Water Risk Management Tools & Data Collection by Pete White

WATER RISK MANAGEMENT TOOLS & DATA COLLECTION Christopher White takes a look at water risk management tools and when to use which? These tools are being developed to assist companies and investors to identify, understand and put appropriate context to business risk related to water scarcity and climate change, from which risk management and business opportunity strategies can be developed. Using publically available information on each tool, the type of data collection and data analysis is explored to ascertain the level of expertise required to ensure that any subsequent business decisions related to water security are based on sound and expert judgement. Fundamentally there needs to be some assurance that risk and subsequent actions are neither grossly underestimated nor overestimated.

The Status of Water Scarcity Awareness A huge amount of effort and progress has been (and continues to be) made in helping companies and investors to be aware of, understand, identify and manage risks posed by water scarcity across the world. This has involved many organisations and companies, that have firstly raised awareness of the issues and developed questionnaires to get a whole variety of stakeholders thinking about the problem and to develop strategies that can be integrated with existing company sustainability policies. Latterly a number of water risk management tools have been (or are in the process of being) developed to enable organisations and companies to action any mitigation strategy more easily. Without reiterating the information and advice already published, it is worth mentioning some of the key messages that are pertinent to water scarcity risk assessment, namely it is important and fundamental to: • • • • • •

Look beyond direct operations and consider the whole value chain; Consider any impact to business in relation to environmental, social and economic factors; Consider competition for water supply and impact by others; Engage with the supply chain and look at water usage and impact throughout. This may have a global reach; Not to just consider water issues alone but understand the link with energy, carbon and other factors that will affect sustainable and business performance; Quantify as much as possible and to an accuracy that is defensible.

Information from organisations such as CERES, Carbon Disclosure Project (CDP), World Resources Institute (WRI) and several multi-national companies and investors have together pulled their experience and knowledge to develop a number of guidance documents and road maps that have provided context, order and structure to a management approach. This enables all stakeholders to see the bigger picture and where they can contribute. To facilitate such an approach, such road maps have needed to be multipurpose in order to provide a management structure and a standardised approach to data collection, stakeholder engagement, through to information disclosure.

A Requirement for Environmental Expertise Many businesses understand and recognise the steps needed to be taken, but a common stumbling block can occur very early on at the data collection stage; in other words moving from the management road map to the technical assessment that is required to actually get the wheels turning on the road itself.

The type of “high level” water management question (as provided by CDP, for example) includes, “Is your company exposed to significant physical risks? Helpful information is provided by the CDP to then define what the physical risks might be: drought, flooding, pollution, falling groundwater tables, issues regarding infrastructure etc. The resultant possible impacts are also explained; such as increased water scarcity could lead to higher energy or commodity prices. However the answer to the above question might be yes; or it could be probably; or perhaps there is insufficient data to fully know the answer? This then raises a number of questions in terms of what is the actual exposure, which physical risk is likely to be of greatest concern and how can this be quantified and verified to a sufficient level of accuracy? Many of the questions, particularly those related to production and water usage probably already has some factory data available to quantify and possibly look at trends over time. However it could be envisaged that answers to several questions could also end up being fairy vague. At the data collection stage there are a number of challenges and there is likely to be a level of expertise that is required, to provide the necessary technical input as well as a reality check that the data is fit-for-purpose. An example of a technically harder (but also a fundamental) question relates to understanding the water cycle of a water catchment basin in which a production facility resides. This will include knowledge of a catchments geology, hydrology, hydrogeology and hydrochemistry; in other words all surface water and groundwater sources, flow patterns, water quality variation, rainfall pattern and more. This has a number of implications for the non-environmental expert who maybe assessing global operations and its supply chain. For example, how do you know that? • • • • • •

•

You have collected (and quantified) sufficient pertinent data to accurately evaluate any consequences? You have actually identified and accurately quantified all relevant risks (probability of occurrence and likely magnitude)? Water-related initiatives undertaken by your company are the most appropriate? Your strategy to reduce risk at a facility will actually be effective within its water catchment? Initiatives undertaken by other users in the same catchment supports the longer term resilience of your own business? Expert judgement has been applied where data is inherently inadequate (which can be for a number of reasons) but from which there has been sufficient sensitivity analysis or scenario analysis to provide a level of confidence in any business decision-making? You have neither grossly underestimated nor overestimated the risk?

