In the wake of rising global awareness of water risk and World Water Day on the 22nd March, Schroders’ ESG Analyst, Elly Irving explores the potential financial impacts of water stress on companies in the beverages sector:
Water risk is firmly on the agenda with the majority of companies across all sectors believing that water risks are likely to materialise within the next three years. A number of supply and demand side issues mean that water stress, which measures “the ratio of total water withdrawals in a catchment in a given year … to the total available water”, is becoming an increasingly material risk for companies. Demand side issues include a growing global population, economic development and increased agricultural water usage. In our view, understanding and managing water risk may be fundamental to a company.
The beverages sector is highly dependent on water. Particularly, the brewing sub-sector is vulnerable to changes in regulation and increasing water-related costs. As the awareness of water risk improves, the regulatory burden on companies will increase and push up costs for operating licences. Our analysis shows that this exposure is already driving up costs, with brewers reporting the biggest increase in their water-related capital spending. Moreover, evidence of brewers mitigating local water stress impacts is limited as brewers are failing to engage with local communities to provide access to water as other beverage companies do. In order to maintain a licence to operate these companies may face higher social costs. These factors may expose companies to greater pressure on margins in the medium term.
Out of eight of the brewing companies analysed, only one identified water as fundamental to its business model and listed it within their principal key risks in their annual report. Due to this, investors may be concerned by the lack of board oversight and failure to acknowledge this risk as fundamental to the business model.
Elly Irving, ESG Analyst, Schroders said: “Water stress is now recognised as a key issue by multiple stakeholders across sectors, from local communities to companies and regulators. In response to rising water costs, stricter regulation and pressure from local communities, companies should be focused on improving water efficiency from manufacturing and production in order to reduce operating and social costs.”