Standard Life Investments

Focused Insight

Water risks in agricultural supply chains – why investors should care

  • Population growth, climate change and urbanisation are threatening global water supplies
  • Companies must shift towards sustainable use of freshwater
  • Food, beverage and retail companies are working with their supply chains to mitigate water risks.

Population growth, climate change, and business activities are threatening the world's water resource. Water quality is also in decline. Global demand for water is expected to nearly double over the next 15 years. Yet there are some 4 billion people who currently live under water scarcity at least one month per year. The International Food Policy Research Institute estimates $63 trillion of global GDP is at risk by 2050 if current water management practices continue.

Agriculture currently accounts for approximately 70% of the world’s water consumption1. And water management is increasingly a challenge for food and beverage companies, retailers and farmers.

As investors, the importance of water cannot be overstated. Companies that fail to manage supply chain water risks may see impacts on their financial performance, due to, for example, increased input prices, supply disruptions or reputational damage.

Nature of risks

One of the difficulties with water assessments is the regional nature of the risk. Water stress is typically felt on the basis of a region or a basin. The limited availability of data also hinders simple analysis of company exposure.

Figure 1: Median water consumption in highly and severely water stressed regions (m3 per US$1,000 revenue)

Chart 1: Median water consumption in highly and severely water stressed regions (m3 per US$1,000 revenue)

Source: PRI research report on water risks in agricultural supply, July 2014

 

Collaborative engagement

The UN Principles for Responsible Investing (PRI) Secretariat coordinates a number of collective engagements, including one on water risk in agricultural supply chains, which Standard Life Investments joined in 2015.

With help from the World Wildlife Fund and PwC, PRI established a collaborative engagement strategy targeting over 30 companies. A number of global investors were tasked with talking to companies and reporting their findings back to the investor group. Asking the same questions and exploring similar issues helped to benchmark companies against peers and identify 'best practice'.

As investors, we have engaged Diageo, Kering and Orkla to understand how the companies deal with water risks in their agricultural supply chains, and what measures they have to mitigate the effects.

Picking up speed

Diageo is the world's leading producer of spirits and beer. It has published a water blueprint strategy and is actively managing its direct operational impacts on the water resource. Diageo puts a strong emphasis on communities, capacity-building and a holistic approach to the issue, including looking at energy use, transport, treatment and discharge of water. This helps the company understand payback time and return on investment.

Kering is an ensemble of luxury houses in fashion, leather goods, jewellery and watches. Water risk is integrated into its programmes for procurement and raw material sourcing. It is innovating in raw materials, fabric processes and product design to improve water efficiency. Its innovative Environment P&L approach provides a detailed analysis of water risk in the supply chain.

Norwegian conglomerate Orkla is a leading supplier of branded consumer goods to the grocery, out-of-home, specialised retail, pharmacy and bakery sectors. Orkla’s involvement in multiple supply chains makes risk identification difficult. But the conglomerate has high ambitions. Its approach is to develop cross-functional programmes on group-wide strategy, with a particular focus on certification. The goal is to have important raw food materials produced sustainably by 2020, with a first focus on cocoa, fish and palm oil.

The UN’s Sustainable Development Goals provide an excellent framework for identifying, measuring and quantifying the positive impact of companies across the globe. Within our impact investing process, we incorporate a number of the underlying performance indicators to quantify the impact of companies on water efficiency, clean water and access to water and hygiene.

There is greater urgency for companies to change their thinking on freshwater withdrawals. Aberdeen Standard Investments will continue our work with the PRI on this issue and believe the stewardship of water by multiple stakeholders including companies, will increase in significance.

 

1 Water Risk in Agricultural Supply Chains – How well are sustainability standards covering water stewardship’, WWF Germany, Oct. 2017