Waterproof investments Assessment of water related risks within NORDEA’s South African investment portfolio after Day Zero
This report was published in October 2018 by Nordea.
The author and on-the-ground researcher of the report by Kata Molnar. Designed by Viktoria Takacs.
Printed on recycled paper.
Waterproof investments Assessment of water related risks within NORDEA’s South African investment portfolio after Day Zero
Sustainable Finance at Nordea Nordea is the largest wealth manager in the Nordics with approxi-
this study aims to uncover the level of awareness on the South Af-
mately 300 billion euro in Asset under Management and 11 million
rican companies in managing water-related risks, the impacts and
customers across Nordea Group. Nordea’s Sustainable Finance ap-
response of multiple stakeholders including the city, the local com-
proach is about integrating sustainability into all our business ac-
munities, and most importantly the companies where NORDEA is a
tivities and products. Driving change through engagements Nordea
shareholder of, and draw conclusions not only for its national invest-
works with companies and other stakeholders, including policy mak-
ment portfolio, but ultimately for exploring how water risk can be
ers, on different themes, individually or through collaborative initia-
translated into business opportunities.
tives. We believe that company engagement is key in order for us to be a responsible owner and drive change within an industry or market.
While this report is primarily dedicated to NORDEA, its public distribution aims to reach multiple stakeholders, including cities (local
Water risk is one of our focus areas within stewardship and engage-
governments, mayors, water utilities), companies at all sectors, in-
ment. In 2016 the World Economic Forum identified water crises as
ternational organizations, media workers, to conduct similar assess-
one of the top five global risks of highest concern over the next 10
ments and share findings.
years. The water issue is not only a present challenge for countries, but also a risk and opportunity for the entities in which we invest, and ultimately the assets we manage.
The information in this document has been obtained from sources believed reliable and in good faith but any potential interpretation of this report as making an allegation against a specific company or
As the historic drought unfolded in the beginning of 2018, we decided
companies named would be misleading and incorrect. The authors
to engage with our South African portfolio as an example to move the
accept no liability whatsoever for any direct or consequential loss
investor and banking community towards better awareness of water
arising from the use of this document or its contents.
risk, and to protect our customers’ long-term assets. In this context,
For more information visit: http://sustainablefinance.nordea.com
Table of Contents Acknowledgments
3
Sustainable Finance at Nordea
4
Foreword
5. Assessment of Companies
18
6. Key Findings
28
Distell Group
19
7. Recommendations
29
5
Netcare
20
8. Appendix
30
Executive Summary
7
Aspen Pharmacare Holdings Ltd.
21
9. Literature List
30
1. Introduction
8
Woolworths Holdings Limited
22
2. Context of Water Risk
11
Exxaro Resources Limited
23
3. Context of Day Zero
14
Shoprite Holdings
24
4. Nordea’s Exposure In South Africa
16
Standard Bank
25
Townships
26
6
introduction Cape Town crisis In the beginning of 2018, Cape Town was facing “Day Zero� - the day when the city government of 4 million would have shut off water taps for homes and businesses, apart from a few essential facilities like hospitals. After three years of unprecedented drought, it could have become globally the first major city to go dry. The scale of impact would have been devastating: social unrest, public health concerns, infrastructure collapse. What was happening in Cape Town cannot be treated as unique. Nearly a dozen more major urban areas face water related crisis events all around the world, including London, Mumbai, Sao Paolo, or California. Although they are characterized by differences in geography, demography, rainfall patterns, level of wealth, but what they have in common is their high exposure to water risk events.
Introduction
Water is Life Water is a fundamental necessity for lives and livelihoods. Access to safe, sufficient water and sanitation and sound management of
ter scarce regions, and 4.3 billion people live in areas where demand for water resources outstrips sustainable supplies for at least part of the year.
4.5 billion
freshwater ecosystems are essential to economic prosperity, health and development outcomes, and to environmental sustainability. There is sufficient freshwater on the planet to secure clean and accessible water for all, according the UN, but the effects of poor management of water risks can play out over an entire lifetime.
The Opportunities Under such conditions, it is vital to improve the productivity of water use, getting more value from each drop, but protect poor and marginalized users who are most likely to lose out from increasing competition. Their vulnerability, exposure to waterborne disease and extreme weather events cannot be ignored.
The Challenges Already, 4.5 billion people, about two-thirds of the world’s population, rely on sanitation that puts their own or their neighbors’ health at risk from waterborne diseases, and 2.1 billion people live without readily available, safe water supplies at home. These are mostly in places where piped water is absent, and where girls are in charge to fetch water, missing out on school or work. Only 3 % covering the Earth’s surface is fresh water, and already a billion people around the world lives in wa-
water statistics people rely on sanitation that puts their own or their neighbors’ health at risk from waterborne diseases.