A facility’s improvement in water reduction alone does not necessarily remove risk because of the possibility of many potential external influences creating physical, regulatory or reputational risk etc. The water management tools could be used to provide guidance on data collection and longer term monitoring, which can then form part of the input into a higher-level management road map. However there remains the need for considerable technical skill for data collection & analysis; sound judgement; recognition of both the benefits and limitations of any tool used; and the likelihood that some data collection / auditing at source and within a water catchment basin, will be required for some ground truthing and reality check.

Water Management Tools and Data Requirements The main tools developed (or currently being developed and tested) are presented in the table below. Their overall purpose is to provide a systematic approach to understanding water related risk issues and then how to manage and communicate with relevant stakeholders. They can be classified as either a simple or sophisticated multiple-choice questionnaire, a more detailed global to local technical evaluation using various data sets, or a hybrid of both.

TOOL 1 Aqua Gauge

LEAD DEVELOPER CERES

WBCSD Global Water Tool

World Business Council for Sustainable Development 3

The Nature Conservancy

World Wildlife Fund and DEG -Deutsche Investitions-- und Entwicklungsgesellschaft mbH World Resources Institute (WRI)

Watershed Risk Assessment

WWF/ DEG Water Risk Filter 5

Aqueduct

GEMI Local Water Tool “Collecting the Drops”(interactive tool currently under development) Water Footprint Assessment 7 Methodology

Global Environmental Management Initiative Water Footprint Network

AIMS TO PROVIDE A Water management strategy and benchmark against peers. Help investors assess the quality of corporate water management Global portfolio overview of which sites are in water stress areas Methodology to assess impacts within a river basin Method to quantify risks at site level; designed for financial institutions On-line global database of water risk at sub river basin level Methodology to quantify factory water balance and assess risks per site Method to quantify water usage through value / supply chain, e.g. all water embedded in a product

CERES Aqua Gauge CERES Aqua Gauge is essentially an Excel based multiple-choice questionnaire that produces a scorecard type of output. It allows investors and companies to assess corporate water management practices under four key categories (1) Measurement through data gathering and risk assessment (2) Management through governance, policies & standards and business planning (3) Stakeholder Engagement – both internal and external; and (4) Disclosure. Each of these categories is scored on the basis for whether a business is considered to have taken no action; progressed to the initial steps; made advanced progress or is a practice leader. This methodology provides a succinct analysis of company performance and provides visibility for where a company should undertake further action to either more accurately assess risk or risk mitigation measures. Considering Category 1 Measurement, Aqua Gauge identifies seven activities for scoring:

1 www.ceres.org/aquagauge

2 www.wbcsd.org/web/watertool.htm 3 www.conservationgateway.org/topic/corporate-water-use 4 assets.panda.org/downloads/deg_wwf_water_risk_final.pdf 5 www.wri.org/aqueduct

6 www.gemi.org/gemihome.aspx 7 www.waterfootprint.org

Company collects and monitors data related to; 1. 2. 3. 4. 5.

Its own regulatory compliance, water use and discharge; Its own environmental and social impacts on direct water resources; External factors affecting direct water resources; Stakeholder perceptions and concerns related to water issues; Effectiveness of suppliers water management practices.

Company identifies and quantifies water related risks for its; 6. Direct operations; 7. Supply chain. These are questions that are quite straightforward to answer, but it does not purport to give any insight as to whether any technical analysis of inferred data has been performed to a satisfactory level. The fact that data is collected and monitored says little about the competency of analysis, which could lead to a false security that water risk, has been accurately quantified.

WBCSD Global Water Tool The WBCSD describe this tool as a means to “provide a snapshot and high level risk screening of water scarcity at any given location around the world” and that the tool as being designed to answer questions, such as: • • • •

How many of your sites are in extremely water-scarce areas? Which sites are at greatest risk? How will that look in the future? How much of your total production is generated from your most at risk sites?

The WBCSD describe their Global Water Tool as providing a means to compare a company’s specific site data (quantity of water used and treated for example) with existing database information regarding water availability, sanitation, population and biodiversity; and on a country and watershed basis. This data has been compiled using a number of external data 8 9 10 sets from institutions such as the WRI, the UN FAO , WHO , UNICEF Joint Monitoring 11 Program and UNDESA . The Global Water Tool does not purport to provide specific guidance on local situations, which require more in-depth systematic analysis. The “granularity” of such data sets does therefore need to be taken into consideration when extrapolating any assessment and actions from results generated.

