Good Governance Is Critical to Sustainable Water Management
From using less water and reducing water pollution to protecting ecosystems and ensuring communities have clean water supplies, a company’s ability to sustainably and responsibly manage water hinges on how it addresses a range of interconnected issues. Strong corporate board oversight can be the thread pulling this work together, ensuring companies are mitigating their broad water impacts and exposure to financial risk.
As climate change and population pressures continue to threaten water resources across the globe—researchers predict we'll be unable to meet even 56 percent of global water demand by 2030—the material financial risks to businesses are becoming starkly clear. A Ceres analysis found that 50 percent of stocks listed in each of four major US stock indexes are in industries with medium-to-high water risk.
These escalating risks are why investors are ramping up engagement with companies on water issues, with board oversight a key focus. Last year, a new effort, the Valuing Water Finance Initiative, was launched by investors to engage with companies with substantial water footprints to address water risk as a financial risk and make the large-scale change needed to protect water systems. These 89 investors managing $17 trillion in assets laid out a set of six expectations, among them the board taking an active role in the company’s water management.
Although the 72 companies on the initiative’s focus list are concentrated in four water-intensive sectors—food, beverage, apparel, and high tech—the investor expectations apply to all sectors, as water is essential to whole industries and all communities and ecosystems. Here are four actions boards should be taking to accelerate progress and meet these investor expectations:
- Formally oversee material and salient water issues. For investors and other stakeholders to understand the board’s engagement, a company should disclose information about the specific water-related issues the board and senior management team oversee, details on material water issues the board is prioritizing, and how the board is involved in addressing those priorities. At Cargill, for example, the CEO/board chair in 2021 assessed and approved water targets and monitored progress against those targets. The CEO/board chair regularly updated the board on progress against environmental, social, and governance (ESG) targets, including the company’s water targets. The company’s executive team and the board’s governance committee also supported publishing the company’s ESG scorecard, which offered an update on the company’s progress on key ESG goals, including two primary water goals.
- Integrate water risks and opportunities into decisions on strategy, risk, and revenue. The board needs to assess the effect that current and future water risks could have on the company’s business strategy and performance, including its assets and supply chain. With this information in hand, boards must ensure these scenarios and potential risks are accounted for in company-wide strategic decisions. Microsoft Corp.’s water stewardship strategy, for example, considers water risk to its assets and facilities, as well as to its technologies and service offerings. The company has modeled water availability over time for its long-term real estate investments and begun concerted efforts to reduce water usage in device manufacturing and its supply chain. Microsoft also considers water in its financial planning for its facilities through looking at both capital expenditures—such as for water-saving, water reuse, and cooling systems—and operational expenses for ongoing maintenance and for the utility costs of water withdrawals for their sites.
- Link water management to pay or incentive compensation for senior executives. When developing financial incentives, boards should consider the long-term timelines needed to meaningfully reduce water-related risks. Identifying and implementing solutions to address emerging water challenges is complex. Accelerating that process to meet short-term compensation goals can threaten the impact of a company’s water stewardship program. At The Coca-Cola Co., the board of directors’ talent and compensation committee approved new sustainability performance measures linked to annual and long-term incentive programs for executives in 2021. The board included quantitative performance metrics based on achieving Coca-Cola's goals for water replenishment and turning hard-to-recycle plastic into bottles.
- Ensure public policy engagement and lobbying aligns with the Valuing Water Finance Initiative's expectations and supports your company’s water strategy. Just as it is critical that companies voice their support for the federal and state policies needed to address the climate crisis—unleashing new industries, jobs, and growth in the process—companies need to advocate for strong water policies. Companies should proactively advocate for strengthened water governance, infrastructure, and equitable access to clean water and sanitation. And as they do, they need to ensure direct and indirect lobbying activities are aligned with these policy positions.
Strong board oversight is key to driving a company’s progress at the pace and scale needed to protect water resources and mitigate material financial risks. Regardless of where companies are on their water stewardship efforts, there are opportunities for corporate boards to solidify their commitment to better managing and valuing water for the benefit of their businesses and communities impacted by their operations.
Kirsten James is senior program director, water at Ceres.