From the July-August 2010 issue of Treasury & Risk magazine

When the Well Runs Dry

One of the potentially devastating impacts of climate change is a shrinking supply of water. A growing world population and urbanization are placing greater demands on a smaller supply of water, just as droughts caused by rising greenhouse gas levels are increasing. In fact, by 2030 water supplies will satisfy only 60% of demand globally and less than 50% in many developing regions, where the water supply is already under stress, according to a report from McKinsey & Co.

For many businesses--utilities and manufacturers that need water for cooling and cleaning, as well as food and beverage companies that depend on farmers for supplies--water scarcity is a particular threat. It poses risks for everything from lost revenues and a hit to their reputation to regulatory action and protests by local communities vying for access to the same dwindling resources.

Consider these cases:

-- In March, PepsiCo India was ordered to cut its groundwater use at a plant in Kerala by two-thirds, after protests
by farmers claiming the company's factory was using up most of the available water, leaving little for irrigating fields,
according to press reports.

-- In 2009, water shortages in California led to estimated losses of 21,000 jobs and more than $1 billion in revenues,
according to Ceres, a Boston-based nonprofit that works with businesses and investors on sustainability issues.

-- During a drought in the U.S. in 2007, the Tennessee Valley Authority was forced to cut hydropower generation
by about a third, costing it more than $300 million in lost power generation, according to McKinsey.

"The impact of water shortages on business is increasing in frequency and severity," says Brooke Barton, senior manager of water programs at Ceres. "And it's only going to get worse."

A growing number of companies are taking steps to address the potential crisis. They're using technological advances to reduce their water use, creating innovative water-management systems and working with local populations to teach them new farming techniques. "The water supply is a finite resource," says Bob Lotts, water resource manager for Arizona Public Service, a Phoenix-based utility. "So we have to learn how to be stewards of our environment."

In most situations, the key is to find technologies and techniques that help businesses do more with less. PepsiCo, for example, saved 12 billion liters of water in 2009 by cleaning new Gatorade bottles with purified air and using a silicone spray, rather than water, to lubricate conveyor lines. In the U.K., it reduced water usage at its largest potato chip plant by 42% from 2001 to 2007 by capturing the moisture in potatoes and using it for most of its water needs. And over the past five years, Unilever cut its groundwater consumption globally by 50%, according to Ceres, with innovations such as harvesting rainwater at factories and using it for non-manufacturing processes and replenishing groundwater systems.

That's just one part of the puzzle, however. It's equally important to examine water needs in a comprehensive, coordinated manner, instead of allowing individual units to come up with their own solutions. Until recently, each of Arizona Public Service's nine power plants managed its own water needs. But about a year ago, Lotts realized that the company's patchwork quilt of water management strategies couldn't create the efficiencies needed to reduce overall use long term. And although the company had enough water for the moment, he knew it was only a matter of time before that changed. Says Lotts, "We had to manage our water resources in a holistic manner."

To that end, he launched an effort to create a companywide water management system. The initial step was to decide which plants to address first, looking at the sources of water for each operation. Plants using surface water from the Colorado River were less of a priority than those using water from other sources. Then the company studied alternatives to water-intensive wet cooling towers. It also started looking at the possibility of using more effluent--recycled waste--water.

In some cases, especially in developing countries, public protest about multinationals' use of water in resource-starved areas has pushed companies to help local farmers learn more efficient farming techniques. For example, over the past six years, there's been an increasing outcry in parts of water-starved India about PepsiCo India's reliance on water-guzzling manufacturing operations that use the lion's share of available water, leaving little for local farmers.

Recently the company launched several pilot projects in southern India to teach farmers a more efficient technique called direct seeding that allows them to produce the same amount of rice with less water. Instead of growing seedlings in a nursery, planting them and then flooding the fields, direct seeding lets farmers plant seeds directly in the ground, bypassing the nursery and saving as much as 30% of the water needed. According to the company, direct seeding on more than 6,500 acres saved 5.5 billion liters of water.

"In many cases, the largest water-related risk--and corresponding opportunity--does not lie within direct operations," Dan Bena, PepsiCo's director of sustainable development, said in an e-mail. "It lies within suppliers and in building your social license to operate in the community of which you are a part."

At the same time, it takes a lot of electricity to move or treat water--about 3% to 4% of all energy generated in the U.S. is used for that purpose, according to Ceres. With the right integrated approach, companies can end up cutting costs by reducing their water consumption. For example, IBM started a program about three years ago at its Burlington, Vt., semiconductor plant to analyze energy and water use. The result: a number of water-reducing measures that also cut down on electricity usage, such as reusing water for such processes as cleaning semiconductor chips.

IBM cut water purchases by almost 30%, saving about $3 million a year. More than half of those savings resulted from a reduction in energy costs. "If you use less water, you pump less water, and you cool less water," says Cameron Brooks, director of IBM's advanced water management team. "All those processes have a huge energy cost."

IBM has turned its Burlington experiment into the marketing centerpiece of an effort to sell information systems for more efficient water management. For example, it recently completed a portal for a consortium of shipping companies, fisheries and government agencies in Ireland that lets them share data about water conditions and other issues.

The bottom line: Water isn't just a problem. It's a potential business opportunity as well.


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