WATERPROOF INVESTMENTS - Analysis of water-related risks within South African companies - Nordea
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WATERPROOF INVESTMENTS Analysis of water-related risks within South African companies
Author and on-the-ground researcher: Kata Molnár This report was published in March 2019 by Nordea. Designed by András Kovács. Proofread by Bálint Pinczés. Cover, p8, p16 photos by Johnny Miller, unequalscenes.com Other photos by the Author. Printed on FSC certified paper.
Acknowledgments
Extended acknowledgment for their insights and comments:
Alliance for Global Water Adaptation (AGWA) network, Dr. Ana Elisa Cascão (GIZ),
Dr. Mark Dent (Alliance for Water Stewardship), Anton Earle (African Regional
Center, SIWI), Dr. Marian J. Neal (Australian Water Partnership), Claire Pengelly
(Green Cape), Dr. Antony Turton (University of Free State), Dr. Kevin Winter
(University of Cape Town).
Companies visited:
Aspen Pharmacare Holdings Limited:
Jeanette Englund, Francois Joubert, Diana Sibanda, Andre van der Walt
Distell Group:
Eric Leong Son, Cecil Everson, Frank Ford, Jacques Rossouw
Netcare:
Lynelle Bagwandeen, Andre Nortje, Chris Tilney, Milton Benjamin, Michelle Norris,
Tony Eekers, Dirk Truter
Shoprite Holdings Limited:
Tamsyn Pinn, Jennifer van der Westhuizen, Willa Lotz, Candice Muller
Standard Bank:
Cathryn le Roux, Nigel Beck, Rochelle Chetty, Brent Smit, Wally van de Venter,
Andre Villiers, Ellen Mthombeni
Woolworths Holdings Limited:
Feroz Koor, Ralph Buddle, Les Hall
Langa and Langrug township residents.
3
Sustainable Finance at Nordea
Nordea is the largest wealth manager in the Nordics with approximately EUR 312 Markets Foundation and Ecostorm prepared reports on the impacts of Indian
billion in asset under management in 2017, and approximately 11 million customers Pharmaceutical companies in 20162 and in 2018.3
across the Group. Nordea is the third largest corporation in the Nordic region and one
of the top 10 financial services companies in Europe based on market capitalization. As the historic drought unfolded in 2018 in South Africa, we decided to take a closer
look into causes and effects of the water crisis. We intend to move the investor and
Nordea’s Sustainable Finance approach is about integrating sustainability into banking communities towards better visibility of their water risks and water-related
all our business activities and products. Nordea works with companies and other risks and to protect our customers’ long-term assets. In this context, this study aims
stakeholders, including policymakers, on different themes, individually or through to uncover the level of awareness of selected South African companies and assess
collaborative initiatives. We believe that company engagement is key in order for us to their exposure to any potential water risks, and the impacts and responses to them.
be a responsible owner and drive change within an industry or market. The report also draws conclusions for the future and explore how the risks can be
transformed into opportunities.
Water risk is one of our focus areas within stewardship and engagement. In 2016 the
World Economic Forum identified water crises as one of the top five global risks of The information in this document has been obtained from sources believed
highest concern over the next 10 years. The water issue is not only a present challenge reliable and in good faith, but any potential interpretation of this report as
for countries, but also a risk and opportunity for the entities in which we invest, and making an allegation against a specific company or companies named would be
ultimately the assets we manage. misleading and incorrect. The author accept no liability whatsoever for any direct
or consequential loss arising from the use of this document or its contents.
Nordea has contracted various reports over the past years related to water risk: a
scoping study from the Swedish Water House and the Stockholm International Water
Institute to better understand water risks for Swedish businesses in 2014.1 Changing For more information visit: http://sustainablefinance.nordea.com/
4
Table of Contents
Acknowledgments 3
1 Setting the Scene
Global Outlook
11
11 4 Assessing Water Risks
in Companies 25
Drivers 12 Research Method 26
Sustainable Finance
at Nordea 4 Opportunities 13 Location of Visited Sites 27
Exposure of the Financial Sector 14 Company Assessments 28
Aspen 29
List of Boxes 6 Distell 32
List of Figures 6
Abbreviations 6 2 Defining Water Risks
Definitions
15
16
Netcare
Shoprite
35
38
How Do Companies Use Water? 16 Woolworths 41
Executive Summary 7 Business at Risk 17
Key Findings
Messages
9
9
Sectors at Risk 17
5 Conclusions
Findings
44
45
Companies 45
3 Day Zero in Context
South Africa’s Water Resources
19 General Observations 45
Management
Managing the Drought
19
21 6 References 46
Macroeconomic Impacts 22
Resilience Building 23
5
List of Boxes List of Figures
BOX 1: Water Stress and Shrinking Reservoirs Figure 1: Water Stress by Country
BOX 2: An Analysis of Decision under Risk Figure 2: Water Use by Type for the Two Main
BOX 3: R
isks Affecting Corporate Financial Western Cape Water Management Areas
Performance
BOX 4: Constitution of South Africa
BOX 5: Townships
BOX 6: Financing Monwabisi and Strandfontein
Desalination Plants
Abbreviations
BCI: Better Cotton Initiative
CBI: Climate Bonds Initiative
CDP: Carbon Disclosure Project
DGP: Gross Domestic Product
ESG: Environmental, Social, and Governance
FY: Financial Year
GHG: Greenhouse Gas
GRI: Global Reporting Initiative
IPCC: Intergovernmental Panel on Climate Change
IPW: Integrated Production of Wine
SDG: Sustainable Development Goals
WASH: Water, Sanitation, and Hygiene
6
Executive Summary
E
nvironmental risks are becoming more and At the beginning of 2018, Cape Town was facing 'Day
more tangible. In a vicious cycle, businesses Zero' – the day when taps run almost completely dry.
impact the environment, but the environment What was happening in Cape Town cannot be treated
also affects the ability of businesses to operate. From as a unique case. Water is a fundamental necessity for
China to California, there are multiple types of risks lives and livelihoods yet it is known that already a billion
and drivers to consider, such as climate change and people around the world live in water-scarce regions. It
inadequate public water management practices that is also known that unsustainable consumption habits
can, when extreme weather events occur, pose threats and lifestyles are spreading, and the world faces a
to industrial, agricultural, and domestic water provision. paradox of inequalities with poverty and hunger in the
These pertain to the allocation of water to ensure era of immense food waste generated. While the biggest
national water, energy, food, and economic security, existing water resource management challenges have
not only to keep the ecosystem intact, but also to avoid more to do with economics and politics than physical
already emerging competitions and conflicts among availability, changes in climate (such as extreme
multiple stakeholders. droughts and floods) have the potential to seriously
affect water and all systems depending on it.
