Executive summary

Companies with direct operations and supply chains that are dependent on agriculture, the world’s largest user of water, are exposed to water risks. Those companies that appropriately mitigate these risks and demonstrate good water stewardship characteristics will create value for their shareholders. 

However, it is difficult to obtain an accurate and robust dataset on which companies are most exposed through their supply chains and are reliant on crops that are the most water-intensive and grown in high water risk basins. Many companies do not have full traceability of their own supply chains and water risk exposure is difficult to gauge for companies with multiple tiers and multiple raw materials to consider, as this level of granular data is not available. Data on how a site responds to water risk is also not readily available. Best practice involves first determining which commodities are most material to a company and then assessing water risk and water stewardship response using a geographically weighted average of production. Enhanced input data means that companies can generate better water risk assessments.

Investors expect companies to identify and disclose agricultural supply chain water risk; integrate water risk into governance oversight and business strategy; implement actions to mitigate and minimise the risks; engage with stakeholders; and monitor and publicly report on progress, including against time-sensitive goals and targets.

Taking the lessons learnt from a PRI-coordinated engagement which saw 84% of 32 companies benchmarked to improve their disclosure of managing water risks in agricultural supply chains in 2017, this guide outlines why and how investors engage on agricultural supply chain water risk. The engagement framework is structured around four categories:

• Foster water awareness - developing knowledge of impact and risk
• Promote internal and supply chain action
• Encourage collective action
• Influence governance of water

It provides indicators that investors can use to assess companies as well as tried and tested questions to encourage food, beverage and apparel companies to mitigate water risks in agricultural supply chains. Examples of good practice are also provided.

Three challenges that investors have encountered through engagement on the topic have been identified:

1. Making the internal business case for action
2. Supply chain traceability
3. Company’s sphere of control

Solutions for overcoming the challenges and having effective engagement are suggested. The complex and localised nature of water and the mix of qualitative and quantitative information available makes it difficult for investors to integrate water risk data into their company analyses. Some of the techniques that investors are using to integrate water data into listed equity analysis are outlined from page 27 and are illustrated with case studies.

Finally, to encourage further company improvement, the guide recommends future investor engagement in the following areas:

• focus intensive engagement on laggard companies to take their performance up to the level of their leading peers;
• encourage all companies to take collective action and a catchment-based approach; and
• continue to encourage all companies to improve disclosure on water risks in agricultural supply chains.