By MATTHEW BRODSKY, senior editor/Web editor of Risk & Insurance®
A recent report from the environmental activist investor group Ceres reveals that some of the world's largest publicly traded companies have a long way to go when it comes to water risk management.
"The report is not surprising," said Douglas W. Charlton, directory of the financial advisory practice and water resource program at San Francisco-based Bradburne, Briller & Johnson LLC.
In this consultant's eyes, the Ceres report identifies a very important part of business exposure that's under stress and where, over the next few years, we will see "dramatic and significant changes" in risk management in this area. Winners and losers will be revealed.
"That process will be very eye-opening," he said.
In fact, some of the low scores in the Ceres report opened Charlton's eyes. The study, done in conjunction with Bloomberg and UBS, ranked water-disclosure practices of 100 publicly traded companies in eight industries especially exposed to water risks.
"We chose sectors where water security concerns are likely to have a material impact on business, whether through regulatory, legal or reputational constraints that in some cases can go so far as to threaten a firm's very 'license to operate,' " said Julie Hudson, global head of sustainability research at UBS Investment Bank, in a statement.
Most firms, Ceres found, fail to report material water risks and performance data in financial filings. Not one of the 100 companies reveals "comprehensive" water data on their supply chains, according to the research.
In each sector, only really a handful of leaders emerged. The mining and beverage industries scored highest among sectors; the three individual leaders were U.K.-based beverage company Diageo, Swiss miner Xstrata and U.S. energy company Pinnacle West.
This pattern--of few leaders and many laggards--mirrors what Charlton sees in the real world. Charlton used to run the environmental programs in the Western United States at DuPont, a leader very aware and sensitive of "doing the right thing for the right reasons," he said.
Regarding such corporate leaders, he said, "They're going to be doing it because they are aware they have a responsibility to their customers and the markets in which they operate."
As for the rest?
For Charlton, their hesitation is simply explained from internal financial pressures; companies devoting scarce capital to making revenue. For David Restaino, partner at Fox Rothschild's Princeton office, it's a matter of climate-change reporting being an "iterative" process. Investors, regulators and companies are all still trying to get their heads around the huge climate-related risks.
But as Ceres points out, pressures to address water and other environmental risks can, will and have come, from investor groups like Ceres or Norges Bank Investment Management, which runs the $415 billion Norwegian Government Pension Fund. It announced in August 2009 that it would evaluate water risk management practices of its fund's 1,100 companies.
Or it can come from regulators. In January 2010, the Securities and Exchange Commission issued guidance on what publicly traded companies need to disclose about climate-related exposures, including water-related risks.
"Looking at the Ceres report and SEC guidance--these types of analyses are teeing up the issue," said Restaino.
Then comes pressure from the market, say if consumers start buying their drinks from a Diageo instead of a competitor because of the former's green leadership.
"It's essential that these (companies) have access to and manage their water-resource demand in a way that will sustain their operation long-term and will present them to the public as a business that's sensitive to green issues and acts accordingly," concluded Charlton.
March 2, 2010
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