Summary: engagement on water risks in agricultural supply chains (phase 2)

Introduction

Since 2015, the PRI has coordinated a collaborative engagement on water risks in agricultural supply chains. The engagement focused on these supply chains because agriculture is a major user of water, responsible for the withdrawal of 70% of the world’s freshwater.^[1] In addition, it is difficult to assess which companies in investor portfolios rely on water-intensive agricultural commodities which are grown in high water-risk areas, and are therefore exposed to risk.

PRI investor signatories therefore engaged companies with significant dependencies on agriculture supply chains in the following sectors: food, beverages, agricultural products, apparel and retail (supermarkets). The engagement took place over two phases:

- Phase 1 (2015-2017), involving 32 companies;^[2]

- Phase 2 (2018-2019), involving the 17 laggard companies from Phase 1.

In the second phase, 37 investors representing US$5.9trn in assets under management joined the engagement. Companies were engaged with and scored on their water awareness, internal and supply chain action, collective action and how they influence water governance in the areas in which they operate and source from. They were expected to also disclose on the progress made in addressing water risks faced in their agricultural supply chains.

The following key findings are from Phase 2 of the engagement.

Cross-cutting findings

Limited progress was made by companies overall

Companies were benchmarked by an external consultant, Chronos Sustainability, using disclosure measures including company sustainability reports, websites and CDP data. Eleven of the 17 companies improved disclosure, but these increases were incremental, signalling limited improvement. Four companies disclosed even less by the end of the engagement period. The company which progressed the most, and which was also the leading company in the group, was still only awarded 66% of the total available points.

With this phase of engagement focusing on laggard companies and only lasting 18 months, progress can be expected to be slow. Water could be a low priority for laggard companies and a longer engagement period with multiple interactions may be required before companies substantively change their practices and processes.

The apparel and luxury goods sectors made most progress, while retailers continue to lag

Three out of the top four companies, which had the highest increases in disclosure scores, were apparel and luxury goods companies. Seven companies were identified as still being in the early stages of managing water risks in agricultural supply chains, including all the retailers in the target list. The retailers have consistently scored poorly throughout both phases of engagement.

Findings by engagement area

Water awareness

All the companies report on water risks, but systematic identification of risk and action in the supply chain is not reported

Disclosure of managing water risk in direct operations is still a major focus for three companies. While the remaining 14 companies acknowledge potential water risks and impacts in their supply chain, the quality of the narrative makes it difficult for investors to comprehensively assess how these companies are systematically managing their overall water risks from a financially material perspective. There is no correlation between companies mapping their supply chain locations and then conducting a water risk assessment to understand where they are exposed.

For investors, it can be unclear what the key commodities are for a company, the extent that these specific commodities are exposed to water risks, and the actions that the company takes to manage those water risks. A lack of disclosure further limits the ability of investors to understand the degree to which negative impacts on water availability or quality created by the company have cascading effects on other portfolio companies, the wider economy or on other interests of beneficiaries.

Internal and supply chain action

Traceability remains a challenge

All 17 companies are beginning to map the locations of tier one suppliers for key commodities. However, only eight companies disclosed evidence of extending this mapping to tier two suppliers. Traceability was also highlighted as a challenge at the end of Phase 1 of the engagement, and it continues to be a barrier for investors to assess company exposure.

Certification does not guarantee good water management

Seven companies reported implementing some form of certification scheme for key commodities; another six companies reported that they are planning to source certified commodities. However, in some cases, companies are relying on certification schemes to ensure that good water management practices are implemented at the source of commodity production. Different schemes recognise and implement sound water management principles and practices to varying degrees.^[3] Companies and investors should not rely on certification to guarantee good water management practice.

Collective action and influence

Collective action to address shared challenges and identify solutions at the basin level is low

Only two companies showed any evidence of working collectively with other stakeholders at the basin level. Water is a shared resource and the risks and impacts posed affect all stakeholders in the basin. Where supply chains are located in high water-risk basins, companies should seek to address water challenges and to achieve positive long-term outcomes through collaboration. Such outcomes benefit universal and long-term investors.

Influencing the governance of water

Attention to the rules and institutions, both formal and informal, which determine how water is managed and distributed is lacking

No company showed signs of understanding the regulatory environments and policies of water management institutions for high water-risk areas where key commodities were sourced.

Recommendations for future engagement

To encourage improved performance by companies, investors should:

1. Continue to engage on water risks in agricultural supply chains through a climate lens.
Water risk in agricultural supply chains remains a significant issue, particularly as physical climate risks become more prominent. There is an opportunity for investors to integrate the topic of water risk into existing climate engagements (e.g. the Climate Action 100+). Investors can also use the PRI’s Collaboration Platform to discuss and share engagement learnings and issues.

2.Implement escalation strategies for poor performing companies
Although a topic such as water risk may be seen as a low priority by some companies and require a longer period of engagement, investors should be prepared to escalate when a company continues to be consistently lagging or non-responsive. Escalation could include contacting the board, issuing a public statement, using voting, filing a resolution, seeking legal remedies, and partially or fully divesting.^[4]

3. Work with companies to develop their reporting narrative.
Disclosures need to show how a company is systematically addressing water risk in its agricultural supply chains – from identifying key commodities, traceability to the source location, exposure of those commodities and locations to water risk and identifying opportunities for the commodities along the supply chain and how these are being addressed by the company.

4.Encourage companies to work collectively at the basin level to address shared challenges for positive outcomes.
While companies need to have corporate strategies and processes in place, local solutions are required to address water quantity and quality challenges which create risks and impacts for all water users in the basin.

Next steps

This is the final phase of the PRI-coordinated engagement on water risks in agricultural supply chains. In future, the PRI will be exploring water within related themes such deforestation, biodiversity and physical climate risk.