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Water and Reputational Value
March 14, 2010
Water is relatively inexpensive and for most companies an insignificant line item on a profit and loss statement. In view of this, why are companies increasingly focused on developing water strategies and implementing programs to reduce water use and where does the real value of water reside?
There is a great discrepancy between the price of water and the value of water.
The real value of water lies in a company’s ability to ensure that water risk does not disrupt business, damage reputational value and limit a company’s license to operate. Conversely, for those companies that manage water related risk well they can reduce the potential for business disruption; increase reputational value and their license to operate.
Most companies focus on the physical risk associated with water. The physical risk of water is tied to issues such as a company’s ability to ensure the delivery of acceptable water quantity and water quality through the value chain (with a focus on supply chain). In particular, business disruption from a shortage of water or poor water quality is a critical issue for water intensive industries such as the food, beverage and energy sectors. An early discussion of the importance of physical risk of water to businesses was provided in the research paper by the Pacific Institute titled, “Freshwater Resources: Managing the Risks Facing the Private Sector” By Jason Morrison and Peter Gleick (August 2004).
Only recently has reputational or brand value been identified as a key water risk for businesses. The most recent study of water risk and the importance of reputational risk was highlighted in the February 2010 CERES report titled, “Murky Waters? Corporate Reporting on Water Risk, A Benchmarking Study of 100 Companies.” The report stressed the importance of reputational risk and the consequences of poorly managing water.
Reputational risks are increasing due to communities’ awareness that they have a right to affordable and clean water. The concept of “access to clean water as a human right” is gaining more recognition, with multinational companies such as PepsiCo adopting a company- wide policy (and leadership position) in support of the human right to water.
A recent article in the Financial Times (FT) highlights the connection between water and reputational value. The FT article, “A Foot on the Gas” explores the emergence of shale gas (the fracturing of shale formations to extract natural gas) as a low (relatively) carbon fuel. One of the problems highlighted is the reputational risk from concerns that fracturing of shale may contaminate ground water sources. Those companies involved in shale gas exploration are becoming acutely aware of the potential for reputational damage from potentially poorly managing water risk.
For any company, managing the reputational value of water starts with understanding your footprint (both direct and through your value chain), proactively engaging your stakeholders (local communities in which companies operate) and developing a strategy to reduce water use. Reducing water use is driven by both efficiency improvements and innovation in how companies use water. We are now seeing the emergence of “water cleantech” companies and organizations such as Imagine H2O promoting innovation in the water sector.
Expect to see increased attention to water as a critical business issue and innovative new companies to address global water issues.