4.3 billion people live in areas where demand for water resources outstrips sustainable supplies for at least part of the year.
Better governance is needed to balance supply and demand, secure sustainable, productive, and equitable shares of water for all in a changing climate. Managing water resources will require strong international collaboration.
2.1 billion people live without readily available, safe water supplies at home.
We also need to make smarter investment in resilient, low-carbon, and multipurpose infrastructure to improve access to water where and when it is needed, and to protect people from extreme events. Water needs to be sourced, treated, and distributed – all of which require infrastructure and maintenance. Introduction
7
Water provision includes societal costs (such
they face. The prices of the fuel, food, and
as environmental damages) as well as finan- is expected to spend about US$90 trillion on
materials we use do not reflect their envi-
cial costs (for supplying water for agriculture, infrastructure in the period up to 2030, more
ronmental damage. Many initiatives and pol-
households, and industries). In order to en- than the entire current stock today.
icy-makers are currently seeking to find ways
sure affordability of access to water for all,
to internalize these externalities through reg-
these costs have to be internalized into the tariffs, taxes, and investment planning of water infrastructure, which is not the case today. The purpose of valuing water is not to commoditize it, but to better understand the value its use provides to different stakeholders, assist resource allocation, incentivize more 8
years. The next few years are vital: The world
careful use, and help raise revenues. There are many instruments, such as the green
There is a heavy economic and social cost of policy failures and doing nothing, but climate change provides new impetus and ways to turn those costs into benefits. It has gotten almost impossible to make sustainability look like a bad deal. Shifting to sustainable technologies and techniques would save trillions of dollars through 2030 in increased productivity, innovation, and reduced health costs.
ulations, taxes and other methods, so it is in a company’s own interest to understand and adapt to this situation. Therefore, progressive businesses increasingly look at their externalities so as to understand and manage their dependence and impact on the environment and societies. The World Economic Forum’s Global Risk re-
ports in the past years put water among the bonds, climate bonds, supporting low car- Companies have also started to become intop risks. Business strategies to deal with bon and climate resilient solutions. This now creasingly aware of the fact that their growth internalization include passing on costs to include a new CBI standard on water. Cape is not disconnected from water security. Maxconsumers, adopting water-efficient technolTown, as recovering from its worst drought in imizing short term shareholder value as if it ogies, and locating operations where water 100 years, has invested US$76 million in these was independent from the key global drivers is less scarce. Energy footprint of water also is a folly. Financial data is no longer sufficient bonds. provides opportunities: over half of compaas indicator of success. Non-financial drivThe developing world needs tons of new innies (53%) report to CDP that better water ers are more and more necessary to take into frastructure; the developed world has tons of management is delivering GHG reductions, consideration. The health of water resourcinfrastructure nearing the end of its life span. showing that water can potentially make – or es and the governance system underpinning That means the world is on the verge of an break – the low-carbon transition. their supply and distribution determine the enormous infrastructure boom that will lock physical, regulatory, and reputational risks in emissions outcomes for the next 50 to 100 INTRODUCTION
The role of the financial sector The financial sector plays an important role in bringing critical resources to water infrastructure projects. They need to assess the sustainability value of investments to satisfy a broader range of environmental, social and governance criteria from investors and emerging green finance mechanisms (Clapp et al. 2016). These efforts place financial actors in a unique position of influence in defining and enabling sustainable development pathways, recognized in
risk and have a positive impact. We know that more than 2000 companies disclose water risk related information but we need strong standardization to move from business as usual. Sectors with traditionally high water needs and risks include energy, mining, some manufacturing, data centers, hotels and resorts, and utilities. Many basic-materials, food, beverage, textile and consumer-product companies also have high water needs, both in direct operations and via their supply chains.
international efforts to transform the financial system to support sustainable development. Aim of the study Despite the emerging sustainability lens of The study aims to investigate the extent to some financial actors, the fundamental criteria which South African companies are aware of of the sector continue to be project bankability the risks exposed by water scarcity and waand risk-adjusted financial return. Companies ter-related hazards, such as flood and drought; disclosing to CDP reported US$14 billion in the capacities that the companies have in manwater-related impacts in 2017, a five-fold inaging these risks; their strategies and responscrease from the year before. Companies are not es to address the risks; and the effectiveness moving fast enough to address the sustainable of these strategies and responses. This study management of water, and far-reaching shifts presents the results of the scoping study based of mainstream investors toward embracing on semi-structured interviews with company sustainable investment practices remain rathrepresentatives as well as data and informaer slow. Businesses need to be brought in and tion provided by participating companies. understand better how they influence water
9
INTRODUCTION
Company snapshot Distell, a global business with roots in South Africa, produces and markets a diverse port-
• Water usage at production sites is measured and re-
corded on a continuous basis. This enables improved management and reporting of water usage.
folio of alcoholic brands, including Amarula, Savanna, Hunter’s Dry, Durbanville Hills and Nederburg. As of 2017, 672 million liters were sold from over more than 20 product categories.
