Faced With a Growing Supply Crisis, Business Re-evaluates a Precious Resource
Although there are few areas of total agreement in international relations, the concept of water as a fundamental human right -- not a tradable commodity -- was ratified in 2002 by the United Nations Committee on Economic, Social and Cultural Rights. And that’s one big reason the prospect of privatizing water has been met with deep suspicion globally.
The U.S. has 60,000 local water systems, many of them small, but today only 15% are owned by investors, BusinessWeek reports. Yet privatization has some momentum. Veteran petroleum billionaire T. Boone Pickens, for example, believes that “water is the new oil,” and is staking a claim in this $400 to $500 billion global industry.
Pickens has bought up land in Texas on top of the vast Ogallala aquifer. His plan, in which he has invested at least $100 million, is to sell as much as 65 billion gallons of water per year to cities in Texas. In a recent interview, Pickens -- who is now the largest landowner in remote Roberts County -- said he is probably as good a steward for this millions-of-years-old resource as any public agency. But there are many who would disagree with him.
Water scarcity and water quality are among the top environmental issues of the 21st century. According to the United Nations, one in seven people today, an estimated 894 million globally, do not have access to the five to 13 gallons of safe fresh water per week that is considered the minimum necessary to meet basic human needs. “By 2025, 1.8 billion people will be living in countries or regions with absolute water scarcity, and two-thirds of the world population could be under stress conditions,” the agency says.
Water access issues are made more difficult by global climate change, which increases drought and flood frequency, degrades water quality by affecting temperature and flow rates, and threatens coastal aquifers. A study by the U.S. Geological Survey, for instance, found that warming of 3.6 degrees Fahrenheit would seriously damage the ability of the Colorado River basin to supply the water and hydropower that much of the southwestern United States depends on.
The UN believes that earth’s population is likely to exceed nine billion by 2050, according to Robert Giegengack, professor emeritus in the department of earth and environmental science at Penn and a faculty member at the Initiative for Global Environmental Leadership (IGEL) at Penn/Wharton. But that in itself does not necessarily pose an insurmountable obstacle to clean water access. “Even at 10 billion there is enough water, if we were to use it responsibly,” he says. “The problem is that we act as if the supply was unlimited.”
Giegengack adds that the actual cost of protecting human populations from dirty water is very low: Americans spend $16 billion on bottled water annually, for example. Three years of that spending would solve Africa’s seemingly intractable clean water delivery problems.
But saving water can be profitable. Businesses can see water challenges as opportunities to reduce spending through water conservation and re-use, says Stan Laskowski, a former Environmental Protection Agency (EPA) administrator, lecturer in the department of earth and environmental science at Penn, and founder of the Philadelphia Global Water Initiative.
The Twin Challenges of Managing Water
Adam Smith was apparently the first to note the paradox that water has incredibly high “value in use” and yet virtually no “value in exchange.” All living things need water to survive, as does the current world economy. (In the U.S., electric power plants alone account for 39% of freshwater withdrawals.) And yet water is chronically undervalued. According to “Water: A Global Innovation Outlook Report,” underwritten by IBM, “In many parts of the world, water is free. There may be costs associated with procuring, distributing and treating it. But the resource itself -- arguably the most important resource on the planet -- has no price.”
Without a market value, the invisible hand of the marketplace is incapable of solving the water shortage problem. Pickens is betting that eventually -- and sooner rather than later -- the growing imbalance between water supply and demand will lead to privatization. But according to Witold J. Henisz, a management professor at Wharton, “Water scarcity is both an engineering problem, and a social and political one. The public views access to clean water as a basic right, but regulating it effectively is often beyond the means of local, state and federal governments. Many NGOs find the idea of privatizing water problematic, and any pricing of it would have to make some allowance for providing access to people as a basic human need, regardless of income.”
The challenge for businesses is to think long-term about water-related risks at a time when they face far more immediate and costly issues. According to Mary Buzby, director of environmental technology at Merck, “Water is cheap or free now to business, so you can’t talk about return on investment as you can with energy. And unless you can demonstrate return on investment to the financial sector, it won’t happen. How do you move from today’s water value to tomorrow’s risk?”
The other challenge business faces is the localized nature of water problems. Unlike greenhouse gases, water issues cannot be tackled on a global basis. Frederick N. Scatena, who chairs the earth and environmental science department at Penn, pointed out recently that, “There are clear differences in how we manage water resources in Pennsylvania, where it is abundant, and Arizona, where it is not. Air pollution gets distributed around the country, but water is different.” Saving water in Maine does nothing to relieve shortages in the southwest or in Africa.
