Water, an emerging business risk

The recently released Draft National Water Policy 2012 says “large parts of India have already become water-stressed. Rapid growth in demand for water due to population growth, urbanisation and changing lifestyle pose serious challenges to water security.”

Yet, most companies have not woken up to the risk related to water or emanating from water, and few have assessed their exposure to water risk. Even the companies that do not foresee water as a challenge in the near term may be at risk due to challenges imposed by climate change and its impact on water availability.

As a consequence, regulation may become more stringent on water use and wastewater discharge to prevent depletion and degradation of water resources. Growing awareness about water challenges may increase the society's expectations about the way water is used by companies.

corporate/business risk

The business risk emanating from a company's relationship to water can be broken into three broad categories, namely, physical, regulatory and reputational.

Physical risk relates to both quantity (scarcity/flooding) and quality (pollution) of water. This can be caused by drought or long-term water scarcity, unequal allocation among users, flooding, or pollution that renders water unfit for use. Physical risk means that a company may face difficulty in accessing adequate amounts of quality water for its business operations and supply chain.

Regulatory risk relates to governance of water uses by law/legislation. It occurs because of changing, ineffective, poorly implemented or inconsistent water policies, and involves pricing of water supply and wastewater discharge, licences to operate, water rights, quality standards, etc.

Reputational risk relates to the impact on a company's brand/image. With growing public and media awareness — about how companies are handling water resources — is becoming important.

Any conflict around access/use/degradation of water often leads to adverse publicity for the company, which in turn adversely impacts its client base.

All of these risks individually or collectively can threaten a company's legal and social licence to operate and in worse cases could also lead to closure of a company's operation.

It is therefore important for companies to have an internal water policy that is aligned to both local sensitivity and national policy.

Companies must report regularly about their conduct and actions on water in the public domain to earn and maintain the confidence of various stakeholders.

Are companies doing that? Over the past two decades, a growing number of companies have begun to publish non-financial reports covering their conduct and actions on environmental and social issues that include water for the benefit of stakeholders and public.

Corporate Reporting

For assessing corporate reporting on water by publicly held companies in India, we looked at the data base of S&P ESG India Index. The data base collects information on disclosures made by companies on four parameters: (a) policy/initiatives for management of water use; (b) total water used; (c) total water used by source; and (d) policy for management of wastewater discharged. Currently, this information is available for six years (see table) and reveals the following:

(a) The number of companies reporting that they have policies/initiatives for management of water use is low, but is increasing. Water policies/initiatives by the companies provide background or overview of their water management. About 30 per cent of the companies in 2010 reported that they have policies/initiative in place for management of water use. In 2005, this percentage was only 20 per cent.

Although over the years the situation has improved, most companies either still do not have a water policy/initiative in place or do not report such information in public domain.

(b) Companies hardly disclose information on total water used by them. Despite about one-third of the companies reporting having policies/initiatives in place for management of water use, only 3.3 per cent of the companies in 2010 disclosed information about their total water used.

(c) Their reporting on the total water used by sources is even worse. Not a single company disclosed information on the total water used by source in 2005. Even in 2010, only 1.5 per cent of the total companies made this disclosure.

(d) About one-fifth of the companies report that they have policy for management of wastewater discharge. Management of wastewater discharge by companies is an important aspect of tackling growing water pollution.

From about 12 per cent of the companies in 2005 disclosing that they have a policy on waste water discharge, the percentage of such companies grew to 22.1 per cent in 2010.

The disclosure and reporting pattern of companies are likely to differ because water uses/requirement as also wastewater discharge varies across sectors. Some sectors require high-quality water as a key input for production, while others use water mainly for cooling or in-plant processes.

Some businesses produce high volumes of wastewater, while others are more concerned about the quality of wastewater discharge.

Therefore, companies that belong to the sectors where water use/requirement is critical, or is publicly more visible in the production process, are more likely to have water and wastewater discharge policies/initiatives in place, compared with other sectors.

This is also borne out of the S&P ESG India Index data base, which shows that a relatively high percentage of companies belonging to energy, materials and utilities sectors reported that they have policies for management of water/wastewater discharge. This was followed by companies belonging to health care, consumer staples and other consumer sectors.

(Mr Sinha and Ms Bhardwaj are Director, Economy Research, and economist, respectively, at Crisil Ltd. Views expressed are personal.)

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