By Brooke Barton, Senior Manager of water programs at Ceres
Behavioral science shows that humans have an inherent bias toward the status quo – we have a hard time imagining that things we’ve long taken for granted might change.
- Droughts in Russia, China, India and the United States severely reduced wheat yields last year and lead to substantial price hikes. By February 2011, the cost of wheat rose $200 per metric ton over an eight month period – a spike that can have life-altering consequences for people in poor countries.
- A U.S. Department of the Interior study found water flow in the Rio Grande, Colorado and San Joaquin river basins had decreased as much as 20 percent due to climate change.
- A 2009 paper revealed up to a dozen power plants, which need water for cooling, temporarily reduced their output or shut down because of inadequate water supplies, and several states denied proposals for new power plants citing water concerns.
With climate change, population growth and rapid economic development, an increasing number of companies face risks: water sources drying up, more expensive water and raw materials (especially agricultural products), potential conflicts with local communities over resources and more.
- During a recent drought in Georgia, low water levels led to a severe reduction in hydropower generation, forcing the electric utility Southern Company to spend $33 million to purchase additional energy.
- In October, apparel maker The Jones Group cut its 2010 sales projections amid record-high cotton prices linked in part to drought. Shares of the New York-based clothing maker dropped on the announcement and have since moved lower.
- Citizen protests in Kerala, India forced Coca-Cola to temporarily shut down a profitable bottling plant due to local villagers’ claims that the company had caused their wells to go dry. The controversy drove an anti-Coke campaign leading to product boycotts on college campuses in the United States and Europe.
Big financial firms that manage the retirement funds of public workers, labor unions and your IRA are sounding the alarm, too. By looking at the intersection of environmental and social issues with long-term company profitability, fund managers have identified water as a core area of emerging risk for their portfolios – especially regarding shares in water-intensive businesses, including food, beverages, mining and electric power.
However, our research at Ceres found corporate disclosure around issues of water was surprisingly weak.
Jack Ehnes, CEO of CalSTRS, one of the country’s largest pension funds, states, “Companies are not providing investors with the kind of information they need to understand the risks and opportunities posed by water scarcity.” To this end, CalSTRS and 350 other institutional investors, who together manage $43 trillion in assets, have asked more than 400 of the world’s largest publicly-traded companies to disclose their water risks and performance via a large, multi-year survey.
Wall Street is paying attention as well:
- JPMorgan says water scarcity poses risks to companies across economic sectors, and recommends that investors “assess the reliance of their portfolios on water resources and their vulnerability to problems of water availability and pollution.
- Swiss bank UBS’s investment division warns that water shortages are already constraining economic growth in California, China, Australia and India.
- Goldman Sachs is sponsoring a new data tool to help companies and investors map their factories and investments against global water scarcity “hot spots.”
At Ceres, we are working to identify best practices for managing these risks successfully. We want to hear from companies about what they are doing on the ground to address key issues regarding water and its increasing scarcity. So, if you have a story to share, please be in touch.
Brooke Barton is senior manager of the water programs at Ceres.
Ceres leads a national coalition of investors, environmental organizations and other public interest groups working with companies to address sustainability challenges such as global climate change and water scarcity.