Uncharted Territory: Water in the Supply Chain
Since CDP launched its first global water report in 2010, water and its relationship with business have rarely been out of the news. Water crises from Texas to Thailand are hitting companies’ profits, frequently because of shocks to their supply chains. Hennes & Mauritz (H&M) reported a surprise 30% fall in profits in the first quarter of 2011, largely because the price of cotton doubled in the previous 12 months as a result of increased global demand and disruption to supplies caused by drought and floods in cotton producing countries like Pakistan.14
About one-third of the world’s hard disk drive production is currently
located in Thailand. The severe floods in this region in October 2011 caused a shortage in the supply of hard disks around the world.
In 2011 the Yangtze delta, which supports 400 million people and 40% of China’s economic activity, experienced its worst drought in 50 years. The lack of water has damaged agricultural supply chains, led to power cuts that dampened manufacturing output, and disrupted distribution channels by closing river networks, including hundreds of kilometers of the Yangtze and its tributaries.
“We are convinced of the link between water scarcity and climate change and are further investigating the supply chain risks to BT and our stakeholders.”
Of course, because water is a business issue, it is also an investment issue. In only the second year of CDP’s water program, 354 institutional investors representing US$43 trillion in assets endorsed CDP’s request to corporations for water-related information. Clearly, investors are recognizing the need for transparent reporting on water so that they can begin to understand the exposure to water risk of the companies in their portfolios.
Responses from Global 500 companies to the 2011 CDP Water Disclosure questionnaire reveal that the supply chain is largely uncharted territory when it comes to water:
• Only 26% of responding companies require their key suppliers to report water use, risks and management plans. Increasing supplier reporting is
vital because the supply chain often accounts for the largest portion of a company’s water use and risk;
• 38% of responding companies do not know if their supply chain is exposed to water related risk compared to only 7% for direct operations;
• 27% of responding companies reported exposure to water risk through their supply chain and two-thirds of the identified risks are anticipated within the
next 1-5 years.
Such near-term risk suggests an urgent need for companies to address water risk in their supply chains. Instead of simply reacting to events by raising prices or cutting profits, companies like Puma are thinking strategically and are taking steps to reduce their exposure to water risk by setting targets to reduce water consumption from their strategic suppliers by 25% preparing them for potential future regulations due to increasing water scarcity. Companies that recognize that the true value of water is not adequately reflected in its cost will be best positioned to thrive in an economy of changing water resources. Those that think of water in terms of business continuity, license to operate and brand value will stand to gain.
14 “H&M Hit by Soaring Cotton Prices,” Financial Times, March 31, 2011, www.ft.com
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