The Risks to Business
Despite these challenges, businesses are increasingly facing up to the growing risks, which include:
· Revocation of operating licenses, due to increasing regulation and/or community pressure. Coca-Cola, for instance, had to close a plant in India when its heavy water use came into conflict with local agricultural needs. Because of this risk, many companies are now factoring in water availability when deciding where to locate new facilities.
· The high likelihood of rising water costs in the near future. U.S. water prices could double or triple in the next few years, according to Neil Berlant, manager of the PFW Water Fund, which focuses solely on water stocks. Among U.S. water stresses are the need for up to $1 trillion to repair crumbling public infrastructure.
· Political instability caused by disputes over water. Wharton’s Henisz cites the case of the state-controlled Cochabamba waterworks in Bolivia. When the international consortium Aguas del Tunari (including the American company Bechtel, Italian utility Edison and the British firm International Water Limited) proposed to take over the waterworks, the selling point was that they could extend water availability to all the people of Cochabamba. But the Aguas proposal also included a 35% water rate hike to an average fee of $20 a month, which was more than many residents spent on food. Uproar over the plan led to the so-called Water Revolt in 2000, and helped elevate a prominent dissident, Evo Morales, to the presidency of Bolivia.
According to a 2007 report prepared in collaboration with J.P. Morgan, the World Resources Institute (WRI) identified the energy production, semiconductor manufacturing and food and beverage industries as particularly vulnerable to water risk. More recently, in 2009, “Water Scarcity and Climate Change: Growing Risks for Businesses and Investors,” a joint report by CERES and the Pacific Institute, looks at risks to water-intensive industries. These include:
High-Tech: Eleven of the 14 largest semiconductor factories globally are in the Asian-Pacific region, which is facing severe water quality risks. The industry is very demanding: Together, Intel and Texas Instruments used 11 billion gallons in 2007 to make silicon chips.
- Beverage: Both Pepsi and Coca-Cola lost access to ground water in the Indian state of Kerala because of competition engendered by drought conditions.
- Agriculture: 70% of global water use is for agriculture, with up to 90% in developing countries with rapidly growing populations (and increasing water demand). Much of the world’s crop and grazing land is in semi-arid regions threatened by climate change. An example is the increasingly stressed Ogallala aquifer, which provides water for 27% of irrigated land in the U.S. (including three major grain states -- Texas, Kansas and Nebraska). In some parts of the aquifer, the water table has declined more than 100 feet. A loss of predicted rainfall affecting Ogallala is a further stressor.
- Apparel: Cotton is hugely water-intensive, requiring 25 cubic meters for the amount of fabric needed to make an average t-shirt. Cotton is commonly grown in areas requiring intense irrigation, including the San Joaquin Valley in California, Egypt, Pakistan and Uzbekistan (the world’s second largest cotton exporter).
- Biotechnology and pharmaceuticals: There is increasing concern about leaks of chemicals and microbials into the wastewater released into natural water resources as part of manufacturing processes.
Of necessity, these industries are becoming pro-active.
The ‘Year of Water’: Businesses Take Action, Wharton Shapes an Agenda
The forum identified several key areas of research (some of which are currently being explored by IGEL) that would contribute significantly to knowledge in the field and help business leaders make informed decisions about water. In addition, meeting participants shared what their own and other companies are already doing.
Jim Fava, managing director of the management consulting firm Five Winds International, quoted the chairman of Nestlé S.A., Peter Brabeck-Letmathe, as saying that “water will run out long before oil does.” Water supply is of more than academic interest to Nestlé, because it is the world’s largest bottled water company, using by its own admission some 0.0009% of the global freshwater draw. The company says it conducts detailed assessments of its bottled water sites, including quality reports, water level measurements and rainfall data.
Water scarcity and privatization issues were brought home to Nestlé in 2008 when protests erupted in Maine over the withdrawal of water from natural, underground water sources (aquifers) by Poland Spring, a Nestlé Waters brand. According to former Maine state representative Jim Wilfong, founder of a group called H20 for Me, “This is a giant filtration system that has developed over millions of years and one that could not easily be replaced.”
Companies are beginning to closely examine potential manufacturing sites for water availability, Fava says. And in regions of scarcity, they are developing water-responsible practices. Among the companies working to reduce water use, he says, are SABMiller, a major South African-brewer, which has released its own water footprint, and Merck, which has reduced its draw by more than 30%.
According to Merck’s Buzby, a speaker at the forum, the company identified 22% of its 30% water reduction goals from existing plants, and closed a further two to reach its goal. Buzby also cites growing concern in the scientific community that some drugs, or combinations of them, entering the water supply can cause human health problems “because water, unlike most specific foods, is consumed in sizable amounts every day.”
General Electric, which was represented at the Wharton forum, has partnered with the World Resources Institute (WRI) and Goldman Sachs to produce the Water Risk Index, which, when launched this spring, will be a tool for financial analysts. According to Piet Klop, acting director for the markets and enterprise program at WRI, “Many companies have produced water footprints for their companies, but without context it is just a lot of numbers. The Water Risk Index will look at such issues as water scarcity, regulatory restraints and the predictability of water resource management.”
