21st Century paradigm for water management: Business, social, and political implications

I believe increasing water scarcity is on a collision course with economic development, energy and food needs.

Without adequate water supplies, the world will not be able to feed an ever increasing population, manufacture products or generate electricity (hydro, nuclear and fossil fuels). Unlike energy, water is unique; there is no alternative.

Increasing global population, urbanization, energy and food demands coupled with declining water quality in certain regions has resulted in increased competition for water in the public and private sectors. The facts and trends highlight this increasing “scarcity” of water are as follows (Water Scarcity. The Water-Food-Energy-Climate Nexus. World Economic Forum 2011):

• Currently, about 884 million people worldwide don’t have regular access to safe drinking water and about 2.5 billion people lack access to sanitation. This has significant economic, social and political implications (www.water.org).
• Water withdrawals are expected to increase by about 50 percent by 2025 in developing countries and 18 percent in developed countries (www.water.org). As a result, projections indicate that about 47 percent of the global population will face water shortages by 2030 (www.oecd.org)
• Increased competition for water is driven by (Water Scarcity. The Water-Food-Energy-Climate Nexus. World Economic Forum 2011):

Building communities to fight climate change

With new carbon tax legislation recently passed by the government and much of the country suffering from severe drought in the past 10 years, climate change is an increasingly significant topic in Australia. During the past year, Deloitte has had the privilege of working with a sustainability organisation based in Canberra to help them develop systems and strategies to deliver information about new sustainability technologies to their member network in support of fighting climate change. As this organisation had previously relied heavily on traditional methods of knowledge sharing, our work focused on the driving both technology and cultural change for them.

The core scope of our work was to develop from scratch an external digital presence, which included the design and build of a technical application, content, and social media strategies and extranet for their member community. A key goal of the engagement was to establish a platform and a set of knowledge sharing engagement rules for all of the organisations’ stakeholders, which included such diverse groups as state and national governments, energy and mining companies, universities and environmental bodies. Evolving their member group from being solely information consumers to actively engaged participants was also a key focus.

Deloitte joins GRI at the launch of Focal Point USA

On 31 January members of Deloitte’s* Sustainability Services team joined in the launch of Focal Point USA, the new U.S. office of the Global Reporting Initiative (GRI), at the New York Stock Exchange. Focal Point USA aims to boost the number of U.S. companies reporting on sustainability performance in a consistent manner, to improve the quality of those reports, and to increase U.S. organizations’ input into developing new guidelines for sustainability reporting.

It’s clear that U.S. companies are putting an increased emphasis on their approach to sustainability reporting as evidenced by the sold out crowd and representation from large companies, NGOs and academics from across the country. Our clients are interested in bringing their reporting on non-financial performance to the same level of maturity as financial reporting in order to provide their stakeholders with a more comprehensive view of a company’s overall performance, taking environmental and social performance into consideration. The establishment of the GRI Focal Point USA is a key step in driving more frequent, accurate and robust reporting on sustainability performance in the U.S. and will be critical to the eventual move towards integrated financial and non-financial reporting.

Several important themes emerged during the event that further emphasized the importance of integrating sustainability into broader corporate strategy. There was robust discussion on the theme of “sustainability makes business sense” and the need to connect sustainability metrics with both individual and corporate goals and objectives. Another major theme was the role of the CFO in sustainability management and reporting. This is clearly an important focus for Deloitte as we work with thousands of CFOs on their companies’ financial reporting, compliance requirements, and stakeholder expectations. 

As with reliable financial reporting, there are many possible benefits for a company that implements assurance processes and reporting on sustainability activities. In addition, through a reliable sustainability reporting and assurance process, management demonstrates its desire to deliver accurate and useful information to its various stakeholders. Therefore, it is important that companies’ reporting on their ESG efforts become more uniform and reliable. 

As the move towards integrated reporting further materializes, it will be critical for us to help CFOs understand the financially material impact of their organizations’ environmental and social performance, and how to report on that performance in a consistent and meaningful way—supported by a roadmap for further integration into corporate strategy and continuous improvement. 

We look forward to the challenge and the opportunity!

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Eric Hespenheide is the Global Audit and Enterprise Risk Services Leader for Deloitte’s Sustainability & Climate Change Services Group.

