WATERPROOF INVESTMENTS Analysis of Water-Related Risks Within South African Companies Author and On-The-Ground Researcher: Kata Molnár
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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 certifed 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 fnancial 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 efects 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 diferent 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 identifed water crises as one of the top fve 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 specifc 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://sustainablefnance.nordea.com/ 4 Table of Contents Acknowledgments 3 Setting the Scene 11 Assessing Water Risks 1 Global Outlook 11 4 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 De fning Water Risks 15 Netcare 35 Abbreviations 6 2 Defnitions 16 Shoprite 38 How Do Companies Use Water? 16 Woolworths 41 Executive Summary 7 Business at Risk 17 Key Findings 9 Sectors at Risk 17 Conclusions 44 Messages 9 5 Findings 45 Companies 45 Day Zero in Context 19 General Observations 45 3 South Africa’s Water Resources Management 19 References 46 Managing the Drought 21 6 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: W ater Use by Type for the Two Main BOX 3: Risks Afecting 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 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. Eimpact the environment, but the environment What was happening in Cape Town cannot be treated also afects 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 afect 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 fnancial 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 fnancial 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 defned by deep racial and economic more and more that fnancial returns are driving green disparities, the Western and Eastern Cape provinces fnance 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 fnancial 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 fnancial returns and the health of billions.