The Index will be distilled from publicly available data, aggregating 20 weighted factors. “In many regions around the world, water scarcity from climate change and pollution is starting to impact a company’s performance, yet few analysts account for water-related risks,” says Jonathan Lash, WRI’s president. “WRI hopes that investors will begin ‘pricing in’ these under-appreciated risks, driving investments to support more hydrologically efficient designs and technologies.”
There are other tools for business, including the Corporate Water Gauge developed by the Center for Sustainable Innovation (CSI), which measures water use against such factors as local precipitation, topographical features, watershed boundaries and population data.
Also at the Wharton forum, Liese Dallbauman, senior manager of water stewardship at PepsiCo International, said, “When we look at footprinting our water use, the upstream use is huge.” Most of Pepsi’s water impact is not at its plants, she noted, but in the upstream agriculture that produces ingredients. According to Dallbauman, PepsiCo’s “direct seeding” work with Indian rice paddies has saved 30% to 40% of water use there, and has also sharply reduced production of methane -- a potent global warming gas.
Scatena identifies Coca-Cola as another company that has stepped up, “because water is a big part of their industry.” In 2006, Coca-Cola provided start-up support for the Global Water Challenge (GWC), which works to meet international water challenges. One of its first programs, “Water for Schools,” has brought safe drinking water to thousands of students in western Kenya. More recently, it mobilized to provide disaster relief in Haiti.
Coca-Cola, which produces 3,000 beverage products around the world and uses 76 billion gallons of water annually (the average American uses 25,000), also partnered with the World Wildlife Fund, beginning in 2007, to conserve freshwater resources in manufacturing operations and the company’s agricultural supply chain. And it has funded Business for Social Responsibility and the Pacific Institute in a joint study titled “At the Crest of a Wave: A Proactive Approach to Corporate Water Strategy.”
Coke’s CEO, Mukhtar Kent, told Forbes that he considers himself to be the company’s chief sustainability officer. “I have not appointed another one and never will,” he said. “That’s me.” Among the company’s goals: A plan to go “water neutral” -- returning to the countries it operates in as much water as it takes out.
Municipalities, too, are stepping up to conserve water. Singapore, on the southern tip of the Malay Peninsula, lacked a natural water resource of its own and had a legacy of flooding and river pollution in the 1960s and 1970s.
Singapore’s answer is NEWater, ultra-clean reclaimed water purified using membrane technologies. Because it is highly purified, NEWater is a valuable resource for local water fabrication, electronics and power generation industries -- and its availability frees up potable water for home use. As described in “Water: A Global Innovation Outlook Report,” NEWater now meets up to 30% of Singapore’s water needs. Conservation measures in Singapore have also dramatically reduced per capita domestic water needs.
Water Reform for Business: Planning and Implementation
Concern about water use by business and industry is leading to new paradigms for management and conservation. And it is sparking a movement to re-evaluate outdated pricing mechanisms that have traditionally undervalued the world’s most precious resource.
As a first step, many companies have begun “footprinting” their water use -- offering public reports that detail and total corporate demand. But many are now realizing, according to the “Crest of a Wave” report, that they need to go further and develop plans to, among other things, better manage water through the supply chain, invest in the restoration of at-risk watersheds, and form collaborations to manage water resources over time.
The “Crest of a Wave” study concludes: “In the next two to five years, companies will need to adapt to availability concerns such as water stress and flooding; quality concerns, including increasingly contaminated surface and groundwater; and access concerns, specifically competition (real or perceived) with other water users.”
The study argues for a corporate water strategy that starts with a comprehensive footprint, including not only direct operations, but also downstream supply chains and upstream product use and disposal. Step two is an assessment of water-related risks, which might include potential flooding and shortages, demand trends, and the impact of company water use and runoff on local communities. In step three, the company establishes a corporate water policy, forms strategic goals and develops management plans.
With that done, companies can move to put theory into practice and innovate with such strategies as:
Create an ability to automatically shut off water flow at the end of the production cycle and at the end of employee shifts.
- Install water-efficient fixtures and water meters, including separate meters for large operations, and use water-efficiency labeling where possible.
- Begin a leak detection and repair program in restrooms and shower facilities, kitchens and food preparation facilities, and wash-down areas.
- Investigate alternatives to water-based cleaning (e.g., brooms instead of mops).
- Encourage employees to make conservation suggestions and implement the best of them.
For further reading, see “Ebb without Flow: Water May Be the New Oil in a Thirsty Global Economy,” http://knowledge.wharton.upenn.edu/article.cfm?articleid=2059.