*As used in this article, “Deloitte” means Deloitte & Touche LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.

Music and leadership

I attended a most interesting WEF Summer Davos session lead by Concert Violinist Miha Pogačnik, an associate of the German Institute for the Development of Intercultural Relations through the Arts.  Pogačnik pointed out in his opening comments that business leaders these days used more and more terms which are connected with the emotional—right— side of the brain i.e. passion, inspiration, performance, creativity, etc. He explained this concept with a simple statement:

“Unless you put your heart into the things you do, you will get very sick.”

To me, leadership is indeed all about passion, and it is one of the strongest emotions of mankind. Great leaders are those who inspire great dreams by focusing on just a few basic values. 

Pogačnik took us on a journey that identified the similarities of the change management process lead by a successful leader to the composition of a classical music masterpiece. He acknowledged the following five steps as common to both processes:
- Stage 1 – The mind purification process whereby the mind is freed from all buzz, and becomes ready to concentrate on the big task ahead. This phase corresponds to focusing on the big picture versus being absorbed by operational routines.
- Stage 2 – The identification of the “brand” for the composition, which uncovers the basic themes, and which in turn will direct the journey.
- Stage 3 – The confrontation with change, which involves a stormy process of dissemination, discussion, initial rejection, and other chaotic situations.
- Stage 4 - The ‘refocus’ stage, where sanity and serenity return and where all attention is centered on the ultimate goals and basic values.
- Stage 5 - The final phase in which all opposites are brought together, and where “TRUST” is created.

I found the concept of comparing the business strategy setting and execution with classical music composition most intriguing. After all, several masterpieces have survived hundreds of years and many generations – just imagine if we were able to do that in the business world.

What were my reasons for attending this session?

First, I am always interested in listening to a new and different perspective. At Deloitte that’s what we try to deliver for our firms’ clients.

But, on a lighter note, although the meeting’s dress code is business casual, over 75 percent of all participants usually appear in full business suits, including ties. I happened to be tie-less that day.  And guess what?  About 75 percent of the participants in this session were tie-less as well. In addition, I had overheard a discussion at the bar the night prior between Pogačnik and another delegate, in which he said, “Life is about value added, not about numbers”.  After overhearing this statement, I think I subconsciously decided to leave my tie on the rack the next morning…

Below is an interesting quote from Pogačnik that I wanted to share:
 “If you focus on the money, the money will be gone quickly, but if you focus on the values, the money comes by itself”.

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Ludo De Keulenaer is DTTL Global Managing Partner, Brand.

Further insights on Summer Davos CEO roundtable

As the China Managing Partner of Business Development and Public Affairs, I found the Deloitte and Talents magazine breakfast roundtable extremely insightful.  The following are my strongest impressions from listening to the open sharing of experiences by business leaders of many of Tianjin's top enterprises.

Although there is common acknowledgement that regulatory risk is the biggest current and medium term challenge, different industries face different specific risks.  That is why it is so important that our national industry practices and our enterprise risk management advisory specialists continue to work closely together to assist clients.

As we have seen in recent times, even the most established businesses are exposed to many risks that they have not been able to anticipate nor have solutions for. Executives with whom I chatted during the Roundtable expressed concern about there being so many unknown risks.  I shared with them the approach that Deloitte advises which is to control what you can and have a structured approach to do that. The top enterprises of Tianjin attending the Roundtable have strong growth potential to become major national enterprises in the near future, and to realize this potential they must prepare to operate in increasingly complex markets within and beyond China. This is a major step and calls on them to develop capabilities and obtain experience that they may not currently have. 

Also, in chatting with the executives, I learned that even though we had open and intense sharing during the one hour Roundtable, there were many more experiences and questions they wanted to discuss had there been more time to do so. This being the case, we will be following up with a number of participants to see how we can provide further information or ideas in response to these. 

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Jennifer Xie is a Managing Partner of Business Development & Public Affairs for Deloitte China.Jennifer leads initiatives related to key government relationships business development, brand and communications. Jennifer is also an executive member of the Marketplace Council at Deloitte China.

Insights from Summer Davos: CEO roundtable on emerging growth opportunities, and new operational risks

On Monday 13 September, during the World Economic Forum Summer Davos in Tianjin, China, Deloitte China and an influential business magazine, Talents, cooperatively organized a CEO workshop focusing on sustainability and operational and regulatory risk.

