Bridge Over Troubled Waters: How Boards Can Manage the Risks of the Global Water Crisis

In brief: Climate change continues to be an area of focus for investors and stakeholders alike, and boards must consider what risks climate change poses to their companies. Water risks in particular are already impacting the corporate bottom line and the integrity of supply chains. This brief, written by Ceres and originally appearing in the 2020 Governance Outlook: Projections of Emerging Board Matters, delves into where boards should be working with their management teams to consider water risks within the sphere of environmental, social, and governance issues.

This resource can help your board to

• consider the material impact that water risks pose to the organization,

• work with management teams to address exposure to water risks, and

• integrate water risk into the overall oversight of corporate strategy. 

Most relevant audiences: Risk committee chairs, risk committee members, audit committee chairs, and audit committee members

Introduction

“Day Zero”—the crisis moment when a local water supply goes completely dry—is fast becoming part of business vernacular. The phrase, which got its start when Cape Town, South Africa, nearly went dry in 2018, is now spreading as other global markets face similar water crises.

For example, India—one of the biggest, fastest-growing economies in the world—is experiencing the worst water crisis in its history. The Indian city of Chennai is in the midst of an historic drought, leaving its population of 9 million without water security. According to the Indian government, 21 major cities will run out of groundwater by 2020, putting around 100 million people at dire public-health risk.

The human tolls also exact business costs. India is not only one of the largest consumer markets in the world, it is also a major technology and manufacturing center. Water embedded in the production of Indian exports uses almost four times the amount of water used by Indian households and industry, suggesting that water scarcity will be a serious risk to economic activity in the future.

On the other end of the spectrum, floods are also causing huge impacts. The 2010 floods in Pakistan destroyed the country’s cotton crop and led to a rise in commodity prices on cotton worldwide. Closer to home, between 1980 and 2013, the United States suffered more than $260 billion in flood-related damages. The 2019 flooding of the Mississippi river, which lasted 107 consecutive days, caused more than $2 billion in damages.

The focus on the board’s compensation committee has never been sharper. The components of compensation plans and the link between compensation and company performance are under intense scrutiny from shareholders, employees, policymakers, the media, and other stakeholders. The Report of the NACD Blue Ribbon Commission on the Compensation Committee revisits NACD’s 2003 Report of the NACD Blue Ribbon Commission on Executive Compensation to highlight the new environment in which compensation committees—and, more broadly, boards—are now operating. It recommends that the compensation committee and board work together to establish an executive compensation philosophy that supports the company in creating long-term, sustainable value.

The report includes ten specific recommendations for compensation committees to consider when evaluating their compensation philosophies. It also provides practical tools, such as sample compensation committee charters, a compensation committee assessment, and guidance on executive employment contracts.