7
More than 75% of the world‘s extracted fresh water is water supply and demand. As most of the economically
used up in corporate value chains, yet the prices of the available yield from surface water resources over
fuel, food, and materials we consume do not reflect their large parts of the country has been fully developed
environmental damage. Valuing water, various financial and utilized, challenges remain to solve issues of non-
instruments, water infrastructure, and target setting revenue water, leakages, and the already mentioned
are among the handful of strategies that can provide gap between demand and supply. Furthermore, as
solutions for the challenges. Exposure of the financial macroeconomic impacts of the drought indicate, as an
sector can be measured in the lists of top global risks, agricultural exporter, a water-scarce country like South
yet it is also known that we need the economic players Africa trading away water virtually through the food
to meet the targets of the Paris Agreement and the and beverage products may further add to the risks for
Sustainable Development Goals. both its local food and water security.
Growth rates and company disclosures are proving As a region defined by deep racial and economic
more and more that financial returns are driving green disparities, the Western and Eastern Cape provinces
finance mechanisms. Reliable supplies of water to be of South Africa went through a 3-year consecutive
available anytime, anywhere, at the same cost can no drought, culminating in a situation of crisis. Cape Town
longer be guaranteed. The concept of risk helps to came close to the day when the taps would go dry
understand and cope with uncertainty. Risks related and residents would need to queue for water. While
to water, including physical, regulatory, reputational, managing the escalating drought, the city also strives
as well as financial implications mobilize businesses to learn the lessons and become a resilient city through
and sectors to wake up to their growing exposure. better water conservation and demand management,
Agriculture as the biggest water user is at the top of as well as diversifying its water mix.
the list.
Nordea invests approx. €90 million into South African
South Africa is a water-stressed country, allocating companies. This report explores examples of companies
most of its water to agriculture through irrigation. from various sectors in South Africa, including
It is also true for the Western Cape region that was beverage, retail, healthcare, or pharmaceuticals that
predominantly in the limelight of the water crisis. A have been experiencing this historic drought. The
constitutional right in South Africa, water is supplied by report demonstrates their dependence, exposure, and
the national government and is distributed by the local response to the water challenges and contextualizes
municipalities, calling for clear policy and institutional water-related risks. Managing these risks is proven to
capacities along with political collaboration. It is most become a critical priority for those seeking to deliver
astounding that based on South Africa’s growing strong financial returns and the health of billions. This
population, economic growth projections, and current is the number one message to ensure waterproof
efficiency levels, the country could have a water deficit businesses and investments.
of up to 3.8 billion m3 by 2030 – a 17% gap between
8
KEY FINDINGS » MESSAGES
• he crisis has made companies more aware of
T • ompanies may not assess their entire value chain
C CONSIDER
their water dependencies and exposures. All against risks. Consider risks within your entire value ENTIRE
companies were impacted at various degrees, chain, and make sure that none of it remains VALUE
drought emergency plans in case of a ‘Day Zero’ a blind spot. CHAINS
scenario was put in place. PREPARE
• Early identification and assessment of potential and
water risks are crucial to capacitate a company ASSESS •
Strategies can include relocating sites to areas
less exposed to water risk, outsourcing operations DIVERSIFY
to respond in time and appropriately. An extreme
to other service providers, utilizing new sources RISK
event such as a drought brings awareness and MITIGATION
often leads to changing the way companies think of water such as groundwater, or long-term water
STRATEGIES
and manage water. saving and efficiency initiatives.
•
Water risk assessments help prepare for crisis
• I dentify and assess how water risks can impact and ensure business continuity.
your business. Do not wait for a crisis to come. BUILD • There is more awareness that in a changing
Start to strengthen your resilience to water- RESILIENCE PLAN
environment adaptation is inevitable and
related challenges and risks. LONG-TERM
planning more flexibility into the system is ADAPTATION
necessary.
• For long-term adaptation, build flexibility into
your system.
•
Once companies established emergency business
continuity plans, they recognized the longer- SHIFT FROM
RISK TO
term value on water risk mitigation savings and • water crisis situation can encourage companies
A
OPPORTUNITY
decided to keep measures as a ‘new norm’. to start disclosing water-related information.
This will not only create transparency within the
company but also towards investors: weighing
companies in their index as it is done for carbon ENCOURAGE
• he provision of water includes costs that are
T DISCLOSURE
footprint – whereby investment is increased in
required to be integrated into tariffs, taxes, and VALUE companies with low water risk and decreased in
infrastructure. With increased price for water, WATER companies with high levels of water risk.
businesses are getting more exposed.
9
REPORT STRUCTURE:
KEY FINDINGS » MESSAGES
1. T
he first section provides a brief overview of the
• cience-based water targets are available and already
S global drivers of water resources availability and
being applied by various sectors and across many why they matter to finance.
SET TARGETS
geographies. Adopting science-based targets can help
long-term planning. 2. R
isks related to water are analyzed by their
definition, how companies use water, and which
sectors are at high or lower exposure to the risks.
• ompanies heavily rely on their water meters.
C
Behavioral change programs were introduced to 3. T
he focus is shifted to the context of Day Zero
engage staff to reduce water consumption. that was expected to happen in South Africa.
