On 31st January 2022, the Climate Disclosure Standards Board (CDSB) was consolidated into the IFRS Foundation to support the work of the newly established International Sustainability Standards Board (ISSB). While this site and its resources remain relevant for preparers looking to improve sustainability disclosure until such time as the ISSB issues its IFRS Sustainability Disclosure Standards on such topics, no further work or guidance will be produced or published by CDSB. For further information please visit the IFRS website.

World Water Week recap: Can better disclosure solve the water crisis?

Following the release of the new CDSB Water Guidance, we caught up with investors, companies, and NGOs to discuss water-related financial disclosure at the World Water Week.

Late August might be a popular holiday season, but the attendees and speakers of the World Water Week are online amidst increasingly alarming news surrounding a precious and vital resource - water. This year’s conference plays out against a backdrop of droughts and flooding of historic proportion.

It is estimated that global water demand increased by 600% over the past century and it is projected to exceed the supply by 40% in the next decade.

“While the term ‘water scarcity’ is often heard, what we’re really talking about or experiencing is increased water competition. It’s important to remember that water is a finite resource. A finite resource for which there is no replacement,” says Cate Lamb, Global Director of Water Security at CDP in a recent interview for the TCFD Knowledge Hub e-learning course.

Entire industries – from agriculture and beverages to textiles and automotive manufacturing – directly depend on freshwater. Water is clearly a material issue for them. As such, it is essential that water-related financial information is properly accounted for and disclosed by companies in their mainstream financial filings.

For Diageo, a beverage company, water is the number one climate risk. “We use water ‘grain to glass’. It is an absolutely fundamental part of our product,” says Michael Alexander, Global Head of Environment at Diageo.

Around a third of Diageo’s global volume is produced in water-stressed sites. To disclose their water and climate risks, Diageo adopted the Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) for one consolidated approach. Looking at both the impact of the company on the environment and vice versa, Diageo then thinks how that translates into financial statements and how they report that externally.

“Disclosure is very important to us to make sure that water risks are integrated within the whole business system at Diageo, if you like, rather than seen as solely a sustainability or ESG reporting requirement.”

The guidance, released by CDSB, calls for the inclusion and meaningful integration of material water-related information in corporate annual reports. This includes company’s disclosure of Governance, Risks and Opportunities, Policies and Targets, Performance, and Outlook.

When it comes to outlook, it provides stakeholders with a summary of long-term climate- and water-related effects on company’s performance and position. Originally, companies relied on historic data to make assumptions on future performance. However, this type of thinking is not decision-useful in the face of climate change and evolving water challenges.

Scenario analysis is a useful tool for producing forward-looking statements. The WWF Water Risk Filter can help businesses to integrate water into their scenario analyses.

Using the Water Risk Filter, Rafael Camargo, Technical Project Manager at WWF, illustrates worst case scenarios in terms of droughts, flooding, and water quality that, if no action is taken, may materialise in the next decade.

“Water risks can manifest in many different ways, and floods is another one with potential for great damage,” Rafael says, showing a map with an indication of $61.3 billion in financial losses caused by flooding in the U.S., Germany, India, China, and Japan in less than 24 months. “With a warmer climate, devastating floods are expected to become more frequent in vast parts of the globe… . Companies should consider that, although floods may not reach their facilities, such events may inundate their suppliers, disrupt their distribution, or can take their consumers’ houses, and that will definitely impact their business too.”

Like Diageo, AstraZeneca has also adopted the TCFD Recommendations, which are now mandated for premium listed companies in the UK, and conducted scenario analysis.

“The key arguments for us [were] to find ways to future-proof the business and also to meet up with further questions from investors on what climate change means to us,” says Fredrik Hellman, Climate Resilience Lead at AstraZeneca.

Working with WWF, AstraZeneca moved towards setting contextual water targets, which includes not just water consumption, but also access to water, the quality of water resources, the company’s activities and collective actions. Fredrik Hellman provided an example of collaboration with other stakeholders in one of their most environmentally vulnerable sites in Chennai, India.