Some thirty CEOs, largely from Chinese enterprises, representing large and medium, state-owned and private companies attended the workshop. It was moderated by Ken, Fion Song, President of Talents magazine.
 
Deloitte framed the discussion with the following four broad issues:

•   The new government-business relationship
  
•   The dynamics of globalization
  
•   Innovation and new business models
  
•   Closing the loop on value networks

Within this context, the discussion focused on operational and regulatory risk driven by the new role of government in business and the dynamics of globalization.  Nearly all CEOs at the workshoprelated these matters to their domestic market and the changing role of the Chinese government. Less was said about globalization and the challenges related to expanding abroad and working with foreign governments. This was a little surprising given the ongoing encouragement by the Government for Chinese enterprises to increase their foreign investment. Clearly, the local yet fast growing and intensely competitive market remains a priority.

Highlights of the discussion are summarized below:

•  State-owned enterprise executives highlighted that top executives and boards of directors still must accommodate both commercial and policy goals and expressed the need for completion soonof the long-standing program to separate business from regulation. 
  
•  Central planning has both a positive and negative impact on business. If an enterprise enjoys consumer support in the marketplace and government support in the regulatory sphere, its business can grow explosively.  However, even very innovative business initiatives by entrepreneurs in sectors like telecommunications can be frustrated by either uncertainty or resistance in regulation, and that can make regulatory risk the biggest struggle for the CEO.
  
•  Due to the fast moving dynamics of the Chinese economy, Chinese enterprises are inclined to diversify as a way of managing operational risk. Typically, a municipally-focused investment enterprise might bridge property development, finance, and infrastructure in order to limit the risk of excessive exposure to one sector.
  
•  For many industries in China, e.g. the pharmaceutical industry, their current fragmented and regional nature creates an operational risk. It generates structural problems that make scaling and competing difficult, underscoring the need for accelerated consolidation and structural reform in supply chains and transactions.
  
•  The dynamics of globalization both enable and require more complex value networks and interdependencies, offering greater revenue growth opportunities than ever before.   Along with this, however, come greater and more complex risks. For example, with more participants in the value network, operational spills may occur anywhere and their impact on brand owners and retailers is unavoidable, in particular where consumers come in contact with an industry's products and services.

Discussants also consistently stressed the difference between "uncertain factors" and "certain factors" in enterprise risk management, and the escalation of operational risks whenever the direction of government policy and investment itself is considered to be an uncertain factor.

What the discussion demonstrated was the complexity of issues impacting Chinese businesses and the related operational risks they present. Globalization and the interconnectivity of markets compound this. There is a lot for business to consider.

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Dr. Ken DeWoskin is Director of the Research and Insight Centre, Deloitte China, and serves as a senior advisor to Deloitte China. Dr. DeWoskin has been involved with China for over 46 years and has lived and worked extensively in both China and in Japan.

China's risk intelligent approach to growth

The keynote speech by Chinese Premier Wen Jiaobao at the Opening Plenary of the World Economic Forum's Summer Davos on 13 September gives business leaders much food for thought. Most broadly reassuring to businesses was the commitment to a long-term, comprehensive and mutually beneficial opening up of China, with specific references to creating an open and fair environment for foreign enterprises, including a high priority on intellectual property protection.

In consideration of China's economic robustness, the assertion by the premier that the nation's stimulus package is yielding positive results was more reassuring because it was accompanied by acknowledgment of the challenges facing China, such as the need for more scientific and technological innovation, resources and environmental management, and coordinated urban and rural development. Particularly noteworthy was the premier's reference to the increase in recent months in latent fiscal and financial risks, especially the debt risks of the financing platforms of local governments.

Looking ahead, Premier Wen firmly stated that China has a clear game plan to strengthen the financial system, including the regulation of financing platforms for key expenditure and economic drivers such as local government, and that implementation of such measures is already in progress. 

So what do I see as the take-away?

There has been much debate on whether the economy is over-heating and whether a slowdown is imminent.  From the premier's speech, we can be confident that China is still actively managing the economy and intends to control the stresses and strains on it. If the completion of one of the main hotels being used to accommodate WEF delegates is anything to go by, we can have even greater confidence. When China states its intentions, it does seem to find ways to accomplish them. 