• Installing water meters and ensuring full coverage of As a background South Africa’s Water Resources
sites, as well as tracking water consumption against TRACK Management is presented, the evolution of the
the relevant municipal water restrictions imposed WATER USE drought and what was the response of the city
is important. Water meters enable companies to of Cape Town. Macroeconomic impacts are also
promptly identify and repair leaks as well as high included.
water usage at sites.
4. In the following chapter, the report presents
a selected list of cases on various companies’
• ngage multiple stakeholders. It is never too late to
E dependency, exposure, and response to the
start a collaboration, but reducing risks is likely to be drought and the emergency situation posed by
more effective and cost efficient this way, given that the threat of Day Zero.
water is a shared resource. Think about your clients, ENGAGE AND
COLLABORATE 5. C
onclusions are summarized, including concrete
staff members, local communities, water authorities,
competitors, local governments. findings for each company and some general
observations.
• isk mitigation projects’ can be viewed with a
R
potential for a return on investment. Consider that
payback periods can vary: it might take several
CALCULATE
years, or in some cases, no return can be anticipated. RETURN ON
Some actions might not be executed on a return-on- INVESTMENT
investment principle, others may lead to a reduced
monthly water bill.
101 Setting the Scene BOX1
Water Stress and
Shrinking Reservoirs
GLOBAL OUTLOOK
At the beginning of 2018, Cape Town was facing a unique case. Nearly a dozen more major urban areas Morocco’s second-largest reservoir, the Al Massira
'Day Zero' - the day when the city government of 4 face water-related crisis events all around the world, dam shrunk by more than 60% over the last 3 years,
million would have stopped providing potable water including London, Mumbai, Sao Paolo, or California. more than 700,000 Moroccans were affected by
for homes and businesses, and residents would have Although they are characterized by differences in drought and grain production fell by 50%. Drought
been required to queue for water at communal water geography, demography, rainfall patterns, level of in Central India leaves two provinces in conflict over
points. After 3 consecutive years of unprecedented wealth, they all share high levels of population density dwindling water supplies. These dry spells have
levels of low rainfalls, the 6 dams that provide most (nearly 60% of the global population will reside in cities devastated farmers, even driving some to commit
of the water supplying the city of Cape Town and by 2030)4 and exposure to water-related risk events. suicide. The surface area of Iraq’s Mosul Dam has
agricultural activities hit unprecedented low levels. The Water is a fundamental necessity for lives and shrunk by 60% from the late 1990s to present day.
drought could have made the Western Cape, and the livelihoods. Access to safe, sufficient water and The surface area of the Buendia Dam in Spain
city of Cape Town, the first major city to go dry. The sanitation and sound management of freshwater shrunk by 60% over the last 5 years, drying up rivers,
scale of impact would have been devastating: social ecosystems are essential to economic prosperity, health ruining crops, and sparking lethal wildfires. Spain’s
unrest, public health concerns, infrastructure collapse. and development outcomes, and to environmental largest power company, Iberdrola, experienced
What was happening in Cape Town cannot be treated as sustainability. a 58% drop in hydroelectric power production in
2017, pushing up electricity prices. Source: World
Resources Institute5
11DRIVERS
WATER STRESS BY
Water Scarcity – Of the waters covering 70% of
COUNTRY
the Earth’s surface, (as 97.5% is salty, 1.75% is frozen,
and 0.45% is under the ground) only 0.3% is surface ratio of withdrawals to
water that provides most of our fresh water needs. supply
Already a billion people around the world live in water-
Low stress (80%)
this growing demand. Competition is set to increase for
This map shows the avarage exposure
water resources unless more cooperation takes place of water users in each country to water
from the local to the regional and global levels. stress, the ratio of total withdrawals to total
renewable supply in a given area.
A higher percentage means more water users
Consumption – With the uninterrupted growth of are competing for limited supplies. Source:
cities and increasing populations, environmental goods WRI Aqueduct, Gassert et al. 2013
and services are provided through ever-increasing Figure 1: Water Stress by Country; Source: World Resources Institute. CC BY 4.0
supply chains covering longer and longer distances. As
living standards rise, consumption habits and lifestyles challenges have more to do with economics and politics transition: over half of companies (53%) which report
change (attributed to the growing middle class). than physical availability. In a historical context it is to the Carbon Disclosure Project (CDP) state that
nevertheless the case that more cooperation happened better water management is delivering greenhouse gas
Inequality – The world is facing a paradox: the over shared waters than did violent conflicts.10 (GHG) reductions. The latest Special Report by IPCC
need to produce 55-70% more food by 2050 while proclaims that:
the absolute number of undernourished people keeps Climate Change – The Intergovernmental Panel
increasing, reaching approximately 821 million in 2017 on Climate Change (IPCC) states that changes in ‘Risks to water scarcity are greater at 2°C than at
from around 804 million in 2016.8 Due to the massive climate (such as extreme droughts and floods) have 1.5°C of global warming in some regions (medium
misuse of resources, global food waste amounts to 1.6 the potential to seriously affect water management confidence). Limiting global warming to 1.5°C
billion tons worth about US$1.2 trillion, which is one- systems.11 Given that the majority of climate risks would approximately halve the fraction of world
third of the globe’s total food production.9 Over 80% happen through the changes within the water cycle, population expected to suffer water scarcity as
of untreated sewage is discharged into water bodies in and impacts are already felt around the world, the compared to 2°C. Socioeconomic drivers, however,
are expected to have a greater influence on these
developing countries. implementation of the Paris Agreement, including
risks than the changes in climate.' 12
its goals to de-carbonize the economy and adapt to
Hydropolitics – Given that 151 countries and roughly the new climate reality, will greatly depend on water
2.8 billion people share transboundary river basins, resource management plans. Energy footprint of water
the biggest existing water resource management shows that water can make or break the low-carbon
12OPPORTUNITIES
Valuing Water - Water provision includes societal
costs (such as environmental damages) as well as
financial costs (for supplying water for agriculture,
households, and industries). In order to ensure
affordability of access to water for all, these costs have
to be internalized into the tariffs, taxes, and investment
planning of water infrastructure. Water needs to be
sourced, treated, and distributed – all of which require
infrastructure and maintenance.
