Designing Innovative Corporate Water Risk Management Strategies from an Ecosystem Services Perspective

Abstract

In January of 2012, we teamed up with representatives from the sustainability department at The Dow Chemical Company with the goal of creating a viable, creative solution that would advance The Company’s efforts to address the risk associated with freshwater scarcity. With uncertainty surrounding the impacts of climate change and other environmental threats, it is becoming increasingly important for corporations to fully understand and incorporate the value of the benefits nature provides into strategic decisions. The focal ecosystem service of our project was freshwater provisioning. Freshwater is critical to life and a key ingredient to many economic activities, such as power generation, agriculture and industrial processes. Water scarcity is of particular interest to Dow, given that 20 percent of The Company’s global production comes from the Freeport, Texas facility on the water-stressed Brazos River.1 Water is used as both an input to production and a coolant for electricity generation. The growing uncertainty around the future supply of water could threaten continuity of operations at Freeport and other increasingly water-stressed sites.2 After surveying the common responses to water scarcity, the team broke down these various solutions into three categories: technology-based, policy-based, or management-based. Management-based solutions, defined here as responses developed within the organization that involve changes to internal policies and processes, were determined to hold the most promise for creating a robust, organization-wide solution for potential freshwater scarcity. We conducted a broad search to identify creative management responses by a variety of institutions to natural resource challenges and selected ten types of responses, referred to as “analogues,” exemplified through one or more specific case studies. We then considered how each analogue could be adapted to the unique characteristics of water and the context of the corporate setting. Our five-step methodology including the following: 1) develop criteria for evaluating the analogue cases; 2) identify and evaluate the cases against those criteria; 3) deconstruct each case to determine the mechanisms driving effective resource management decisions; 4) adapt those mechanisms to the freshwater challenge; and 5) as necessary, adapt those mechanisms to the corporate context. We then evaluated the purpose, strengths and weaknesses of each analogue and identified common enabling conditions, benefits and limitations. After considering commonalities, we compared and mapped out unique benefits and limitations for application to freshwater scarcity in the corporate context. 5 The analysis was used to provide a strategic recommendation for addressing water scarcity at The Dow Chemical Company. Building from the analogue benefits and limitations outlined above, we were able to identify a way in which multiple analogues could be used in a complementary manner to achieve Dow’s goals within its particular organizational context. The initial proposal incorporated mechanisms from carbon taxing, infrastructure portfolio standard, and revolving fund analogues. These analogues provided mechanisms to generate and allocate capital by placing a tax on water use, with fee revenue dedicated to a revolving fund. This revolving fund financed water projects prioritized through the portfolio standard. Through further iterations and discussions with environmental and finance staff at Dow, we further refined our proposal to combine elements from two analogues– infrastructure portfolio standards and revolving funds – with a balanced scorecard approach to performance evaluation. In this case, capital is allocated internally to a fund that is used to finance projects prioritized by the portfolio standard. Projects are evaluated and reviewed for continued funding based on a scorecard that considers both financial return and other beneficial outcomes. This recommended strategy is sensitive to the financial realities and processes within Dow and is flexible to allow for the varied operational and policy contexts in which Dow faces freshwater scarcity challenges around the globe. Further, it addresses the desire of The Company to frame and address sustainability holistically, while still using freshwater scarcity as a focal challenge within the new effort. We believe that the analogues analyzed in this report can be combined in multiple ways to overcome a broad range of sustainability challenges. The analysis is designed to illuminate the potential applications of the mechanisms underlying each analogue. We hope that it inspires readers to think more broadly and creatively about effective options for responding to natural resource challenges.