for corporate sustainability, including efficient and responsible water-related policies and practices, are also on the rise. Companies perceived to mismanage scarce water resources are likely to suffer damaged reputations, especially when their operations negatively affect basic human and environmental needs or contravene legal requirements. For example, effective advocacy campaigns in India have already forced Coca-Cola to close its plant in Plachimada, Kerala, and recommended it pay $48 million in damages due to the belief that Coca-Cola’s groundwater pumping hindered communities’ ability to extract the water needed to maintain their livelihoods (India Resource Center 2010). A loss of goodwill such as this can be a real economic loss.

Furthermore, consumers increasingly choose products based on the perceived sustainability and social responsibility of companies’ practices and policies. In the United Kingdom, expenditure on ethical goods and services has tripled in the last decade (The Co-Operative Bank 2009). Eighty-one percent of Koreans, 70% of Singaporeans, and nearly half of British consumers are willing to pay a premium for environmentally friendly products (Czarnowski 2009).

Companies perceived to have better water-related practices may thus see improved brand value and a subsequent expansion in sales. The Alliance for Water Stewardship’s (AWS) April 2014 release of its standard for water stewardship suggests that stakeholders’ ability to assess the adequacy of a company’s water-related activities is arriving quickly. Furthermore, the financial community is increasingly seeking to invest in companies that are managing short- and long-term water-related risks and that are striving to meet stakeholder expectations on water. Shareholder resolutions on water— mostly focused on the food, beverage, oil, and chemical industries—more than quadrupled over the past ten years (Ceres 2009).

Ensuing water-related development challenges, together with the changing landscape of stakeholder expectations, are creating very real economic incentives for companies to behave in a manner that is deemed responsible. It would be short-sighted and unwise to dismiss these potentially paradigmshifting levers toward corporate sustainability because they mark a divergence from previous corporate actions—especially when such a divergence is exactly what the CEO Water Mandate, PSIRU, WWF International, and others are calling for. Instead, we should ask how these new levers can drive changes that benefit business, communities, and ecosystems alike, and how we can avoid one-sided outcomes and the greenwash that undermines such opportunities.

Do businesses and other watershed actors have a shared interest in robust governance and sustainable water management?

Although businesses, communities, ecosystems, governments, and others may face common waterrelated challenges, they still may not share an interest in the same solutions to such challenges. Indeed, this is another core argument made by those skeptical of a meaningful private sector role in driving more sustainable water management. Considering the notion of regulatory water-related business risks, for instance, PSIRU contends that:

For communities and ecosystems, regulation is not a risk but a positive opportunity for democratic and peaceful limitation of competing (including corporate) behavior. By contrast, the [CEO Water Mandate’s work] has the anti-democratic implication that companies would be subject to less risks if there was no democratic government and no civil society.

Despite the fact that this is an obvious misrepresentation of the CEO Water Mandate’s conceptualization of regulatory risk—on the Mandate’s website regulatory risk is defined as “risk [that] stems from changing, ineffective, poorly implemented, and inconsistent water policy and regulations” and includes cases where “local governments do not have the capacity to consistently deliver high-quality water to local industries and agricultural growers”—the criticism is, at least in part, a valid argument. Companies can be negatively affected by strict regulations that limit their activities and thus they often consider such regulations a business risk (as would, for that matter, a local agricultural grower facing a rationing of water allocations). In the 2012 CDP Global Water Report, 51% of companies consider “tightening withdrawal limits” a risk, while 30% consider “restricted water operational permits” a risk (CDP 2012).

However, water-intensive companies are also negatively affected by a lack of regulation on other actors in their watershed—a lack that eventually leads to the depletion or degradation of a shared resource. This creates a not uncommon scenario in which a wide range of actors using a common pool resource are threatened both by the possibility of their own resource use being regulated and by the unregulated resource use of others.