Financing Water Infrastructure - The developing
world needs new infrastructure; the developed world
has infrastructure nearing the end of its life span.
According to a new Global Water Intelligence report, the
total worldwide investments into water infrastructure
must reach US$449 billion each year between 2018
and 2030 if the planet is to meet the UN’s Sustainable
Development Goals (SDGs).13 This is also important
because it will lock in emissions outcomes for the next
50 to 100 years.14 Financing still comes predominantly
from public sources for water, energy, and transport
so the funding gap for the annual water infrastructure
in Africa alone is over US$11 billion mostly due to
market failure on a continental scale. Infrastructure
development is of decisive importance for economic
growth and poverty eradication, especially in African
countries.15
Target Setting - Leading companies are seizing the
opportunities of this new approach: over 450 companies
across all major sectors have committed to setting
science-based targets in line with the Paris Agreement,
with more than 120 targets already established.16 133
companies have approved science-based targets,
among them several from South Africa.17
13Financial Instruments - There are many instruments, positive returns on investment, and engagement can FACTS & FIGURES
such as green bonds and climate bonds supporting mitigate Environmental, Social, and Governance (ESG)
low carbon and climate resilient solutions. Green bond risks and, in some cases, generate positive impacts.23
issuance in 2018 is expected to reach US$250 billion.18 Financial firms responsible for over US$86 trillion in Global demand for fresh water is projected
A new Climate Bonds Initiative (CBI) standard on assets have committed to disclosing climate-related to exceed supply by 40% in 2030.
water exists in green bonds, into which Cape Town, financial risks. In total, 4,653 companies were asked to
as recovering from its worst drought in 100 years, has report to CDP on their water activities in 2017 24, with a
Nearly 60% of the global population
invested US$76 million. 46% response rate. 2,000 companies who are disclosing
will reside in cities by 2030
to them reported US$14 billion in water-related impacts
in 2017, a five-fold increase from the year before.
EXPOSURE OF THE FINANCIAL We have lost 35% of our natural
Value Chains and WASH - More than 75% of the
SECTOR wetlands over the last century
world‘s abstracted fresh water is used in corporate
A Top Global Risk - The World Economic Forum’s value chains. 1 in 5 people work in globalized supply
Global Risk reports19 in the past years put water among chains, very often in countries where Water, Sanitation,
55-70% more food by 2050
the top risks, defining water crises as “A significant and Hygiene (WASH) access is not ensured. Only 20%
decline in the available quality and quantity of fresh of all countries have sufficient finances to meet their
water, resulting in harmful effects on human health national WASH targets.25 How companies manage risks Increasing number of
and/or economic activity.”20 Water is a growing (e.g., water or climate-related risks) associated with undernourished people:
material risk regardless of the industry and asset class, their supply chain is of vital importance. 821 million in 2017
that investors are elevating in their corporate and
other engagement strategies. However, despite the Externalities - The prices of the fuel, food, and Global food waste amounts to
emerging sustainability lens of some financial actors, materials we use do not reflect their environmental 1.6 billion tons worth about
project bankability and risk-adjusted financial return environmental damage or social impact. Many US$1.2 trillion
remain the fundamental criteria of the sector. initiatives and policy-makers are currently seeking to
find ways to internalize these externalities through
Growth and Disclosure - Financial data are no regulations, taxes and other methods, so it is in a Over 80% of untreated sewage
longer sufficient as indicators of success. According company’s own interest to understand and adapt and
to CDP21 companies have also started to become become those progressive businesses that start looking
increasingly aware of the fact that their growth is at their externalities. 151 countries and roughly 2.8 billion
people share transboundary river basins
not disconnected from water security. A recent HSBC
research found22 that financial return was the No.1
driver among those who choose emerging green
finance mechanisms (including environmental, social,
and governance, or ESG criteria) in their investment
strategy. This means that sustainability can bring2 Defining Water Risks
F
reshwater availability is changing worldwide26, Defining what does and what does not pose a risk can
and roughly half the industries in our economy be misleading and viewed as an ‘exercise in power’.
face significant risks related to water according For example, infrastructure today often fails to act as
to the American organization, Ceres.27 In many parts of a buffer against extreme weather events because it is
the world, uncertainty has already replaced the belief built with the risk of such events to happen every 20-40
that reliable supplies of water are available anytime, years, not more. Cape Town’s infrastructure system was
anywhere, at the same cost – this can no longer be built with a 1-in-50-years drought in mind. This drought
guaranteed. happened to be a 1-in-300-years drought30, according
In fact, the concept of risk helps to understand to climate scientists.
and cope with uncertainty.28 The concept of risk often
suggests a perception and a likelihood of an event
in the future that has not yet materialized.
15DEFINITIONS
• ater risk implies both perceived risk and real risk
W drought, lack of adequate human resources capacity). BOX2
for water to be physically limited in its availability,
defined as: “the probability of an entity experiencing
To determine long-term solutions for how to mitigate
such risks, it is key to identify the root causes.
An Analysis
a deleterious water-related event (…) create risk of Decision under Risk
for many different sectors and organizations
simultaneously.”31 A complete assessment of water HOW DO COMPANIES USE WATER?
risk requires an understanding of biophysical
conditions (rainfall, water quality, underground Directly, because they need it for their operations, for
water resources) as well as exploring public water example, within a product. Companies may also depend
management including the impact of water utilities on water indirectly, as a result of water reliance within
and local governments. While the former has their value chain. Many products have upstream supplier ‘The simplification of prospects can lead to discard
increasingly been studied and understood, the latter dependencies on water, e.g., a food manufacturer’s events of extremely low probability and to treat
has not, which may lead to incomplete assessments use of crops and a clothing manufacturer’s use of events of extremely high probability as if they were
of risk and suboptimal risk mitigation activities.32 cotton, both highly dependent on water. In addition, certain. Because people are limited in their ability
• Water-related risk, on the other hand, can downstream consumer dependencies on water exist to comprehend and evaluate extreme probabilities,
materialize from the above-mentioned water risks: too, such as cleaning or maintaining products like highly unlikely events are either ignored or
the problem of too much, too little, or inadequate washing. overweighed, and the difference between high
quality of water due to physical or governance Some companies provide water to others as part of probability and certainty is either neglected or
related circumstances. their business. This may either be by extracting water exaggerated.’
