The briefs, released by Ceres in partnership with the Valuing Water Initiative, a Dutch government program, estimate the cost and financial materiality of addressing companies’ impact on water and make a compelling financial case for companies to take meaningful steps to address their water use impacts. The briefs, developed by the consultancy Bluerisk, cover the packaged meat and apparel industries, two industries that are exposed to a high level of water risk according to forthcoming research from the Global Institute of Water Security at the University of Saskatchewan.
The analysis uses a methodology developed by asset manager DWS to estimate the financial fallout for industry leaders — such as Hormel (NYSE: HRL) and Tyson (NYSE: TSN) for packaged meat and Burberry (OTCMKTS: BURBY) and Ralph Lauren (NYSE: RL) for apparel — in response to the negative water impacts generated from their operations and value chain.
“Much of the existing research focuses on understanding the impacts of the global water crisis on company performance,” said Paul Reig, founder of Bluerisk and lead author of the briefs. “The analysis flips that premise on its head, and explores the financial materiality of addressing a company’s impacts on water resources. For the first time, investors can understand the financial implications of addressing water-related externalities in two water-intensive industries.”
This analysis finds that the risks generated by impacts to water from company actions are material to a company’s bottom line, but are typically underestimated by both companies and investors. Companies are encouraged to act now to boost investor confidence that the business is committed to reducing value at risk. Investors should encourage companies across sectors to use these methods to inform the potential capital and operational costs needed to eliminate impacts, reduce value at risk, and capitalize on opportunities in the face of increasing water challenges.
The findings for the apparel industry show that:
· Eliminating apparel companies’ impacts on freshwater would require approximate total annual expenditures that range from US$189.8 million to US$1.77 billion.
· The impact of the additional annual expenditure on apparel company earnings is significant for all companies, ranging from -21% to -47%.
The findings for the packaged meat industry show that:
· Eliminating meat company impacts on freshwater would require an annual expenditure of between US$57.3 million and US$301.4 million, depending on the company.
· The impact of these additional expenditures on meat company earnings is expected to be modest, ranging from -7.5% to -4.7%. The impact on net profit is higher, ranging from -5% to -165%.
According to research cited in the briefs, the cost of inaction may be up to five times what is estimated to be needed to address the negative water impacts on company operations. The negative impacts on water should be addressed promptly to gain investor trust and confidence that companies are committed to protecting their social and legal license to operate and minimizing price volatility and disruptions in raw material sourcing in the face of emerging water challenges. Despite this incentive, research from Ceres released in October shows that the meat industry continues to lag behind other food sectors in addressing water-related impacts.
“Ceres’ new research shows that companies are not passive actors in the water crisis – their operations are creating additional risk when impacts on water resources are left unaddressed,” said Kirsten James, senior director of water programs at Ceres. “Companies have an obligation to understand this risk and act to eliminate their negative impacts on water, in order to protect value at risk for shareholders.”
On the other hand, investors may experience negative financial impacts within their portfolios, as company valuation and profits fluctuate in response to addressing these negative water impacts, on top of water-related impacts caused by increasing water stress and droughts. Investor initiatives such as the Ceres Valuing Water Finance Initiative and the Global Investor Engagement on Meat Sourcing can help compel companies to eliminate the risk created by externalities through company engagements.
“The common knowledge among investors — that water does not put the value of companies at risk — is wrong,” said Piet Klop, Head of Responsible Investment at PGGM Investments and a founding member of the Valuing Water Finance Task Force. “Despite the differences in the projected financial impacts between industries, the bottom line is that the risks to company value created by water impacts are real and significant.”
“Water is not receiving enough attention due to the fragmented nature of water regulations and society’s misplaced belief that water is plentiful and cheap,” said Francesco Curto, Global Head of Research at DWS. “In this research collaboration with Bluerisk and Ceres, DWS has helped demonstrate the true financial impact if investors were to use a sustainable framework in the management of the water risk for the apparel and meat industries, showcasing the need for companies, investors and governments to act. This ought to be the starting point for a more advanced approach to the true price of water.”
In 2022, Ceres will release a set of new expectations for companies seeking to reduce their impacts on water resources. These expectations, along with the research from these briefs, will shape investor engagement on responsible water use as part of the work within the Ceres Valuing Water Finance Initiative.
“This study is vital to companies and investors who are increasingly concerned about the water risks faced across the whole of their value chain including operations, supply chains and investments,” said Alexandra Freitas, Senior Adviser for the Valuing Water Initiative. “Understanding business risks related to water is critical to inform the capital and operational expenditures required to eliminate impacts and reduce the value at risk as well as capitalize on opportunities as we face worsening water security across the world.”