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Challenging Business Notions Of Regulatory Water Risk: Proposing An Alternative Good Governance Paradigm Lalanath De Silva, Tien Shiao And Jesse Worker

Congress: 2015
Author(s): Lalanath de Silva, Tien Shiao, Jesse Worker
World Resources Institute1

Keyword(s): Sub-theme 7: Global challenges for water governance,
AbstractIntroduction: There is growing evidence that trends in water challenges have had serious financial impacts on various business sectors. A 2011 survey sent to Global 500 companies found that 38 percent of 190 respondents had suffered water-related business impacts with associated financial costs as high as US$200 million (per company)(Carbon Disclosure Project). The results published in 2013 stated that "The majority of responding companies have identified water as a substantial risk to their business. Fifty nine percent (113) of respondents reported exposure to water-related risk and over one third of respondents had already suffered recent water-related business impacts, with associated financial costs as high as US$200 million." (pp.6) An unexpected increase in water tariffs or decrease in permit regulated water withdrawals from a river could load significant costs on to an enterprise, sometimes rendering it economically nonviable.

Methods: In this context, this paper focuses on the prevailing paradigm used by companies in assessing water "regulatory risk", critiques that paradigm and proposes an alternative paradigm of water "governance risk" that would be more beneficial to companies as well as serve the interests of good governance. In doing so, the paper will also make use of an interview survey with representatives from multinational water-intensive companies and other subject matter experts.

Results and Discussion: Prevailing definitions of water-related risks can be grouped into physical, reputational and regulatory risk. The United Nations CEO Water Mandate has defined regulatory risk as one that "relates to the imposition of restrictions on water use by government and the capacity of government to manage water effectively and sustainably. This may include the pricing of water supply and waste discharge, licenses to operate, water rights, quality standards, infrastructure development, water allocation, etc." (emphasis added) The Mandate further states that "(r)egulatory risk stems from changing, ineffective, poorly implemented, and inconsistent water policy and regulations." A water "footprinting" website states "Regulatory risk: governmental interference and regulation in the area of water use will undoubtedly increase."(Water Footprint) Pretorius and Turton define water regulatory risk as "the risk that regulatory intervention will impose costs on an organization." (Pretorius and Turton, 2012)

These definitions place emphasis on the costs to businesses arising from regulatory interventions on water use and on changes, ineffectiveness, poor implementation and inconsistency of regulations. In short, the current paradigm of water regulatory risk frames the risk to businesses as risks associated with water regulations. However, the above definitions also highlight the inadequacy of the regulatory risk paradigm. As the broader definitions suggest, risk is a function not only of regulatory substance and timing, but also of how water use and management decisions are made, with whose input and what information, as well as the capacity and willingness of actors to implement these decisions.

Partly because water regulatory risks are so framed, businesses tend to focus on the content and implementation of regulations (on the "what") rather than on the processes associated with regulation (the "how"). For example, business focuses on regulatory risk arising from unpredictable or incoherent policy and legislation changes precipitated by a water crisis, bureaucratic incompetence, or corruption. The long term water risks that companies most care about include maintaining business continuity and ensuring return on investment. The paper critiques the current obsession with regulatory risk that has led to symptomatic responses by business, neglecting the opportunity to address broader water governance causes of business risks. These broader causes stem from, among others, systemic rule of law failures as well as from the lack of transparency, citizen engagement and dispute resolution mechanisms in the water governance system.

In order to further understand the different types of regulatory risks companies are facing and the impact that poor water governance has on the private sector, the World Resources Institute conducted a series of telephone interviews with sustainability directors (or individuals in similar positions) representing 20 companies in water-intensive industries. The interviews were conducted over the course of 5 months in the spring and summer of 2013. The survey identified several "regulatory risks" when in fact many of them were caused by weak governance.

Conclusion: The paper proposes an alternative paradigm of water governance risks and demonstrates how such a framing could re-direct valuable business resources and efforts to addressing systemic good governance failures. The alternative paradigm will also allow businesses to make new alliances with civil society instead of being on opposite sides. The paper seeks to demonstrate, through case examples and interviews with water related companies, that a re-framing of water related business risks as "water governance risks" will lead to long term mitigation of business risks and improvements in water governance. 1. Carbon Disclosure Project, "CDP Water Disclosure Global Report 2011", https://www.cdproject.net/CDPResults/CDP-Water-Disclosure-Global-Report-2011.pdf. See also https://www.cdp.net/CDPResults/CDP-Global-Water-Report-2013.pdf

2. Pretorius L and Turton A, (2012) Water Accounting and Conflict Mitigation in Jayne M. Godfrey and Keryn Chalmers (eds), Water Accounting: International Approaches to Policy and Decision-making, Edward Elgar Publishing, 2012, 221 at 227. They further state "Corporations require water use licenses and as the water resource becomes more stressed, government may regulate by imposing more stringent standards on those licenses or withholding licenses from entities that are no longer environmentally acceptable."

3. Water Footprint website: http://www.waterfootprint.org/?page=files/CorporateWaterFootprints

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