Significant reduction in volume of wine in the industry
Sites visited:
4%
Adam Tas and J.C. LeRoux facilities Finding: Water Risk • Water management plans were calculated
10
South Africa is the eighth biggest wine producer world-wide
of the world’s wine is pruduced by the country
by the worst case scenario. • Site level water stewardship is measured against the facility’s previous best performance because each site in the value chain is different. • There is a clear governance structure for South Africa
2000
5500 people
managing and measuring water specif-
the industry contributes R36 billion to the country’s GDP
2017
290 000
people employed by the wine industry in South Africa
2018
ic KPIs. However, is unclear how the resource efficiency targets for 2020 related to water, electricity and fossil fuel-based 22,3 billion
www.distell.co.za
unknown
energy use relate to context based, policy relevant, scientific targets.
Assessment of companies
According to the wine industry body Vinpro, the 2018 harvest, that is at 1 220 920 tonnes, was 15% smaller than in 2017
Dependency As a beverage producer, Distell has relatively high water needs in their supply chains especially in its manufacturing operations. Brexit, the weakness of the local currency and cli-
tices, reliance on municipal water supply, and the rising cost of energy. The water sources used at facility: Delivered water (supplied by a water service provider) and planned self-abstracted groundwater.
mate change (extreme weather events) are Water access regulations apply to both the referenced in the latest Sustainability Report surface and groundwater sources: permits (2017) as the main causes on the South Afri- are required, metering is mandatory, and can grape and apple production. Water crisis costs increase with volume. Overall volumes mentioned as a cause for disrupting produc- were reduced by 15-20% in hl/hectare, which tion operations. 90% of the wine comes from cooperatives, the rest is produced at Distell farms by own grapes or grapes sold for them.
resulted in higher prices for the grapes and
Through its presence in the Western Cape region, they expect shortage of rainfall in the longer term. The company is exposed to operational, regulatory, financial, and supply-chain related risks, its high water footprint, irrigation prac-
as the community does around us. Frank Ford, Group Manager: Investor Relations
consequently for the wine. No direct impact was reported in employment for workers or farmers.
Footprint measured by Liters of water used Response per liter of packaged product. Water Governance Exposure
We only exist as long
• 38,1% reduction was reached in water usage as of June 2018 in the Western Cape by accelerating the water management program • In case of a DAY ZERO scenario, water demand and supply for all the sites in the Western Cape has been provided with plans.
11 Data, Disclosure and Performance Tracking • CDP water report and sustainability reports are prepared on an annual basis, but they do not cover site level. • A climate risk assessment was conducted for agricultural supply chain in 2013 in order to identify what risks were stemming from water supply. • A water risk assessment was conducted by the World Wildlife Fund using their Water Risk Filter, and numerous engineering Assessment of companies
studies were completed. Management of Physical Risks • Demand reduction management and new water-saving initiatives were calculated for the worst case scenario (Distell made sure they prepare as if Stellenbosch was exposed to the same level of water risk as Cape Town, where Day 0 was projected to happen.) • A total of R22 million was invested to waste water treatment and re-use programs to 12
mitigate water supply risks. Through new
cilities sites like Adam Tas will go off the Management of Stakeholder, Social Risks municipality water supply and will rely on groundwater, and if required, water can be transported between facilities.
the affected area with bottled water. Their
tal sustainability scheme established by
suppliers are being risk assessed with mit-
the South African wine industry in 1998.
igation actions
Compliance with the standard grants a
• In the longer term, Distell will look for other provinces with better precipitation forecast and relocate certain water-intensive production activities there
manufacturing in countries of production
its water consumption.
and sell locally rather than fully exporting.
facilities and office facilities across the Western and Eastern Cape. For example,
This would not only reduce long supply chains, pollution, but it would create local jobs and support the local communities in places like Nigeria or Angola.
showers got closed down (except for man- Management of Regulatory Risks ufacturing and distribution sites to ensure occupational health and safety requirements) • Those manufacturing and distribution faAssessment of companies
tified by the Integrated Production of Wine (IPW) standard, a voluntary environmen-
Tas site will be able to reduce 50-60% of
in place at all manufacturing, distribution
farmers contracted by Distell must be cer-
• Offices would be supplied from outside
water recovery technologies their Adam • Furthermore, the Group aims to increase
• Behavioral change program has been put
• To ensure supply-chain sustainability, all
• Following the water restriction guidelines (level 6B) water consumption reductions were put in place by on-site water meters.
seal to individual wine bottle, covering the grapes, the vineyards, the bottling facilities, ensuring the necessary sustainability measures such as water or soil management.
13