Nature Conservancy Watershed Risk Assessment The Nature Conservancy (and PepsiCo) have set out a process which sets a business in the context of its wider environment and with respect to where water to a facility is actually derived and the extent to which such a supply is sustainable. This is described as a six-step process, the first two steps of which relate to data collection of water sources, their areas of influence, trends; and the degree of change beyond any determined baseline condition that would still be sustainable.

United Nations Food & Agricultural Organisation World Health Organisation United Nations Children’s Fund 11 United Nations Department of Economic and Social Affairs, Population Division 9

PepsiCo has defined a strategy of positive water impact that is designed to protect and restore watersheds. Noting that watershed characteristics are all different in one or more aspects, pilot trials have been carried out to evaluate the process. One of the observations has been that a number of examples have been identified where the early data evaluations have not been straightforward. One of the main conclusions has been that “collecting local information on the ground is key”.

WWF/ DEG Water Risk Filter This tool is currently being developed and is essentially a set of questions with multiple choice answers designed to help investors understand and analyse their exposure to water--related business risks. This is stated as not to denote “no go areas” but to highlight locations that need to explore opportunities for improvement. Data sets, using publically available information, have been collected for 85 countries and from which 33 water indicators have been developed. This includes data from the WBCSD Global Water Tool, the FAO AQUASTAT database (available freshwater resource per capita per year and percentage of water resources withdrawn) and other data related to biodiversity etc. The tool is being designed to be used both initially as a high level screening tool with minimum data entry or for a more in-depth analysis of both risks related to a river basin and /or company specific risks. Each indicator can be weighted according to its relevance in the risk assessment. An example question is “What is the total annual actual renewable freshwater resources per capita in the basin?” Five possible answers are defined and range from >4000m3/capita/year (water abundant); to<500m3/capita/year (extreme water scarce). Depending upon the region and data sets, suggested answers are given for about 90% of the questions. This answer can be accepted or changed if the user has additional knowledge (or wishes to test the sensitivity of a particular answer). The output is a type of scorecard where the relative risk against physical, regulatory and reputational risk can be observed. DEG have tested this approach on its own portfolio and has reported some interesting observations with regard to data collection from companies contacted across their countries of operation. The WWF and DEG now intend to use lessons learnt to develop the tool further for wider and more accurate use. Some of these early observations were: • • • • •

Only 20% of the feedback from 65 locations showed that a company’s own assessment was in line with the WRI basin indicators. Many companies were underestimating the risk in comparison; Only half of the companies measured quantity and quality of water abstracted and discharged; Lack of information on suppliers was more profound than foreseen, hence in many cases it was not possible to make a complete assessment of the risk; Information on pollution and other information at a river basin level were hard to gather, as there was a lack of harmonized data in many parts of the globe; Overly coarse spatial granularity and lack of direct local linkages between water use and impact, can generate misleading risk indices.

Water Resources Institute (WRI) - Aqueduct This is currently being developed to provide an on-line technical database of local level water risk indicators for about ten of the major water basins around the world. The tool also enables country specific knowledge to be gained related to baseline water stress, water reuse, socioeconomic drought and climate change predictions. Much of the water risk data used has been provided by Coco Cola. The WRI states that the objectives of the tool are to enable:

• • •

The private sector to better map, assess and manage water risk at a sub-basin level; The public sector to develop for effective investment programs and policy reforms; and The investment community to more accurately assess companies’ water risks.

At a water basin level there are a total of 23 water risk indicators grouped into eight categories and classified within three dimensions (1) access & growth constraints; (2) cost risk and; (3) disruption potential. The indicators are based upon information available in the public domain and focus on measuring the economic risk posed by water. Examples of such risk indicators include: • • •

•

Comparing recent annual river flow with historical data and hence whether there is increased pressure on water resources; Providing a measure for water allocation used for industry compared to non-industrial and relative water usage efficiency; Determining a metric for water quality comparison using seven basic water quality parameters that give an overall view of good to poor water quality and hence some indication of potential water treatment cost that may be needed; Providing a ratio for how much of the wastewater generated is actually treated before discharge back into the environment.

