Chapter 10 WATER OVER THE BRIDGE: RISING ESG STAKES IN THE APPROACHING WATER WARS

• Jurisdiction: United States

Water Law Institute
Chapter 10

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WATER OVER THE BRIDGE: RISING ESG STAKES IN THE APPROACHING WATER WARS
Margaret Peloso ¹ Matthew Dobbins ² Austin Pierce ³ Kelly Rondinelli ⁴

MATTHEW DOBBINS has a national practice spanning every major environmental statute, and has been recognized for his expertise in the areas of environmental litigation, regulation and transactional matters by the Legal 500. Matthew's practice focuses on complex regulatory counseling, remedial issues, environmental litigation, navigating the energy transition, and environmental transactional matters. He has extensive experience advising clients engaged in low-carbon ventures, including permitting issues in connection with carbon capture and sequestration (CCS) projects, negative emissions projects, and renewable fuels and credits (e.g., EPA RFS and California LCFS). He also counsels clients on matters related to infrastructure development, including pipeline safety regulations. He routinely counsels private equity, financial institutions, and public and private company clients on environmental liabilities across an array of industries, including all segments of the oil and gas sector, renewable power and fuels, waste recycling and disposal, and the mining, chemicals, and paper industries.

Access to quality water resources is essential for maintaining a functioning society. Water is not just critical with respect to maintaining healthy ecosystems or ensuring access public health and welfare; it also represents a key resource for many industries. But water is also finite, particularly the freshwater that comprises only a fraction of available water on the planet.⁵ It is that combination that makes water a significant potential flashpoint for competing interests, including as companies navigate how to address both operational needs and increased attention to sustainability and environmental, social, and governance ("ESG") matters.

ESG has continued to surge in interest for company stakeholders, including investors and regulators. Various companies have, in turn, started to develop ESG strategies and policies, as they have recognized that ESG will increasingly need to play a key role in their business considerations. In many instances, this has been fueled by the urgency associated with climate change. But climate is not the only topic garnering attention. Conversations around sustainability have seen an ever- evolving range of topics--social as well as environmental--join climate at the fore of ESG concerns. These include water.

Water scarcity is an increasingly salient risk in many areas. Certain companies have already made pledges with regards to water use from their operations,⁶ and, if climate is an example, then more companies will be expected to manage water-related ESG risks in the future. Unlike some other ESG focus areas, water use and quality are generally subject to extensive existing legal regimes in most jurisdictions. However, managing water-related ESG risks calls for a broad approach and integrating climate, natural capital, and human rights considerations, among others, into an overall risk-management strategy. The remainder of this article explores certain of these more prominent intersections and developments in the treatment of water in ESG frameworks to-

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date to help companies better understand the context that relates to their water strategy and the various points of tension that can emerge at these crossroads.

A Brief Primer on Water

Companies' water policy does not form in a vacuum. As noted above, bodies of law already exist regarding water use. And these are often already somewhat tailored to geographic and hydrologic system-specific characteristics that impact water use. For example, the continental United States can in many ways be thought of as two major regions when it comes to water: a relatively water-rich East and a relatively water-poor West. This has led to the development of two major doctrines governing water use in the United States. The water-rich East relies on a doctrine of riparian rights, which allows for landowners adjacent to waterbodies to make "reasonable use" of such water. In contrast, the water-poor West typically relies on a doctrine of prior appropriation--or "first in time, first in right"--as a response to the scarcity of water in the region. The "first in time" here is generally based upon the physical control and beneficial use of the water; thus, the first landowner to beneficially use or divert water is given priority for that quantity of water over later users. In times of scarcity, junior rightsholders in a prior appropriation system are the first to be cut off. While a relatively clear policy, its application can have rather draconian results in times of scarcity.

This is particularly striking when the physical realities of climate change enter the picture, as what may have been a reasonably well-situated water right may suddenly be facing systemic water shortages in even the best of years. Climate models show that, as the climate changes, so do precipitation patterns. This ultimately ends up changing patterns of water availability as well. For example, In its Sixth Assessment Report, released in August 2021, the Intergovernmental Panel on Climate Change's sixth report on the physical science of climate change, released in August 2021, noted that global precipitation patterns have shifted, causing torrential downpours in some areas and droughts in others.⁷ Similar results were found for the United States in the National Climate Assessment released in 2018.⁸ In particular, the Assessment found climate change, coupled with deteriorating water infrastructure, to be "a major driver of changes in the frequency, duration, and geographic distribution of severe storms, floods, and droughts."⁹

With anticipated future climate changes placing even further stress and risk on water systems, companies will have to adjust their approach, operations, and outlook, and consider how these changes interact with existing legal regimes regarding water resources. This also sets the stage for companies' approach to ESG considerations.

Topics of Intersection

Given water's integral role to global functioning, even at a basic biological level, there are numerous points of interconnection with other topics, including within ESG. However, here we have focused on certain larger or more common topics: climate change, natural capital, and various social concerns.

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Climate Change

As touched on above, climate and water have a close relationship, with the potential for severe, damaging implications on health, economics, and global relations. According to the IPCC, climate change is leading to physical water cycle changes, including warmer temperatures allowing for greater moisture transport via weather systems (such as tropical storms) and, on land, increasing atmospheric evaporation, contributing to severe droughts.¹⁰ Without large scale reduction in greenhouse gas emissions, increasing, substantial changes are projected for water cycles at both global and regional levels.¹¹

This can have a variety of impacts, ranging from more intense storms and flash flooding to droughts, changes in land type (such as the permanent inundation of an area), and changes in agricultural growing seasons, amongst others. The most pertinent risks vary globally and within countries, including the United States. However, in this context, the most important risk is water stress. Water stress occurs "when the demand for water exceeds the available amount" and can cause deterioration of both water quantity and quality.¹² In the United States alone, NOAA estimates that nearly ten percent of U.S. watersheds are already exceeding their hydrological budgets, with situations worsening as climate change advances.¹³

This has clear implications for businesses. Certain impacts may be obvious, such as the limiting role that water can have for certain high water use industries, such as food & agriculture and thermal power generation. However, other indirect impacts may be equally important. For example, changes to hydrological patterns may result in issues with transportation and logistics. Certain waterways may no longer be navigable for transportation or, at a minimum, may only be navigable for limited cargo loads.¹⁴ Water stress may also lead to increased dependence on groundwater in some areas, increasing the risk of subsidence and damage to infrastructure, such as roads and pipelines, as a result of depleting aquifers beyond recharge rates.¹⁵

In turn, water stress thus changes businesses' risk profiles, implicating their relationships with financial institutions, such as banks, insurers, and investors.¹⁶ While not as dramatic as more immediate risks, such as regulatory change or wildfires, water has the potential to just as if not more likely to disrupt operations. For example, prolonged periods of drought in California have resulted in intense local opposition to business-related water uses regulators issuing orders at least

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one business prohibiting further water withdrawals.¹⁷ Similar to climate-risks, operational and physical risks related to water are likely to be subject to increasing scrutiny from financial institutions, which in turn may lead to the imposition of more stringent lending requirements.

Certain infrastructure projects can help to protect assets from water-related physical risks, such as flooding. And supply chains may be modified, either by shifting to regions experiencing less water stress or identifying areas of the supply chain where water needs can be reduced, to account for concerns over water scarcity. Identifying areas to enhance resiliency against water- related risks that may be exacerbated by climate change should be a significant area of focus in enterprise risk management.

However, it is also important to note the role that water itself can play in...