Regulation that is coherent and consistently applied is positive for society and reduces risk to business. We live in a world where ecosystems and communities do face regulatory risks when government fails to regulate polluters, allocations, permits, fines, fees, and use, or to oversee and manage the socioeconomic trade-offs inherent in particularly stressed basins. Water-using companies are similarly negatively affected by such poor public management and oversight. The same CDP report mentioned earlier found that 54% of companies responding consider “regulatory uncertainty” a risk (CDP 2012).

Nonetheless, for detractors to suggest that risks would be lower for companies if government and civil society were silent or absent truly misses the point. We recognize that some companies have a long history of polluting waterways, have failed to meet minimum legal requirements, or have operated where the rules of the game are poorly enforced—and that companies have benefited from these situations. Such companies should be exposed and duly penalized.

Yet even in those parts of the world where the rules are the most lax or where the issue of water pollution, for example, is most acute, things are changing. Companies increasingly see higher risk where effective water governance is not in place. There is mounting evidence that some companies actually seek clear and consistent regulatory signals and policies, where coherence allows them to plan, protect, and avoid negative impacts (Pegram et al. 2009). As expressed in the 2012 CDP report, companies may indeed complain when they do not have enough water to operate their facilities, yet the alternative is exposure to wide criticism and fear of a regulatory response that can be draconian and reactive.

In Beilun, China, the local government is trying to balance the need for both industrial development and ecological protection. Local authorities have shut down more than 72 large-to-small factories which were failing to adhere to local water regulations (Shanghai Daily 2013). A similar picture is emerging all over the developing world, where because of the scale of the issue and lack of capacity, governments are closing down facilities that breach pollution controls. On the one hand, this creates a solution to an immediate problem, but it also creates the space for more engaged dialogue with companies seeking to adhere to rules and comply with local standards. These companies want to ensure a license to operate, and that license—social and legal—is increasingly predicated on playing by the rules or (where rules are not in place) on adhering to the best practices as defined internationally.

Take, for example a Coca-Cola plant in the village of Kaladera, Rajasthan in India. The plant is located in a watershed experiencing groundwater depletion reportedly leading to increased irrigation costs for local growers, reduced availability of drinking water, and reduced milk yield (TERI 2008). The Coca-Cola plant, established in 1999, was certainly a prominent groundwater user during a time of concerning groundwater depletion. However, in 1998, before the Coca-Cola plant was operational, the Central Ground Water Board had already deemed the area “overexploited” (TERI 2008). Indeed, groundwater depletion in Kaladera has coincided not only with Coca-Cola’s presence, but also with a shift toward water-intensive crops and increased overall agricultural water use, rising water demand due to population growth, and urbanization (TERI 2008). In 2006, groundwater extraction in the Kaladera area was 135% of the natural recharge rate, with agricultural water use alone accounting for more than 100% of this (TERI 2008).The plant accounts for less than 3% of local water extraction 70% of the time, and less than 1% for 40% of the time (TERI 2008). Since it is a well-resourced and well-known actor that pumps substantial volumes of groundwater, local stakeholders deem Coca-Cola largely responsible for this problem and are calling for the closure of the plant.

Arguably, the core problem to be resolved in Kaladera is not the exploitation of water resources by one industrial water user, but the widespread overexploitation enabled by the lack of a functioning management regime to regulate the utilization of a limited, shared resource. A robust water governance system with direct regulatory oversight would incentivize widespread water-use efficiency and would deny permits to those unable to demonstrate responsible use. Coca-Cola has the financial and technical resources to facilitate and support such water governance. By contrast, shutting down the Coca-Cola plant may or may not slow the rate of groundwater depletion. Such closure would do little to solve the region’s systemic long-term groundwater overdraft problem. The company has also been rolling out a “water neutrality” policy, which includes investing in watershed projects (e.g., rainwater harvesting) geared toward offsetting the amount of water used by the company. One could argue that in this situation, as with many similar to it, Coca-Cola has a very strong interest in ensuring that other water users in the area are efficient and that local government can manage water effectively so that more water is available for all and pressure on the company is diminished.

Do companies, communities, ecosystems, and others have a “shared risk” driven by water challenges?