from rivers, lakes, reservoirs or groundwater, or by
It is also important to know the reasons behind such treating wastewater, or both. Companies that use and/ Source: Prospect Theory29
risks to potentially emerge, and at what degree different or provide water may also impact water and water
stakeholders are exposed to risks in the event of them bodies downstream directly through extraction, which
materializing. depletes water quantity, or by discharging effluents,
Response to such events can further create risks for which may reduce water quality. Companies may
other stakeholders. The materialization of such risks also depend on certain habitats (ecosystems) such
can happen because of physical nature (i.e. posed by as forests and uplands that help to regulate the flow
climate change or biophysical circumstances), but also (causing or reducing floods) and quality of water (e.g.,
due to governance related policy decisions (i.e. upstream towards those industries located downstream).
infrastructure development limiting downstream access
to water, the lack of adaptation measures to flooding or
16BUSINESS AT RISK SECTORS AT RISK
Water-related business risk can be examined from If a corporation has high water-related risk exposure, then a heightened response to risk can lower the overall
a number of closely related perspectives: physical, materiality of that risk; and conversely, if a corporation faces medium water-related risk exposure, and there is a
regulatory, and reputational risks. According to the CEO lack of corporate response to lower these risks, then overall materiality may be higher. Although risks may not be
Water Mandate33, they can ultimately lead to increased present at the beginning stages of a project, they may grow over time.
costs or lost revenue because of diminished supply or The following sectors (although it may vary by location) are exposed at high to medium degrees according to
quality of water or mismanagement of water resources the Pacific Institute and CEO Water Mandate34:
(i.e., financial risks):
• hysical risks: Too little water (scarcity); too much
P
water (flooding); or water that is unfit for use
(pollution). They can be caused by drought or long- High risk exposure to water Medium risk exposure to water
term water scarcity, over-allocation among users,
flooding, etc.
• Regulatory risks: This includes permits, prices,
or both to control consumption and discharge.
Regulation has become dramatically more Agriculture (Food and beverage companies in particular Construction & materials, Gas distribution & multi-
important in the water sector in recent years as face water-related risks in their agriculture commodity utilities, Manufacturing of industrial household goods,
water resources have been fully committed and supply chains as 70% of freshwater use goes to growing home construction, leisure goods, Media (printed), Real
engineering solutions no longer offer easy ways to crops, feeding livestock and processing ingredients), the estate (asset owners), Transportation, Travel & leisure
increase supply. This not only raises costs but may risk from lack of water available for irrigation or animal services.
also result in less predictable supply. consumption, and risk from changing precipitation
• Reputation risks: Reputational risks stem from patterns affecting current crop production areas35).
changes in how stakeholders view companies’ real Biomass power production, Chemicals, Cloth &
or perceived negative impacts on the quantity and apparel, Electric power production, Food producers,
quality of water resources, the health and wellbeing Food retailers, Forestry & paper, Freshwater fish &
of workers, aquatic ecosystems, and communities. aquaculture, Hydropower production, Mining, Oil &
Reputational concerns lead to decreased brand gas, Pharmaceuticals & biotech, Technology hardware
value or consumer loyalty or changes in regulatory & equipment, semiconductors, Water utilities and
posture, and can ultimately threaten a company’s services.
legal and social license to operate. This is particularly
true in developing countries where multinational
companies source inputs, as the associated water
use or discharge directly affects the livelihoods of
people who may themselves not have sufficient
access to clean water.
17BOX3
Risks Affecting
Corporate Financial
Performance
• inancial losses in the form of foregone
F
revenues due to disruption of the production
process.
• igher costs related to supply chain
H
disruptions; changes in production
processes; capital expenditures to secure,
save, recycle, or treat water; regulatory
compliance; and the increased price of
consuming or discharging water.
• elayed or suppressed growth due to
D
intensifying competition.
183 Day Zero BOX4
Constitution
in Context of South Africa
South Africa enshrines the basic right to sufficient
water in its Constitution, stating that “Everyone has
SOUTH AFRICA’S WATER the right to have access to (...) sufficient food and
RESOURCES MANAGEMENT water ...” – Constitution, Section 27 (1) (b).39
Water Stress - Despite being a water-scarce country Governance - In South Africa, water is a constitutional
with extreme climate and rainfall fluctuations36, South right, under which the national government (the
Africa’s per capita water consumption is around 233 Department of Water and Sanitation, currently under
liter/day, compared to the international benchmark of the rule of the leading party, the African National
around 180 liter/day37. Front) is responsible for the supply of water, while the
local government (the municipalities) are in charge of
Water Use by Sectors - In line with global trends, the delivery of water. In the case of the Western Cape
the agricultural sector consumes 63% of water in South region and the city of Cape Town, it is important to
Africa, the municipal sector uses about 27%, and the note that the local government is led by the opposition
industrial sector accounted for 10% of consumption. party, the Democratic Alliance. The Water Services Act
The Western Cape Province, in the south-west corner states that municipalities are required to provide water
of South Africa, falls predominantly within two water of potable standard. Communication and collaboration
management areas where irrigated agriculture is the between the different levels of government can be
major water user, followed by urban water use, as challenging for various reasons, including their position
shown in Figure 2. and political power.
