Water conservation and stewardship initiatives are helping companies from manufacturing to consumer goods to gain competitive advantages and manage future risks.
As the challenges facing our environment become more serious and far-reaching, public companies are stepping up in their conservation efforts and partnering with governmental and other organizations to help develop solutions. The introduction of the United Nations Sustainable Development Goals (SDGs) in 2015 formalized these broad challenges and offer a practical framework to complement and support the environmental, social and governance (ESG) considerations we analyze in our fundamental research.
Many of the 17 SDGs address areas where progress can improve the sustainability of the planet, including climate change and conservation. We believe integrating business practices with the management of natural resources can have positive impacts not only on the environment but also the financial results of companies that adopt a sustainable agenda.
One of our current engagement goals is to spread best practices in environmental conservation across their larger global operation and supply chain. To that end, ClearBridge has maintained an ESG dialogue for over nine years with SanDisk, a prominent maker of flash memory and information storage devices.
What started out as a discussion on sustainability reporting led to the company measuring and reporting carbon emissions data and setting five-year targets to reduce emissions by 30%. By upgrading the energy and heat recovery systems across its manufacturing facilities and installing LED lighting, the company has significantly reduced its electricity and natural gas usage and lowered its carbon footprint by 900 tons per year.
Through our engagement, the company also recognized the need to address water consumption and eventually achieved 100% water recycling in its Shanghai manufacturing plant, the first facility of its kind to reach such a milestone. The company later applied the same recycling technology to its Penang facility and is in the process of converting other facilities as well. In addition to the environmental impact of saving over 200,000 tons of water per year, this decision has resulted in over $2 million in water utility cost savings, a direct impact to the bottom line.
Consumer companies are also increasingly prioritizing water stewardship. Not only does it strengthen relationships with the local communities where their products are manufactured, but it also has a clear positive impact to their bottom lines.
The Coca-Cola Company, for example, has been replenishing over 100% of the water used in its finished beverages back to communities, a goal first realized in 2015. For water replenishment projects, Coca-Cola partners with several non-governmental organizations (NGOs) to identify water-vulnerable areas and invests in various watershed conservation/restoration projects in those areas. The company and its partner NGOs estimate that projects implemented through 2016 provided a replenish benefit of 221 billion liters per year (133% of production). Besides finished product water replenishment, the company has reduced the amount of water used in manufacturing (wastewater) by more than a quarter (Exhibit 1) and has high standards for wastewater treatment before returning the water back to local communities or municipal water systems. Given that Coke sells approximately 166 billion liters of beverages per year, this is equivalent to an annual reduction of 123 billion liters of wastewater since 2004. The savings from both lower water usage and less wastewater that needs treatment are significant.
Exhibit 1: Using Water More Efficiently
Source: The Coca-Cola Company
Another example from a very different industry is Pioneer Natural Resources, one of the largest exploration & production companies in the Permian Basin of Texas. Pioneer has incorporated environmental stewardship as a core part of their operational procedures and core set of values. This has engendered strong relationships in the Midland, Texas community where it continually must earn its license to operate, in part by securing a $110 million agreement with the city of Midland to use reclaimed wastewater for field operations. Pioneer’s agreement reduces reliance on freshwater sources and may be a competitive benefit as Permian Basin development continues, straining water availability. Long term, the agreement reduces Pioneer’s overall cost of procuring water and secures supply under a 20 to 28-year contract with the city.
Water conservation efforts by public companies across sectors have not only lessened the environmental impact of operations but also provided cost and risk benefits that we believe can benefit long-term performance.