Chennai has experienced heavy flooding in 2015, displacing over 1,8 million people, followed by the worst drought in decades in 2019, drying up nearly all water reservoirs and affecting 10 million people. “We worked with local communities and partnered with local organisations to find nature-based solutions, such as restoration of several ponds and lakes.” Fredrik presented an example of a restored pond in place of a former landfill. Such work helps prevent flooding during monsoons by buffering flash floods, regulates temperature locally and restores biodiversity.

“Things like that will probably be more common across more sites in AstraZeneca’s future,” says Hellman, adding that the company has a $1 billion investment to support net zero targets and invest in nature.

Besides physical risks, there are also the so-called transition risks, which can arise from changing regulation and the move to a low-carbon economy.

Ron Gruijters, Policy Advisor at Eumedion, – a platform of institutional investors, promoting good governance and sustainability in The Netherlands, highlights the fact that the timing of the publication of the Water Guidance could not have been better for companies, but also for standards setters and policymakers in Europe.

The European Commission is working on a comprehensive approach for sustainable finance that includes the development of a taxonomy to classify economic activities that impact on the environment, as well as disclosure requirements for institutional investors, and a proposal for mandatory sustainability reporting standards (Corporate Sustainability Reporting Directive).

“Interestingly,” points out Ron Gruijters, “specifically in relation to water many of these requirements and upcoming tools are still under development.”

“The guidance published today,” Gruijters says, “can have a major influence on speed and quality of improving water-related disclosure requirements.”

So why is sustainability disclosure important to investors?

Francesco Curto, Global Head of Research at DWS Group, that has recently published “A transformational framework for water risk”, says that he sees a rise in sustainable investments.

“We are moving away from a world where investors were just interested in maximisation of financial return,” Curto says, “into a world where, basically, they want to understand not only how you achieve that financial return, and what is the risk for that financial return, to also what is the impact I’m having as a citizen or a person on the world when I am providing capital to that company.”

Francesco Curto stressed the importance for investors to understand both the impact of climate change and water on the company, as well as the impact that the company has on the environment.

“Water in an input factor in the manufacturing process, but also an output factor. It’s a waste. There are a lot of elements that go back into the environment as a result of this. And that type of treatment of waste is key because it especially affects biodiversity.”

Addressing the often confusing and fragmented disclosure landscape, Curto says that he cannot be expected to “play God” in decision making, and that proper independent organisations must take charge of defining disclosure standards that need to be informed by science.

“If you look at the Dasgupta review, it’s very clear that our economic model in the last 50 years has brought massive improvements in terms of life expectancy, has brought massive improvements in terms of GDP, but also has brought a 50% reduction in the stock of natural capital. So, it’s very clear that our economic model is not sustainable.”

Taking to the virtual stage, Francesca Recanati, PhD, the lead author of the CDSB Water Guidance, summarised the learnings of the discussion, highlighting the current dynamic and evolving reporting environment; increasing requests of corporate water disclosures from regulators and investors due to the materiality of water-related risks; and importance of water stewardship in the business strategy.

“All of these aspects underline the importance of water, water stewardship and of comprehensive and effective water disclosures,” she said.

The CDSB Water Guidance was written with consideration of existing global reporting standards, including the TCFD, as well as the evolving reporting landscape. It is designed to support companies in reporting water-related information with the same rigour as financial information. Ultimately this enables investors to access the information they need to drive capital towards a resilient and water secure economy. Essential to this, is the topic of materiality.

“We hear a lot of debate around whether companies should disclose only the financial materiality or the double materiality. From our perspective, double materiality and financial materiality go hand in hand. One hand feeds the other,” says Ravi Abeywardana, Technical Director at CDSB.

The Water Guidance builds on the concept of dynamic materiality, introduced in 2020 in a shared vision for sustainability reporting. This joint vision addressed the dynamic nature of materiality and its focus on enterprise value creation, serving as the basis for the International Sustainability Standards Board under the leadership of the IFRS Foundation.

“Dynamic materiality means that the concerns of one stakeholder group may quickly become material for financial decision-makers,” adds Ravi Abeywardana.

For more information on how dynamic materiality applies to water, for reporting suggestions and guidance, disclosure checklist, tools, resources and examples of good practice from corporate mainstream reports, we encourage you to download the CDSB Framework Application guidance for water-related disclosures.

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