Investors face numerous challenges when engaging with companies on this topic to understand the extent of their water dependency, security and management response.
1. Making the internal business case for action
Investors may need to make the business case to the company to secure a dialogue, as some companies may be reluctant to engage for several reasons. The table below provides some tips for investors to encourage companies to engage in dialogue.
|Company response||Potential solution|
|Why are investors engaging on corporate social responsibility (CSR) or sustainability issues? We should focus on more material issues to investors.||For companies with an agricultural supply chain, water risk is indeed likely to be financially material. The argument is illustrated by statistics from the annual reports issued by CDP Water, peer comparisons within the sector and external benchmark/rankings. Investors may want to understand the sustainability and productivity of supply chains, including the continuity and quality of inputs in areas of high water risk, to evaluate water risk response and identify investment opportunities that are likely to outperform. Companies could be asked if they understand their value at risk. Employing water valuation tools (see Table 6) can help companies explore how their finances could be affected.|
|Our priorities lie elsewhere in the business||Before starting a dialogue with a company, investors should research where the company’s water risk exposure lies and which commodities are most at risk. Having an idea of the business and supply chain structure (including its forward-looking plans and strategy) will help the investor identify priorities and highlight relevant risks to the company.|
|We are capacity and resourceconstrained||Investors can start a dialogue by understanding the company’s starting point on managing water risks in the supply chain and mapping this against the framework outlined in this document. Begin with early steps, such as discussing the number of suppliers and volume of supplies at risk before moving on to water risk assessments for the supply chain. This will help the dialogue seem manageable. The requests of the company can become more advanced as the conversation matures. Tools, guidance support materials and collective action initiatives that can help bridge capacity and resource constraints59 can also be highlighted.|
|We do not have the internal expertise to address this issue||Investors can point to solutions, share knowledge, share good practice examples from other companies and direct companies to resources. There are also many collective action initiatives, consultancies and NGOs with expertise that can assist if internal expertise is lacking.|
|We are uncomfortable with engaging with a large group of investors on this issue||In cases of collaborative engagement, lead investors can offer to host a call/meeting with a smaller group of investors and send a list of investor names and questions to help the company prepare.|
|We are uncomfortable with publicly disclosing this issue||Investors can encourage companies to disclose material indicators by explaining to companies how the data is used and that it is an opportunity for the company to author its own story. Without company data, third parties will provide analyses and interpretations for investors. Investors can also point to peers to show how other companies are disclosing.|
2. Supply chain traceability
Understanding supply chains can be complex, and traceability can be particularly challenging. Companies do not often have visibility of their supply chains beyond Tiers 1 or 2 and, consequently, cannot identify what raw materials they are sourcing from where. While some companies have direct ownership or contracts with the farms where crops are grown and sourced (vertical integration), others may have many tiers in their supply chain and source via traders, exchanges and cooperatives.
Traders and cooperatives may change their suppliers frequently, making it difficult for the company to influence farming practices or to demand certain levels of data. For example, barley may be grown on a farm, but the same farm may not grow it the following year. Also, a mix of bulk commodities sourced by traders and cooperatives make traceability and data accessibility challenging. This opaque agricultural supply chain makes it difficult for a company to assess its own risk exposure.
Before engagement, investors need to understand a company fs supply chain structure to help them determine where to steer the dialogue. Investors could respond to the challenge by:
requesting a map or list of a company fs suppliers (Tier 1, 2, 3+). If unavailable, request a list of priority commodities for the company (as commodities can be mapped against water risks);
using mapping tools such as The Sustainability Consortium’s supply chain mapping tool and emerging tools like TRASE;
once companies know their suppliers, encouraging companies to adopt incentives for applying water stewardship practices - via codes of conduct or sustainability standards that address relevant water risks, longer-term contracts and pricing structures, for example;
where most of the crop is sourced from traders, encouraging companies to work with traders to identify sourcing regions/suppliers, align codes of conduct/ standards and pass along tools/guidance to drive best practice through supply chains; and ¡ ¡ encouraging companies to participate in sectoral initiatives to map suppliers and/or implement unified supplier requirements (performance and data).
3. Company’s sphere of control
The company’s sphere of control is linked to its supply chain leverage. Companies have the greatest level of control over their own direct operations. They can increase operational water efficiency and take actions internally to reduce their water impact. Further along their supply chains, companies have less control over the actions taken to reduce water impacts, although they can still influence suppliers’ actions. The amount of influence a company has within its supply chain varies depending on several factors including type of business, size of the supply chain and relationship with suppliers.
Investors should not expect that corporate water risk can be completely mitigated through short-term individual company actions; understanding the local context of the company’s operations and supply chain is required. It is important to note that while a company fs own operations may have an impact on the environment and other stakeholders in the same catchment . generating water risks . the company is also exposed to risks outside of its control. These are referred to as shared water challenges and require collective action with other stakeholders to achieve basin goals. This will help to ensure actions taken at the facility and basin levels are sufficient to mitigate water risks that would otherwise be impossible to deliver as a single company acting alone.
Therefore, investors should note that there is a range of measures that companies can take when managing water risk . from simple internal actions by the company to more complex collective action measures; for more information, see the CEO Water Mandate 2013 Guide to Water-Related Collective Action. This includes engagement with relevant institutions, water users and stakeholders in a catchment to understand the formal and informal dynamics of water use. Collective action and influencing the governance of water is required for a company to mitigate risk.
Growing water risk resilience: An investor guide on agricultural supply chains
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Challenges for engagement