From: Issue 41 Categories: business

I'll drink to that

15 January, 2013

Water management is getting boardroom attention

Written by Doug Morrow, Managing Director, Corporate Knights Capital

It might not receive much attention, but water management is a deceptively important priority for many companies these days. In some geographic or industry groupings – such as the Australian mining industry, the Canadian oil sands and the U.S. power-generation sector – water management is a top-of-mind financial issue. Consider that Exelon, the Chicago-based electric power producer, used 60 billion cubic metres of water in 2011. This exceeds, by almost 14 billion cubic metres, the total amount of water consumed in 2011 by all U.S. households.

Against a backdrop of growing water scarcity, rising per-capita demand and the growing privatization of global water resources, water management is becoming a legitimate boardroom issue in many sectors of the economy. Despite this, most firms in most reporting jurisdictions are still not obliged to disclose details of their water consumption to shareholders, securities regulators or relevant government agencies.

The good news is that a rising proportion of the world’s public companies is choosing to voluntarily supply this information, partly in response to increasingly forceful requests from institutional investors. In 2010, 41 per cent of the 1,747 companies in the Corporate Knights Capital coverage universe (across 15 large-cap global equity indexes) disclosed water use, up from 25 per cent in 2006.

Yet this upward trend in disclosure belies severe discrepancies among industry type (see table below). For instance, 74 per cent of companies in the Household & Personal Products category disclosed their water consumption in 2010, while only 13 per cent of companies in the Commercial & Professional Services group chose to disclose.

Companies use water in a variety of ways. It is used as a core input in manufacturing processes (by food and beverage companies like Coca-Cola, for example), industrial processes (such as steam-assisted gravity drainage processes deployed in Canada’s oil sands) and as coolant in the power-generation sector. About 70 per cent of the world’s total freshwater consumption is used in irrigation.

Corporate Knights Capital has a long-standing focus on measuring the financial impact of non-conventional business drivers, so it’s no surprise that key performance indicators (KPIs) designed to measure water management practices figure prominently in our research model.

Our standard approach for gauging a company’s water management is to take its annual revenue and divide it by total water use. Each company’s Water Productivity ratio is then per-cent-ranked against that of its industry group peers within our coverage universe. This step allows for “apples to apples” comparisons by ensuring companies are only measured against their industry peers.

Using revenue to “normalize” disparate quantities of water consumption is appropriate in industries where water use varies directly with revenue, such as mining. But in other industries, the relationship between water consumption and revenue generation is non-linear. In banks and insurance companies, for instance, one would not necessarily expect to see an association between increased water use and revenue, or vice versa. In these industry groups, we normalize a company’s water use by number of employees rather than revenue.

In more specific cases, we measure the amount of water that companies consume using industry-standard metrics. For instance, we can normalize water use in mining by looking at consumption per tonne of ore extracted; in retail, we can compare water use per thousand square feet of retail space.

Water clearly matters more to some companies than others, but disclosure is improving across the board. The next step is greater standardization of reporting methodologies and increased use of tools to better measure the long-term benefits of improved water productivity.

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