China is home to 20% of the global population but only 7% of the global fresh water supply1and pressure on water is mounting due to the country’s explosive growth. China has lost 27,000 rivers to diversion and over-extraction since the 1950s2. In 1999, former People’s Republic of China deputy Prime Minister, Wen Jiabao, warned that water shortages threaten “the very survival of the Chinese nation”3. China’s water scarcity is of strategic importance to business.
A growing population and increasing economic activity, coupled with declining water quality in many regions within China, has resulted in increased competition for water in the public and private sectors; the economic effects are becoming increasingly apparent. In April 2015, a potato supplier of McDonalds was fined RMB3.9 million (USD629,000) for polluting local water supplies.
“Business too is responding. A large and growing number of institutional investors & businesses are devising and implementing strategies to enhance water security and are often partnering with others …”
The response to this situation is multifold. The Chinese government increased its water investment budget by 7% in 2014 and is undergoing regulatory reform to improve the governance of water resources4.
Business too is responding. A large and growing number of institutional investors and businesses are devising and implementing strategies to enhance water security and are often partnering with others to reduce costs and increase credibility. For example, leading international brands, with supply chains in the heavily polluted Yangtze River basin, have successfully partnered together with NGOs to drive better water standards and increase water efficiency in textile manufacturing and cotton growing. This form of corporate water stewardship is emerging as the most effective approach for improving water security.
“Enhancing water security in China”, published by CDP in June 2015, presents the case for corporate water reporting in the region alongside analysis of the 2014 disclosures from 29 companies with headquarters in China, and 70 companies with facilities and/or supply chains exposed to risk in China.
These companies are from the most water dependent sectors.
Key findings from the report outlined below.
Business in China is already impacted by water related challenges but opportunities exist
CDP’s analysis indicates that while none of the 29 companies with headquarters in China report having experienced water-related detrimental impacts in the reporting period (2013-2014), seven companies with facilities located in China did. Of these seven:
- 43% reported higher operating costs (including one of U.K.’s largest manufacturing and engineering companies, Morgan Advanced Materials);
- 25% experienced property damage; and
- 50% reported suffering brand damage (Spanish clothing company Inditex reported that it has been hurt by Greenpeace’s ‘Detox’ campaign).
31% of companies with headquarters in China reported water-related opportunities
However, at the same time almost a third (31%) of respondents headquartered in China report opportunities relating to water; the majority of which result in cost savings, business continuity or enhanced brand value.
Accounting for and protecting freshwater resources is fundamental to economic stability and yet there is minimal action in China
An increasing number of stakeholders are recognising that reporting can uncover risks and opportunities otherwise unnoticed by companies and lead to timely action.
0% require key suppliers to disclose water risks they may face
Analysis in the report found potentially inadequate water risk assessment processes and procedures by Chinese companies. While 55% of companies with headquarters in China undertake a water risk assessment:
- Only 24% conduct a review that includes risks to both direct operations & supply chains;
- 0% conduct assessment at the river basin level – the crucial geographical area to consider when assessing water risk; and
- 0% require key suppliers to disclose water risks they may face.
|“Corporate disclosure of water-related risk is seriously inadequate … The financial impact of water shortages on sectors and companies is unclear, because information on water use data and impacts is spotty and partial”
JP Morgan, “Enhancing water security in China” Report 2015
Analysis also identified areas of improvement in corporate governance and highlighted how some companies are realising opportunities relating to water.
For example, Belgium brewers, Anheuser Busch InBev conducted large-scale trials in China, in partnership with the state supported Gansu Academy of Agricultural Sciences, to identify optimal irrigation practices for barley. A benchmarking tool was introduced, allowing growers in China to improve crop management practices through advanced productivity and environmental key performance indicators including water related parameters
Businesses with a pro-active approach to water stewardship will be favoured
The significance of corporate water issues is now being widely recognized by a large and growing number of institutional investors. These key stakeholders are increasingly holding companies accountable for the economic, environmental and social consequences of their water use and management.
|“As the manager of about €140 billion of pension assets, water risk is affecting PGGM investments in a variety of ways. The problem however, is that the business value at water risk remains unclear because company information on water is rarely comparable and meaningful. CDP’s work on improving and standardizing water risk disclosure is therefore vital in helping PGGM assess the water risk in our portfolios. Beyond that, we want companies to reduce their water use and increase collective water security.”
PGGM Investments, ”Enhancing water security in China” Report 2015
What needs to be done now?
For businesses, developing an effective programme of reporting in China will not be straightforward, but will provide significant benefits and is essential in ultimately managing both risks and opportunities.
Businesses need to integrate water into their business strategy;
only 45% of respondents did this compared to 90% of Global 500 respondents
Greater transparency and access to corporate water data, robust governance of corporate water issues, long term thinking and business planning are some of the major areas that they can explore in terms of improving the management of water resources.
Also, in addition to the required improvement to water risk assessments, analysis shows that the governance of water issues reported by Chinese companies could be strengthened: only 45% of respondents report that water is integrated into their business strategy, compared to 90% of Global 500 respondents.
|“Emerging and frontier economies are expected to have an increased portion of global GDP and GDP growth. Companies located or active in these jurisdictions have an increased importance in many investors’ portfolios. We would therefore welcome increased geographical coverage of the CDP Water Survey.”
Norges Bank Investment Management, ”Enhancing water security in China” Report 2015
For CDP, we will work alongside all of the key stakeholders in the debate and believe that a water disclosure program in China will be the most effective way to stimulate a rational and coherent business response to the issues of water availability. For further information on CDP’s work on water in China click here and for our global water programme click here.
1 UN WATER Water and Energy Sustainability Available from: http://www.un.org/waterforlifedecade/pdf/01_2014_sustainability_eng.pdf
2 2 FOUNDATION FOR NON-VIOLENT ALTERNATIVES (2014) Publication, Commentary and Analysis South-North Water Transfer Project Available from: http://fnvaworld.org/research-and-publications
3 3 Roy D. Return of The Dragon. New York: Columbia University Press; 2013
4 5 CHINA WATER RISK (2015) China’s 12th five year plan Available from: http://chinawaterrisk.org/regulations/water-policy/
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Corporate Water Stewardship
- Water Stewardship: Actions Must Match Risk - Despite acknowledgement of water risks, 58% of companies in CDP’s 2014 Global Water report do not have a public commitment to water. We expand on actions needed in China & globally to match the risk
- Water: Can’t Always Buy What You Need -With competition for water intensifying, paying more for water may not get you what you need. Deloitte Consulting’s Will Sarni on strategies that can help corporates secure water for growth
- Corporate Conscience: Beyond Charity - Why are so few companies effectively mitigating water risk? Is it time for the conscientious corporate to transition water from purely charity and compliance to a core business activity?
- Business & Society: Building Trust - Given pressing societal issues, companies are now expected to lead the change across their business value chain. Edelman’s Ashley Hegland on why businesses need to reprioritize value to include such societal benefits to build & maintain trust or face reputational brand damage