Glass half full: How water-intensive companies can mitigate risk

The U.N. forecasts that over the next seven years, the number of people facing water scarcity will double to some 1.8 billion. If accurate, this will have negative security and political implications for water-intensive industries. Those most at risk are water-intensive producers of non-food crops such as tobacco and cotton, carbonated beverage plants, sporting and leisure parks, mining, and industries such as steel and paper production.

This report uses four recent case studies of local unrest targeting major companies to illustrate the corporate impact of water risks.

Case Study 1: Coca Cola Inc, Cape Town, South Africa

Cape Town is South Africa’s main tourism revenue earner and major agricultural and manufacturing hub. At the beginning of 2018, the city’s water reserves reached their lowest level in 133 years. Several other major South African cities were also facing water shortages.

As Allan & Associates highlighted in February, the water shortages pitted the poor against the wealthy, a distinction that in South Africa still cleaves closely to racial lines. Black Africans concerned by the potential lack of drinking water accused affluent Capetonians, many of them white, of wasting water to service golf courses and car washes.

A local bottler, Coca-Cola Peninsula Beverages (CCPB) – the rights-holder to distribute The Coca-Cola Company’s products in Western Cape and Northern Cape provinces – felt the pressure when a coalition of 70 civil-society organisations (CSOs) called on the company to halve its production over three months or distribute water for free to the worst-affected areas in Western Cape. CCPB, like many other manufacturing industries, is highly dependent on water for its operations; the bottling unit consumes about 530 million litres annually from the city’s water reserves. That, the CSOs argued, is the same as the city’s four million inhabitants’ daily consumption. The company subsequently pledged to provide access to the Newlands water spring and to distribute bottled water in the event of ‘day zero’ – the date when Cape Town’s water reserves would fall below 13.5 per cent and the authorities would enact crisis responses.

‘Day zero’ has been pushed back for at least another year, but the incident shows that water security has become a hot reputational issue for foreign investors, not only in South Africa but across Sub-Saharan Africa. CCPB’s response to the threat of protests or worse against its staff and premises was astute and proportionate, and offered a model for how beverage companies facing such criticism should respond.

situations like these will become more common in the five-year outlook

Allan & Associates forecasts that situations like these will become more common in the five-year outlook. Access to secure and stable supplies of water is likely to climb on the political agenda of many governments in Sub-Saharan Africa, suggesting that the public will demand more corporate responsibility from commercial entities. Failure to do so could expose the company’s staff to heightened security risks as activists are likely to engage in more disruptive tactics.

Case Study 2: Constellation, Baja California, Mexico

In January 2018, there was a resurgence of protests against U.S. beverage manufacturer Constellation Brands over its plan to construct a brewery in the drought-hit town of Mexicali in the north-western state of Baja California. Peaceful rallies have taken place since the company announced the USD1.5 billion-deal in March 2016.

The most significant civil unrest to date occurred on 16 January when Mexicali Resiste, a CSO comprising local farmers, residents and activists, attempted to disrupt the building of a new water pipeline at the Ejido El Choropo ranch. Police arrested six protesters after they threw rocks at security forces who assaulted them with batons, leading to at least seven injuries. Activists also called for a boycott of the company’s products, including Corona Extra, Modelo Especial and Pacífico beers.

Constellation Brands has said that it will invest USD500 million in land, transport and water pipeline infrastructure and create 750 full-time jobs at the plant when it begins production in 2019. However, members of Mexicali Resiste say this will not be enough to outweigh the environmental cost as the project will ‘dry up this state and city’. They estimate that the brewery will consume 20 million litres of drinking water annually, volumes which could otherwise supply 750,000 people and sustain the region’s agricultural sector, the largest contributor to the local economy. According to the Mexican government, more than 300,000 residents in Baja California do not have regular access to potable water, and Mexicali is one of the cities most afflicted by the water scarcity.

Furthermore, Mexicali Resiste says that the project is mired in several conflicts of interest, arguing that the legal representative for Constellation Brands, Sergio Eduardo Montes Montoya, currently works in the mayor’s office. Moreover, the senator and former mayor of Mexicali, Víctor Hermosillo y Celada, owns the company that is responsible for the construction of the Mexicali plant. Constellation Brands has denied hiring government officials or authorities.

The dispute in Mexicali reflects the range of problems foreign investors could face in other Latin American countries with water shortages

The dispute in Mexicali reflects the range of problems foreign investors could face in other Latin American countries with water shortages, notably Bolivia, Ecuador and Peru. The lack of prior engagement with the local communities has deepened mistrust and fuelled a sense of inequality between Constellation Brands and the residents. This in turn has led to protracted campaigning by grassroots organisations, which could be further amplified if global media increases its focus on these unaddressed grievances. They pose reputational and legal risks even should the allegations of corrupt practices be found untrue.

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