Just two months ago, the Deloitte China team visited the hotel in hard hats and wondered at the extent of work that needed to be completed to get it ready for Summer Davos, and for the Deloitte CEO event during WEF. On Monday morning, Deloitte and Talents magazine, a well respected business magazine held a CEO Breakfast Roundtable in one of the newly finished function rooms. As we discussed the significant issue of the new operational risks associated with new growth opportunities, we couldn't help marveling at how the hotel had been completed in such a short period of time.  That is an example of the strength of determination of China.

Nevertheless, there is a convergence of Premier Wen's keynote and the CEO Roundtable discussion topic in that both recognized that new growth opportunities bring new operational risks. The message we shared with business leaders attending the roundtable was that they should always look ahead and, target their share of future market opportunities. At the same time, they should also always look for the latent risks. Some can be foreseen and some cannot in terms of their form and scale, not to mention the impact of globalization. For business growth, risks must be taken. For business sustainability, risks also need to be anticipated and managed. 

In the new era of growth for China and for businesses, the challenge and opportunity is in an appropriate risk intelligent approach – taking the right risks and minimizing the bad risks.

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Chris Lu is CEO of the Deloitte China member firm. His experience includes serving domestic and multinational corporations in areas such as managing local statutory audits, consolidating accounts for international clients, preparing accounts for companies seeking listings, conducting due diligence reviews and joint-venture negotiations.

A shrinking planet

I recently attended the “Sustaining a Shrinking Planet” session at the 2010 World Economic Forum Annual Meeting of the New Champions ("Summer Davos”) in Tianjin, China. The discussion focused on how to address the challenges of our planet’s dwindling natural resources, and a key takeaway was that panelists agreed that by far the greatest challenge is the impending water shortage in several parts of the world.

One significant reason for concern raised by discussants was the expected and dramatic increase in water consumption. This is being driven by several factors including a growing population, a shift in nutrition preferences from vegetarian to animal-based food sources, the production of which consumes comparatively huge quantities of water, as well as the trajectory of industrialization and urbanization in large parts of the developing world.

The discussion also turned to agriculture, with some citing the fact that agriculture today uses some 80% of all water consumption, and managing usage is therefore an urgent priority. One panelist made the compelling point that more should be done to grow crops in their natural habitats. This would avoid huge inefficiencies both in energy and water consumption in trying to grow crops in unnatural environments.

The discussants suggested that to facilitate this would require open and free trade and the abolition of existing agricultural subsidies. These were seen as interfering with market forces and resulting in production inefficiencies. There was also optimism expressed for consumers and pressure groups to soon embrace the progress provided by technological advances in the field of genetically modified crops.

Another panelist highlighted the need for integrated water management systems at the global, regional, and local level. The panelist stated inefficient production and distribution systems can account for 30 percent of leakage in distribution in most western cities, and up to 60 percent in some third world countries. Additionally, ineffective pricing structures and poor infrastructure will significantly impact these challenges.

Why did I attend this session? If something of this magnitude is impacting the world, it matters to Deloitte. It is important that Deloitte is continually looking forward on all issues which are relevant to future generations. The people of Deloitte member firms strive to be one step ahead and to do this we must anticipate the challenges and their impacts and contribute our best thinking to support workable solutions. As always, organizing efficient change requires the best talent, from a multitude of backgrounds and disciplines.

To me that’s what Deloitte is all about.

Some food for thought:

• Did you know that the production of 1 liter of bio- diesel requires 9.100 liters of water?
• Did you know that Iceland sells water to Saudi Arabia and that this is transported in old oil tankers refitted with rubber balloons for this purpose?

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Ludo De Keulenaer is  DTTL Global Managing Partner, Brand.

Open Innovation

Open Innovation – a concept that emerged early in the 2000s from work done by Henry Chesbrough of the Haas Business School at Berkeley – has considerable potential for generating new ways of thinking and acting in response to the sustainability challenges facing our world. The interdependency of innovation and sustainability was recently discussed among my fellow panelists and participants at an Open Innovation workshop during the World Economic Forum “New Champions" meeting in Tianjin, China.