19Water Management Areas were established, and Challenges - An estimated 37% of the water in South
hydrological catchment borders administered by Africa’s municipal systems is non-revenue water.42
Berg-Olifants WMA
Catchment Management Agencies.38 This means it is “lost” – through leaks, theft, or metering
Water demand is expected to rise over the next 20 inaccuracies – before it reaches customers. This water
years while its supply is likely to decline. Based on is worth more than ZAR7 billion annually. Building new
South Africa’s growing population, economic growth dams through increasing the overall level of surface
projections, and current efficiency levels, water will not address the challenges, as they would
be insufficient to meet South Africa’s growing water
the country could have a water deficit of up to 3.8 needs in the absence of demand constraints. The
billion m3 by 2030 – a 17% gap between water reason for this is that most of the economically available
supply and demand.40 yield from surface water resources over large parts
61% Irrigation of the country has been fully developed and utilized.
36.8 Urban
1.9% Rural
Exporting Virtual Water- Significant changes Collaboration - In late 2011, the 2030 WRG helped
0.3% Bulk Industry
happened in agriculture since the government increased establish the Strategic Water Partners Network43, a
0.1% Afforestation
irrigated farmland. This has enabled farmers to decrease multi-stakeholder platform that brings together the
the area under production for staple low-value crops government, major water users from the private sector
Breede-Gouritz WMA such as wheat and maize, and successfully grow high- and civil society to identify and develop joint solutions
value crops for export such as fruit, grapes, and citrus. to the country’s water challenges.
The agricultural sector contributed around 10% to South
Africa’s total export earnings in 2017.41 Citrus, wine, table
grapes, and apples and pears accounted for the largest
exports by value, while the country also exports nuts, corn,
wool, sugar – most products have a large water footprint.
In a water-scarce country like South Africa, this can pose
a major risk in terms of both food and water security,
87.7% Irrigation and perhaps importing water-intensive products could
7.9% Urban provide a more economically viable route.
2% Rural
0.5% Bulk Industry
1.9% Afforestation
Figure 2: Water use by type for the two main
Western Cape water management areas
Source: Green Cape, 2018
20MANAGING THE DROUGHT
In 2007, the national Department of Water and Sanitation • ach week the City takes the previous week’s daily
E • anaging the remaining water in the dams, e.g.,
M
issued a warning about Cape Town’s water supply, water consumption into account to project when by stopping releases to irrigation boards once
saying the city would need new water sources by 2015. the taps will run dry. The projected Day Zero date allocations were reached late in January.
The city implemented a water demand management was publicized weekly, based on the previous • A sizeable transfer was made by an adjacent
strategy involving water meter replacements, pressure weeks’ average volume extracted from the system, catchment area in February, also reducing the
management, and leak detection. About 14-15% of extrapolated into the future to the intersection point drop in dam level. These two aspects, as well as
water is lost through leaks, which is a global average. of 13.5% dam level without adjusting for potential a reduction in urban demand, led to the Day Zero
The strategy was so effective that the city met its 2015- rainfall, reduction in demand etc. date moving well beyond the anticipated start of the
2016 water saving target 3 years early. This pushed the • To overcome the drought, the city introduced Level rainy season in 2018.44
deadline back to 2019, based on normal rainfall and 6B Restrictions from 1 February 2018, where the • Managing demand down as much as possible
normal water use. daily individual consumption must be limited to a and bringing on-stream water from other sources
In response to low winter rainfalls in 2015, the maximum of 50 liters, and a more drought-resilient (ground, re-used and desalinated45) and through
Western Cape provincial government took pre-emptive punitive tariff system where more is charged for communication campaigns, behavior change
action to increase water supplies by drilling boreholes water use at higher volumes applied to anyone information campaigns, pressure reduction,
and recycling water, but dams were still 75% full. The using over that amount. household flow regulations.
following year, the national government recognized
some Western Cape municipalities as drought disaster
areas. As Cape Town was not included, the Mayor of
Cape Town appealed directly to the Department of
Water and Sanitation for disaster relief funding.
The Western Cape is the only province in the country
run by the official opposition party, the Democratic
Alliance. South Africa’s ruling African National Congress
runs the rest. This means that the relationship between
the national government and the Western Cape is
complicated. Provinces don’t have the power to make
water allocations to agriculture, as that is done by the
national government.
Local authorities, the Western Cape Province and the
City of Cape Town municipality had to work together
with the Department of Water and Sanitation to set
priority actions to get through to the rainy season
without Day Zero to happen as the following:
21MACROECONOMIC IMPACTS BOX5 the population of Cape Town stands at just over 3.7
million, 47% households live below the poverty line of
According to Standard Bank’s analysis46, the Western
Townships ZAR3,200 and there are approximately 130,000
structures in informal “shack” settlements.
Cape constitutes around 14% of national GDP of From water supply perspective, no toilets, taps, or
which food-related products constitute around 48% showers are installed inside the homes, residents have
of total goods exports and around 5.4% of South Although not companies, informal settlements – known to use public facilities. Townships like Khayelitsha,
Africa’s total exports. The impact of the drought may as townships - are located around South Africa, the Gugulethu, or Langa rely on scarce communal taps
weigh on fruit prices and on export as volumes may most vulnerable as urban poor exposed to such crisis serving water at basic minimum standards – stand
not meet the export standards in terms of size and situations as Day Zero. pipes are available within certain proxy that residents
quality of the crop. The Western Cape government Under the apartheid system, Cape Town was can access within 100-200 meters. Townships use less
expected an average 14% decline in major progressively segregated. Forced removals left 200,000 than 5% of the city’s water, where the population is
agricultural produce, including fruit production people and informal settlements exploded in number roughly third of all Capetonians. Most often women
volumes, 20% in vegetables, and 37% in grains in the as Black Africans in-migrated towards the end of and children carry water home. Water bills are sent to
2017-2018 financial year (FY) from the previous one apartheid. These under-resourced communities, where all consumers based on a fixed monthly tariff which in
as a result of the drought. Fruits that will likely be they continue to live still today, are mostly marginalized turn is calculated on the basis of an estimated average
the worst affected include grapes, apples, and pears. from the urban economy. According to the 2011 census, monthly use.
The drought has also had a negative impact on wine
grape production, with the estimated production of
only 1.43 million tons of wine grapes in 2017, a fall by
around 20%.