Each of these water risk indicators can be viewed in isolation to compare a singe risk across a river basin. The scores for each risk indicator have also been normalised to make quantitative comparisons across several or all indicators combined. Further if other knowledge is known about a particular location, the risk indicators can be manually weighted to either increase or decrease it significance. Data selection has included expert consultation to derive these indicators and WRI also puts limitations on accuracy at a very localised level and particular circumstances. It advises that baseline water stress may be overstated for major cities and possibly understated for major rivers. It also states that the tool provides reasonable accuracy for shallow groundwater usage but does not account for groundwater withdrawals from aquifer.

GEMI Local Water Tool GEMI, in cooperation with WBCSD, is developing a new environmental tool, the GEMI Local Water Tool (LWT). The approach is designed to allow companies to firstly identify and prioritize risks in their portfolios using the WBCSD GWT and then to further evaluate the highrisk locations and plan actions to manage the risks using the GEMI LWT. The GEMI Local Water Tool uses a modular approach to work through an assessment. Module 1 is designed to gather site data whilst Modules 2-6 then guide a user through data risk assessment, planning and reporting. The initial data requirements include information on an operations water sources (from mains water, river, aquifer etc), defining and quantifying its usages of water (including average and peak demands). The tool provides checklists and profile forms as additional guidance as well as case histories. Coco Cola, for example was reported to have found that source water protection has been an effective business continuity strategy that has reduced costs, improved ecosystem health and benefited communities where it operates. This has been achieved through source protection planning to identify source vulnerabilities, sometimes using consulting services to assess in-depth water supply reliability. GEMI also allude to a third stage beyond using the WBCSD and LWT tools, where detailed data analysis and technical assessment is likely to be required. This may be as important input parameters into the GEMI LWT and/or as validation to assumptions made. For example one of the basic questions posed in Module 1 is “ what is the ability of a source to meet current and future water demands associated with agriculture, industry, residential and ecosystem needs?”

For many countries contacting the regulatory authority may well answer this question, but for many the infrastructure and data availability may not be readily available and a degree of expertise will be required to produce a reasonable analysis that then justifies changes to operational management and strategies. Further expertise would also be required should any assessment on the above question be borderline or negative? This could be quite crucial to on-going production and investment decisions.

Water Footprint Network – Water Footprint Assessment Methodology This tool provides a detailed methodology to quantify water usage along a supply chain or value chain. Water is categorized and quantified in terms of how much potable (blue) water is used; how much waste (grey) water is created and to what extent rainfall (green water) contributes. This provides a means to quantify how much water is “embedded” within a product as it moves through different stages of a supply or value chain. It can be expressed in a number of ways, such as water volume per unit of time, per product, per unit of energy, per capita, per facility, per area, etc. A water footprint does not (nor is it intended to) address the severity of the environmental impact on a given location, but it does provide measurable / quantified data at a local level to incorporate into a risk assessment. By measuring, monitoring and developing data trends, any mitigating actions can be quantified and accurately recorded (from a factory to catchment level) and like-for-like comparisons made with critical suppliers.

Choosing an Appropriate Tool The description of the above tools shows that the level of detail and sophistication required, varies depending on their application. The CERES Aqua gauge and the WBCSD Global Water Tool could initially be used to understand (fairly quickly) whether one or more company facilities are located in water scarce areas and to what extent each facility has made progress in understanding its own environment and taken onboard water risk management as a performance indicator, operationally and strategically. This information would provide an initial risk ranking and help to prioritise actions. Further data collection & analysis could then be undertaken to enable water risk to be put into a realistic context and integrated within a business structure. The WWF/DEG Water Gauge, the WRI Aqueduct, The Nature Conservancy Watershed Risk Assessment and the GEMI Local Water Tool, all provide a more detailed assessment with the incorporation of local and regional site characteristics. For example each would appear to address the actual water source within a catchment as a key parameter. Hence there would appear to be some overlap but each tool does have a different emphasis that may determine which of the tools is actually preferred by a particular user or by particular circumstance. The GEMI LWT and the Water Footprint Assessment Methodology both focus down to a production facility itself to assess water usage, water treatment, deriving facility water balances etc. The choice of which approach may depend on whether one site only is being assessed (hence perhaps the LWT) or a broader picture across the value chain is required, hence a full water footprint may be undertaken. Given that some of the tools are still being developed, there is not presently sufficient information to make any detailed comparison between the questions that each tool asks at the data gathering stage, their accuracy and differences, or the age of databases incorporated into any tool, or the density of data used at either a country or catchment basin level. For example, at present, it is not possible to directly compare the 33 indicators used in the Water Gauge tool with the 23 used within Aqueduct.