The belief that companies have an incentive to invest in sustainable water management beyond their fence-line is grounded in what has been referred to as “shared risk.” Some have questioned the appropriateness of this term, knowing that companies, communities, and others all experience risk uniquely and that water risks are often distributed unevenly. However, the overarching concept that companies have a shared interest with the public for reliable water services and sustainable water management is gaining traction (Hepworth 2012, Newborne and Mason 2012). In Colombia, for example, the indigenous vegetation of mountainous upland ecosystems is being cleared to make room for agriculture and cattle grazing. Without this vegetation, which traps water and protects soil, there is greater sedimentation in local waterways that the downstream city of Bogota relies on for its water supply. In recent years, this sedimentation has severely degraded water quality in the area, raising treatment costs for the local water utility, residential users, and businesses, such as SABMiller’s Bavaria, alike. To address these shared challenges, Bavaria has teamed up with The Nature Conservancy, other local NGOs, the Bogota water company, and government agencies to manage sedimentation issues (Water Futures Partnership 2013).

Today in Kenya, integrated approaches to water, energy, and land are being undertaken by a range of actors living and working in the Lake Naivasha region, including small landholders, major horticultural businesses, the tourism sector, and local, national, and international authorities. Lake Naivasha has experienced declines in water supply and quality due to a variety of causes. The multiple water challenges created risks for all water users who rely on healthy ecosystems for their livelihoods and future. Even though the export farmers had improved agricultural water-use efficiency to record levels, the cumulative impact of multiple water users had driven the lake to record low inflows. The consumer markets and retail companies purchasing Naivasha’s produce faced high reputational risks due to their poor understanding of the water demands of their suppliers and the perceptions of their customers (ERD 2012).

The concept of shared water challenges was employed to bring users together to work closely on joint action plans, funding local water user associations, promoting and setting up reallocation plans, and creating incentives for government to better protect and manage the lake. These outcomes, supported and largely driven by the private sector, have been integral in advancing more sustainable management of the region. The underlying shared need for effective governance of the lake has united the stakeholders (WWF 2012). The Naivasha example illustrates that while the criticism of “shared risk” has focused mainly on multinational companies with visible brands, the private sector in Kenya was largely represented by Small and Medium Enterprises (SMEs). These companies, Kenyan and international, saw a clear business case for engaging proactively with other water users. The focus on stewardship, shared challenges, and collective action should not obscure the fact that most of the implementation of projects on the ground will be negotiated through SMEs—either because of supply-chain pressures around buyer protocol for stewardship or because SMEs are embedded in these local communities and understand the water situation and business case from multiple perspectives.

There are specific challenges in facilitating the shift toward seeing water challenges as shared, among them, the generally differing languages and expectations of various stakeholders around needs, timeframes, and modes of communication. To speak of “shared water risks” does not imply that water challenges create an equal and similar burden or sense of urgency for all stakeholders. It is necessary to ask: risk of what and risk to whom? The risk to an individual differs from societal or business risks, and certain groups will be more vulnerable than others. Water scarcity and pollution can be subjective in this sense. For a farmer, the danger may be back-to-back years of below-average rainfall. For the owner of a processing plant, the risk might be a temporary, sudden cessation of stream flow during peak operation time. For a government, risks might include the increasing costs of accessing water for utilities and the
implications of higher energy costs, or failing to deliver on economic growth and development pathways because of poor water management (Orr and Cartwright 2010).

Rather, the concept of shared interest elevates local water challenges as shared problems—ones that can be addressed in proactive and collaborative ways. Consider the alternative to this, in which stakeholders facing similar challenges need not (or should not) speak to or engage with one another over shared resources and should only be ruled by government policy, regulation, and fines leaving those operating in geographies absent of good water governance to fight over resources. Critiques against corporate engagement in water issues, knowingly or not, indirectly or directly, appear to advocate this alternative, yet collaboration and inclusion of all water users, including corporate and industrial actors, lies at the heart of water resource management and particularly integrated water resource management (IWRM)—the chief paradigm of reconciling water management challenges among shared users. Collaboration and integrated management also lie at the heart of the “soft path for water” approach (Gleick 2002, Wolff and Gleick 2002).