It shall be kept in mind that exporting water-
intensive products equals exporting water virtually
(virtual water trade). A further downside risk consists
in the noticeable slowdown in total and international
tourist arrivals (by air) in the Western Cape which
could pose a risk to the estimated impact on GDP
and the current account. This has been raised as
an issue connected with the government’s crisis
communication.
22RESILIENCE BUILDING
Cape Town is committed to becoming a resilient city and
is part of the 100 Resilient Cities Initiative, pioneered
by The Rockefeller Foundation. Through that, it will be
part of a new global City Water Resilience Framework47
being developed by the multinational engineering firm
Arup, in collaboration with The Rockefeller Foundation,
World Bank and others. Pilot projects have been
launched in Cape Town, Mexico City, Amman, Greater
Miami and Hull in England – cities that face a range of
water challenges, from shortages to coastal floods.
In line with international best practice thinking for
coastal cities, Cape Town’s resilience will need to be
increased through the diversification of water supplies
away from dependence on surface water only towards
a situation where the city also obtains a share of its
water through integrated management of 4 sources of
water: Surface water from rainwater (including urban
stormwater runoff) managed in dams and wetlands;
groundwater (with recharge); reused wastewater; and
desalinated seawater. The 2 key focus areas of action
for the city going forward are:
1. W
ater conservation/demand management
through increased water use efficiency (in
agriculture, industry, and households), leakage
reduction from distribution networks (municipal
and others, including irrigation);
two-thirds of South Africa’s water is allocated.
2. D
iversifying the water mix by reusing effluent, Within the twin focus on demand management and
desalination (sea water and acid mine drainage), water mix diversification, a specific subcomponent
and the use of groundwater (development is wastewater treatment facilities. About 40% of
and sustainable management of groundwater South Africa’s wastewater is untreated. Improving
resources, in particular for rural areas), which is wastewater treatment could increase the quantity
particularly important for agriculture, where nearly and improve the quality of water in the country.
23BOX6
Financing Monwabisi
and Strandfontein Desalination Plants
The Municipality of Cape Town urgently The financing mechanism was established
required an alternative feedstock for the via a project related corporate loan.
production of potable water to its citizens. Proxa is responsible to develop the asset,
Given the city’s proximity to the Atlantic pump the water to the city, they get paid per
and Indian Oceans, seawater desalination liter of water by the municipality, and that is
technology was selected. Speed of plant how they generate revenue to repay the loan.
delivery was crucial. PROXA, in joint venture The risk of the plant being unused (for
with Water Solutions SA, designed and example because it starts to rain and there is
installed two temporary seawater desalination no need for desalinated water) was mitigated
plants for the City of Cape Town: Monwabisi by a fixed tariff per liter stipulated in the
and Strandfontein. The two plants should contract for the 24-month project provision.
provide the “Mother City” with approximately This means that even if the rains come, the
14 million liters of potable water per day. The city would still continue the payment for the
projects make only a small contribution to purified water.
its daily water requirements, but form part
of efforts to make additional water available Source: Interviews during site visit and
without relying on rainfall to fill dams. Proxa info sheet 48
Standard Bank approved financing for the
construction - The provision of ‘On-balance
Sheet’ financing for the desalination plant
over a contractual period of 24 months,
with revenue collected from the supply of
water into the city’s grid, helped the city in
meeting its emergency needs. The plants
provide a temporary solution before the mega
size plants are built by 2021, so once the
contractual period is concluded, the plants
will be demobilized and the area will be
rehabilitated.
244 Assessing Water Risks
in Companies
N
ordea invests approx. €90 million into South use appliances, clean products, maintain products.
African companies that are exposed to Other key sectors include Retailing, Energy, Forestry,
increased risks in worsening water security. Manufacturing, Extractive/Mining, Pharmaceuticals,
Among these, more than 50 companies and various Technology, Transport and Construction, Real estate,
sectors are represented. Industrial, Financial Services, Healthcare products and
Several companies were represented in the services, Telecommunications, among others. Most of
Agriculture sector (Food and Beverage Processing), these are among those sectors with high water-related
which is the primary user of water in both South Africa risks exposure.
and the Western Cape region, where water may be
used within the product; direct use through cleaning,
indirect use through upstream suppliers through
using crops, indirect use through upstream suppliers
through use of cotton, downstream dependencies to
25RESEARCH METHOD
The analysis and company visits were established with Three factors have been evaluated in each case,
the aim of gaining an insight into direct impacts of following the guidelines Investor Water Toolkit49 by
the drought in those facilities that are located within Ceres. The Toolkit was developed to be able to better
the Western Cape region, where the risk of municipal integrate ‘externalities’ such as water scarcity, pollution
water supply suspension was high, acknowledging the or flooding risks (and the associated investment
fact that this is not the only part of the country that opportunities) into the investment process:
was experiencing extreme weather events, including
drought. DEPENDENCY:
The possible financial risk exposure from where
3 key criteria for company selection from NORDEA’s water-related risks lie in a company’s value chain,
South African portfolio: usually sector-specific (e.g., sourcing of inputs,
• A higher level of investment in the company; wastewater management in direct operations, product
• Water-intensive sectors with high or middle water impacts), what related financial risks are (e.g.,
exposure were prioritized; potential loss of revenue, increase in costs).
• Willingness in participating in the analysis. EXPOSURE:
Involves understanding a company’s geographic
The procedure of the analysis: dependencies and the environmental, regulatory
• Initial contact was made with shortlisted companies and social conditions on the ground in regions. This
to build connection, and establishing a platform of context-based analysis frames corporate water needs
mutual trust, awareness, and understanding; and water-management policies and goals against a
• Prior to the field visit, a discussion took place with region’s reality.
the companies to explain the aims of the analysis, RESPONSE:
share interview questions prior to the meeting, and It refers to assessing the company’s resilience amid
jointly determine the location of the site(s) for a half water-related risks and how these risks are being
day or full day visit; mitigated by corporate management, water-resource
• Conducting research: ensuring that the right managers or others. Mitigation strategies can range
participants are in the room (beyond IR staff); from short to longer-term strategies of working with
• Observations, interviews, documentation during the stakeholders to improve watershed resilience.
site visit.