From another perspective such as for due diligence purposes, more than one tool could be envisaged being used to seek comparative assessments. Hence a combination of tools using different combinations of databases and density of data could provide a degree of sensitivity analysis.

The Process of Data Collection Sustainable water management requires both: • •

A holistic approach to check that all factors have been considered in context and that recommendations for one element is not detrimental to another; and Data quality is of a sufficient standard and of sufficient quantity to be able to justify subsequent operational & strategic decisions.

Any proposed assessment on water risk management would benefit from both a top down and bottom up approach. This can then take account of any strategic risk and opportunity analysis, whilst in parallel determining exactly what technical data would be required to quantify such analysis. The starting point in any technical assessment would be collecting all readily available information to set a benchmark from which further actions can be planned. Such early data is likely to be derived from water meters; from raw water supply to wastewater treatment discharges and how both parameters vary over time. Other information may include water costs, existing water efficiency measures, regulatory pressures and commitments; any operational problems related to water (and power). The known source of the water may be surface water or groundwater and information may be available on water quality and any historical problems related to continuity of supply. Depending upon the infrastructure a water supply may not necessarily be derived from the catchment within which a facility is located. Details of water quality and continuity of supply may well be at a “too detailed” level to be picked up in some of the water management tools. This is where local assessments, audits and due diligence becomes critical to accurately quantify water usage and identify subsequent risk. Should, for example, contaminated water exist locally, this could affect both continuity of supply, pre-treatment costs or longer-term viability of the water source. Local problems will require local solutions, for which there could be many ways to manage risk. Information from within a water catchment basin might include knowledge on biodiversity stress, planned increases in local population or new industrial enterprise zones; existing heavy industries and known pollution incidents, stream flow or groundwater measurements and more. Where data does not exist which is considered to be crucial, such as information on depth to groundwater and water quality as appropriate, then this may further necessitate borehole drilling to collect it.

Conclusions Water management tools provide at their simplest a set of questions, whose answers are likely to have a significant influence on operational and strategic approaches to water management over the long term. They have all been designed to particularly help companies look outside their immediate environment to be able to appreciate just how crucial water can be to business continuity, profitability, reputation and long term business resilience.

The development of water risk management tools will short circuit much of the data gathering and difficulty of data collection and assessment in many parts of the world that do not already have strong catchment management systems. They are also helping to provide a standardised approach to enable realistic comparisons to be made within industry and the investor community. However the investor or company that uses one or more tools to assess risk could be faced with a dilemma for whether to continue to invest or make another acquisition in a water scarce area. Much of this decision may reside on whether such risk can be successfully managed or is outside of a company’s control. Local data and knowledge is likely to be needed to be able to come to an appropriate conclusion. Much of the feedback from business to date has also highlighted the need for help to determine exactly what data should be collected and the need for support in tackling issues such as water basin governance and external stakeholder engagement, to name a couple of examples. The key messages at this stage in understanding water scarcity and incorporating into business planning are: • • • • •

Tools will greatly assist, but they have limitations that need to be recognised; Environmental expertise is required to gauge whether sufficient and appropriate quality data has been collected; Data interpretation has been made on a sound basis; Risk mitigation measure are appropriate and efficient; Potential business opportunities do reflect the environmental data.

As an overall conclusion, any adopted methods taken on board should: • • •

• • • •

Enable a business to put a value on water; Identify potential cost saving measures related to the water usage life cycle; Allow companies to understand their operations with respect to water risk management (and those of their critical supply chain) in the local, regional and global context; Enable companies to look at longer term investment decisions with an insight to how issues such as water scarcity and climate change may influence its business; At an operational level help quantify water usage from which business decisions and water efficiency targets can be made on the basis of good quality data; Enable water efficiency issues to be integrated into an overall sustainable strategy; Achieve a better sustainability performance through the integration of water with energy and carbon management.