How do other water users benefit from private sector involvement?

Regardless of whether companies benefit from robust water governance, for the “shared water challenges” concept to function, water managers and those advocating for the public interest must themselves benefit from companies operating in a stressed watershed. Companies can provide vital employment and taxes for local communities, contribute to GDP and foreign exchange, and help governments deliver on poverty, growth, and development challenges. The example of Lake Naivasha showed that 10% of foreign exchange to Kenya could be linked to the output of the Naivasha’s produce and horticulture trade (WWF 2012). Government saw how failure to address water challenges could not only drive business away from its jurisdiction to relocate somewhere else, but also feed the perception that Kenya was an unstable place to do business, which in turn could undermine much needed foreign investment over the long term.

Companies can contribute to water management in simple yet beneficial ways. For example, they can provide sorely needed financial resources to address water losses, especially in places where water governance is weak and capital is limited. Sasol, a global integrated energy and chemicals company with its main production facilities in South Africa, has recognized water security as a material challenge to its operations, some of which are highly reliant on the inland Vaal River system. Sasol uses about 4% of the catchment yield while municipalities use approximately 30%, of which water losses can be as high as 45% because of the aging infrastructure (Greenwood et al. 2012). Sasol has approached a number of municipalities to implement water conservation initiatives (Greenwood et al. 2012). One such project, implemented in collaboration with GIZ and the Emfuleni municipality, used Sasol and GIZ funds to repair water leaks in roughly 60,000 households in Emfuleni (Sasol 2013). Water savings achieved through this project equate to roughly 10% of the annual water use of Sasol’s Sasolburg facility or 2% of Sasol’s total annual water use from the Vaal River System (Sasol 2013). Sasol’s implementation of this beyond-thefence-line water strategy has created system-wide water savings and supported local water security to the benefit of all. It has also reduced water management costs for both local government and the business itself. This is a salient example of a win-win scenario, where the company was able to invest in the most cost-effective savings, and where private and public interests were fully aligned.

Companies can also help introduce new technology to improve water-use efficiency and water quality and collection of water-related data that supports informed water management decisions, and use privileged access to national decision-making processes that NGOs and small communities may lack. For example, Intel teamed up with the City of Chandler, Arizona, to devise a collaborative approach to water management that includes building an advanced reverse osmosis facility to treat rinse water from Intel’s manufacturing facility to drinking water standards before being returned to the municipal groundwater source and nearby farmlands (Morrison et al. 2010).

The lack of financial, technological, and informational resources in many watersheds underscores the reality that current governmental expenditure and investment in sustainable water-resource management is low in many places across the globe (Ginneken et al. 2011, WaterAid 2011). In many cases, this may be due to corruption or a lack of awareness of the importance of sustainable water management. In other cases, it is because the government faces many competing demands for resources and policy attention and may lack the resources needed to manage water in a sustainable and equitable manner (WaterAid 2011).

PSIRU contends that the solution is to drive companies away from waterstressed basins and to exclude companies with “questionable environmental records” from dialogues and initiatives promoting corporate sustainability. While doing so may provide temporary relief or a brief moment of satisfaction, it will not pave the way toward a sustainable water future. In many areas, some degree of water stress in inevitable. Achieving sustainable water management necessitates that we better understand our shared objectives of healthy communities, a clean environment, and thriving industry, and learn how to accomplish them even in the face of water stress.

The CEO Water Mandate suggests that it is only through robust public water governance (which includes effective regulation of corporate practices) that sustainable water management can ultimately be achieved. While certainly companies have an obligation to (and an interest in) implementing sustainable and equitable operational practices, private sector businesses can and should also play a role in bridging the public resource and capacity deficit, especially in the context of water stewardship initiatives and collaborative projects that harness the expertise, knowledge, and legitimacy of NGOs, academia, and government agencies. With the private sector in this role, however, we also must pay serious and careful attention to protecting the public interest, addressing equity concerns, and preventing “policy capture.”