263.
Location of Visited Sites
4.
7.
5. 3.
1.
2.
6b.
6a.
GSPublisherVersion 0.85.100.100
1. Aspen - Fine Chemicals Corporation
2. Distell - Adam Tas and J.C. Le Roux
site in Stellenbosch
3. Netcare - Christian Bernard Hospital
and Blaauwberg Hospital
4. Shoprite - Cilmor Distribution Centre
5. Woolworths HQ, CapeTown
6a. Strandfontein
6b. Monwabisi - Desalination Plants
7. Langa - Township
27Company Assessments
28Company Snapshot
Aspen Pharmacare Holdings Limited is a leading specialty and
branded multinational pharmaceutical company. Operating 25
manufacturing facilities across 17 sites, the Group has a presence
in over 50 countries, offering a wide variety of product types.
Fine Chemicals Corporation (Pty) Ltd, situated in Cape Town,
South Africa, is a wholly owned subsidiary of Aspen since 2004.
Specialized API manufacturer for domestic (35% of its sales)
and export markets (65% of its sales). On-site activities include
materials handling, solid waste handling, etc.
Site visited:
Fine Chemicals Corporation based in Epping, Cape Town.
Durban, since 10,676 people ‘We want to be responsible corporate citizens.
South Africa 1850 (2018) If we do not use our resources responsibly,
we would be exposed to reputational impact.’
– Jeanette Englund,
Aspen Group Risk & Sustainability Manager
ZAR42.6 billion www.aspenpharma.com
(2018)
29DEPENDENCY
• ater utilization includes input within operations,
W • ater footprint measured by volume of water
W
steam production processes, cooling, cleaning, and used per kg of product manufactured: reduced
sanitation. by approximately 51%, from 0.7 to 0.34 kiloliter/
• Early identification of increased risk to operational kilogramm (kl/kg).
sustainability due to low rainfall in Cape Town.
EXPOSURE
• hysical Risk: In South Africa, aging infrastructure
P The rationalization of domestic supply could
is a risk for both water and energy provision, potentially result in absenteeism as a result of
potentially leading to operational interruptions. employees queuing for water and illness due to
Elsewhere in the Group, limited business disruptions poor sanitation.
have occurred due to extreme weather events • Financial Risk: Increased cost to secure reliable
(snow, tropical cyclone, and earthquake). During the water supply as the site has spent approximately
recent drought in Cape Town, the site experienced ZAR6 million to-date on water conservation projects
decreased water pressure which marginally and anticipates spending a total of ZAR20 million
impacted fire protection systems and production. to reach the end state. As the risk profiles changed,
• Regulatory Risk: Reduced water pressure the budget was diverted from other projects to
applied initially as restrictions were imposed by water projects within the existing budget and so no
the municipality. In the event of Day Zero, the additional funds were required.
local authorities had confirmed that services
to the Epping area would not be terminated.
51% ZAR6 million ZAR20 million
Water consumption measured Spent to-date on water Anticipated total spending on water
by volume of water/kg conservation projects on site conservation Capex over
of product manufactured the next 3 years
30RESPONSE
Drought Management (Response to Physical Risks) Water Governance Data, Disclosure and Performance Tracking
• Water conservation projects took place from • The overall objective of the FCC water management • Aspen is a signatory to the UN Global Compact
November 2016 and an overall 63% reduction in plan is to reduce site-wide consumption by at least and therefore publicly reports progress on these
water consumption was achieved by the end of 40% and to reach an “off the grid” capability on principles each year.
April 2018, equating to 34 million liter/year. water supply for the site via ability to source and use • There is a clear governance structure for managing
underground water for 100% of FCC’s water needs and measuring water specific KPIs.
Actions at the Site level as an alternative to municipal supply, should Day • Further documents related to sustainability are
• Water conservation and sustainability projects Zero ever arise. available.50
were planned between 2016 – 2019 in 2 phases, • Sites are managed as independent business units,
an estimated water of 150 kl/day was saved in with their own strategic leadership, budgeting, Return on Investments
phase 1. and risk assessment processes. This allowed • Based on the monetary value of the net savings
• The site’s future water use has transformed to the site to act quickly and reprioritize budgeted on water consumption over a two-year period,
be supplied by more diversified sources. The spending to address the increasing water risk. Re- the project payback period on the initial capital
municipal water supply of 120-150 kl/day can be prioritization of sustainability projects related to investment of ZAR6 million is 6 years.
reduced by using underground water from the water management happens through the Group
newly installed borehole, with supply from the Executive Risk Forum. It is driven by a bottom-up
borehole rated at 2,5 times of the site’s daily need approach: each site does its own enterprise risk
fed into 80kl of pretreatment storage and then into assessment quarterly report through a standardized,
120kl of post-treatment site buffer storage. consistent, predominantly qualitative methodology.
Phase 1 includes a desalination and treatment plant Risks are aggregated and captured as group-level
that can supply 70kl of water a day out of 100kl top risks, then communicated through the Group
consumption estimate. Risk Sustainability Manager to the Group Executive
Risk Forum. While the strategy and budget remain
Management of Stakeholder- and Social Risks at the site level, if a water risk escalates into a group
• Meetings and discussions were held with Cape Town risk (such as disruption of supply became a top 10
city officials about the impact that reduced pressure group risk), the Group Executive Risk Forum will
was having on the site and they immediately monitor that appropriate risk mitigations are being
responded by increasing and maintaining normal implemented at the site.
pressure on water loops to the site. • A baseline water risk assessment is in the process
• Company reputation: sustainable strategies were of being completed for the manufacturing sites
identified as key to demonstrate positive corporate across the whole Group (including domestic and
responsibility, which received exposure in both local international sites), using the WWF Water Risk
and global media. Filter in order to inform the development of a water
strategy for the Group.
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