Date: June 08, 2020
It’s often said that accounting is the language of business. Climate risk is forcing many companies to become bilingual.
That second language that executives need to learn? Sustainability.
Back in January, BlackRock CEO Larry Fink told clients that “risks presented by climate change are set to accelerate a significant reallocation of capital, which will in turn have a profound impact on the pricing of risk and assets around the world.”
In other words, BlackRock, the largest investment management company in the world with $6.2 trillion in assets under management, will be taking a hard look at sustainability when determining where to invest.
Fink’s comments are set to accelerate existing trends in corporate sustainability. But the trend toward a focus on sustainability hasn’t been universal. Some companies are on their third or fourth generation of sustainability planning, while others have yet to implement a program. The companies that have tried to address sustainability have tended to focus on power consumption over water usage – in part because of the connection between electricity usage, greenhouse gas emissions, and climate change.
Increased urbanization has stressed regional water basins, and the impacts of climate change are leading to seasonal fluctuations in water availability, if not outright scarcity. That makes water sustainability more critical than ever. Unfortunately, sustainability program managers, in many cases, aren’t prepared to tackle water challenges.
With that in mind, I want to discuss some of the key topics that executives will confront when setting sustainability goals for water.
Companies in the early stages of water sustainability should begin by launching the broadest data gathering program they can manage.
The focus shouldn’t only be on water usage. Other factors like revenue and production at various facilities should also be considered, as well as the levels of water stress in the surrounding areas where facilities are located.
At any reasonably-sized company, there will be some surprises. Many facilities that draw water directly from a local source may not be required to meter their water usage; often the only material cost associated with extracting and consuming water from these sources is the energy needed to convey it. These circumstances present challenges that make it more difficult to establish the all-important baselines.
Because sustainability means different things to different companies based on their operations and products manufactured, gathering data shouldn’t happen in a vacuum. There are several ways to assess water usage. In fact, the ultimate goals of a sustainability program might not be entirely clear until data collection has begun and its results have been digested.
Regulatory requirements for US-based publicly traded companies exist to ensure financial reporting obligations are performed in a transparent manner (e.g., 10-K reporting). In contrast, corporate sustainability reporting does not have the same obligations. For the most part, sustainability reporting is voluntary, creating a significant variation among reports.
My former GE colleague, Kris Morico, who now specializes in helping companies establish sustainability footprints at Jacobs Engineering, characterized some of these apparent reporting variations.
“I used to teach an environmental leadership class at Yale. One of the assignments I gave asked students to pick a company, any company, and study its corporate sustainability reports and other publicly available financial disclosures. Every year, students would be surprised at the inconsistencies in the reports and would share examples of how companies’ goals and criteria changed year to year. For example, a company may include criteria about what counts toward a sustainability water goal one year, then completely omit that information the following year.”
When launching a water sustainability program, think carefully about what and how you will report your results. Investors are unlikely to give credit for sustainability if it is not reported in a consistent and transparent manner.
Determination of a water sustainability goal varies based on the industrial sector. For example, it might make the most sense for a car manufacturer to look at water use per each car produced. A diversified conglomerate, however, likely has no common denominator for water use since its products vary. Consequently, it might want to select an absolute water use reduction metric company wide.
Sustainability reporting by industries, Morico says, will continue to become more transparent and rigorous with both its criteria for establishing sustainability goals and subsequent performance tracking, with a greater emphasis on reporting quality.
“It’s okay if your water usage goes up year-over-year, but you are going to have to be able to explain that — perhaps it’s the result of an acquisition or some other plausible reason,” Morico said. “But it’s going to take some thinking at the outset about how they want to report so it is transparent to the reader.”
There are some existing resources for setting data parameters, including the Water Disclosure Project, Global Reporting Initiative and the Sustainability Accounting Standards Board, but the standards continue to be a work in progress. Industry associations and even shop talk between competitors can also help when setting data parameters for your program.
One of the biggest questions confronting sustainability teams is how to make sustainability goals meaningful.
There are reputational factors involved. Set a goal too low and it looks like you aren’t really trying. Set it too high and you risk missing your target. In practice, you don’t know what you can and can’t do without a little bit of investigation first.
Companies in the early stages of water sustainability planning may find some very low hanging fruit, such as leaky pipes or slightly opened valves, which can be discovered easily using portable water monitoring devices. Fixing leaks or closing valves are simple adjustments that can result in a sizeable return on investment (ROI). Additionally, deploying a diverse team of operations and engineering staff to review water use at facilities can help identify immediate reduction opportunities, such as water-intensive machinery that is left on, as well as future opportunities to use recycled water at a facility.
Mature companies that are on their third of fourth generation of sustainability goals might find big gains harder to achieve. These companies might want to use kaizen teams that take a multidisciplinary approach to looking at water reduction possibilities from every angle and strive for continuous improvement. And in many cases, companies will want to achieve water sustainability results that go beyond their own fences, positively impacting the local communities where companies operate.
Water is an integral part of global business, used in everything from industrial cooling to agriculture and beyond.
Water isn’t just necessary to support human life, it also supports the global economy. And that’s the broader message underlying Fink’s position on sustainable investing. A deteriorating environment creates an unpredictable business climate. The big challenge over the next few years will be to implement sustainability goals that are meaningful, transparent, intentional, and to some degree, standardized in a way that investors and stakeholders can understand and act on.
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