The discussion focused on five open innovation tools, including such items such as knowledge pooling, incentivizing innovation, and crowd pooling. These were then applied to various sustainability challenges. In this blog I expand on this discussion and consider open innovation as a means of addressing the multi-faceted challenges facing business today, including sustainability.

A key feature of global business in the 21st century is the blurring of lines between companies, industries, and people.  This blurring is being driven by such forces as the Internet, the availability of massive, inexpensive computing power, the emergence of social media, and political and demographic changes. The good news is that these drivers also provide a solid foundation for open innovation.

Companies typically approach innovation as a process that will help them generate competitive advantage.  But many competitive processes are short term, inefficient, and have negative sustainability impacts when taken as a whole.  We often see duplication of products, overlapping or incomplete distribution networks, and wasteful or inefficient packaging.

Open, collaborative innovation has the potential to be transformational.  So how can we, as leaders, drive collaboration and innovation?

Many highly regarded businesses are seeking new methods to do this, and Deloitte is certainly one of them. We recently launched a global refresh of our strategy, "As One," which is quite consistent with the concept of open innovation, enabling 170,000 Deloitte professionals to operate ‘As One’, across 100 plus geographies. Put simply, it is about borderless behavior – working together across borders to bring the best of Deloitte to our clients.

We are utilizing the power of open innovation. One development has been a practical, social-media-influenced tool – D-Think – which we expect will serve as the day-in, day-out global enabler of “As One” thinking and behavior for our people.

Another development has been the Deloitte Global Innovation Network (GIN). Its mission is to capture innovation occurring in member firms and leverage it across the Deloitte network. The GIN comprises leaders from more than 30 member firms; members are ‘entrepreneurs in residence’ and change agents. It is closely aligned with Global Services’ mission of driving innovation, supporting the creation of “Virtual Marketplace Communities.”

At Deloitte we see open innovation as a powerful approach for directing ideas to organizations that are equipped to cultivate and commercialize them.  The power of open innovation can help drive change across our organization, our clients, and ultimately our world.

Are you taking practical steps to drive open innovation (whether you call it that or not) with your teams and in your client relationships?  Let us know...

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Jerry Leamon is DTTL’s Global Managing Partner for Services and also heads the Global Mergers & Acquisitions practice. He oversees Deloitte’s four core functions (Audit, Consulting, Financial Advisory, and Tax) and leads the development and promulgation of new multifunctional service platforms.

Integrating your financial and non-financial performance into a single report

Integrated reporting is no doubt the wave of the future for sustainability reporting. The recent Global Reporting Initiative (GRI) Conference on Sustainability & Transparency in Amsterdam, only further reiterated this point.

Also termed "One Report" (One Report: Integrated Reporting for a Sustainable Strategy by Robert G. Eccles and Michael P. Krzus), integrated reporting is defined in the simplest terms, as the combining of a company's financial and non-financial information (environmental and social) into a single report.

Although some skeptics see integrated reporting as just the creation of a page intensive and exhaustive document, proponents see it as the opportunity to tie environmental and social sustainability performance to financial performance. In addition, integrated reporting has the opportunity to yield the following benefits:

• Better exposure of a company's sustainability performance against goals, increasing the company’s reputation amongst a wider group of stakeholders;
• Greater visibility into the costs and benefits of a company's non-financial performance; and
• Better information to enable a company make smarter business decisions and develop long term strategy.

For the unconvinced skeptic, perhaps the fact that a growing number of investors are investing in social and environmentally responsible companies further validates the need for integrated reporting. These investors are known as impact investors, investors who seek out investments that will yield both a financial and environment and social responsible return.  Companies that can draw the connection between their environmental and social investments to the financial return are sure to attract more investors of the like and increase their bottom line.

From Southwest Airlines to HSBC, corporations both small and large, across the global and across all industries are taking heed of the benefits and issuing integrated reports. With these companies being the front runners, their competitors will soon be sure to follow this growing trend.

For more information on integrated reporting, visit http://www.globalreporting.org/currentpriorities/futuretrends/futuretrendslinks.htm#IntegratedReporting

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Eric Hespenheide serves as the Audit and Enterprise Risk Services Global Leader, Sustainability & Climate Change.