Businesses that rely on food, water, and energy as necessary production inputs are very sensitive and dependent on a robust supply of these resources. As such, they are exposed to risks that need to be carefully managed: physical risks related to the constraints of FWE, which can affect direct operations or supply chain; reputation risks; and regulatory risks.
Sometimes the physical risks initially appear to be an issue for suppliers to manage, however for sectors involving long and complicated value chain such as Textile and Apparel (T&A) and Fast Moving Consuming Goods (FMCG), the risk transfers to these companies if their suppliers are unable to deliver product at the required price, quantity, and quality.
In this case, companies need to consider the embedded water risk in their supply chain in order to minimize the likelihood of operation being interrupted.
Textile and Apparel
The textile industry in China is the largest in the world in both overall production and exports. In 2014, textile fiber production in China exceeded 50 million tons, accounting for 54.36 percent of world share (Shenglu, 2016). Although some low-wage countries in Southeast Asia are seen to play a bigger role in supplying textile fiber due to the rising production cost in China, it is likely that China will remain the top apparel sourcing destination for most EU and US fashion companies given its vast production capacity, supply chain efficiency, and industry integration.
The textile industry has long been criticized for its stubborn wastewater effluent discharged to the environment which causes big concerns over water security and health problem. According to the World Bank, 20% of water pollution globally is caused by textile processing. The textile industry uses more than 8,000 chemicals to make the 400 billion m2 of fabric sold annually around the world and many of these chemicals are toxic and persist in the environment if the effluent is not treated properly (Chemical and Engineering News, 2015). Textile fabrication is also a water-intensive process. It requires estimated 7 m3 water to produce a pair of jeans and 3 m3 to produce a T-shirt (Chemical and Engineering News, 2015). Let alone the massive water required to grow the thirsty cotton crop.
The high environmental cost came to the spotlight in 2011 when Greenpeace, a non-governmental environmental organization, released a report “Dirty Laundry” which revealed various apparel companies’ connections to toxic water pollution in China through their suppliers. Big names such as Adidas, Calvin Klein, Converse, H&M, Nike, and Puma were called into question regarding their commitment in sustainability and urged to work closely with their suppliers to phase out toxic chemicals used in the manufacturing process.
Another driver shaping the industry’s move is government policy. China’s 13th Five-Year Plan for 2016-2020 sets the goal to reduce the water consumption per unit of industrial value added by its textile and apparel industry by 20% annually. The Action Plan for Water Pollution Prevention published by the State Council in 2015 anticipated the imposition of cleaner production standards for ten major industries comprising textile.
It will not be surprising seeing stricter pollution control regulation to be enacted and enforced by the government in order to achieve these ambitious goals. In response, textile factories are expected to invest in new technologies that can help optimize the production process into a cleaner and more efficient one. Industrial process solution providers and wastewater treatment technology companies can then come into play.
Real Estate Sector
The real estate sector has a significant and growing impact on the environment. It is estimated that the sector consumes over 40% of global energy annually and uses 40% of raw materials globally (3 billion tonnes annually) (WEF, 2016). The rapid urbanization will lead to further growth in the construction and real estate market. The World Economic Forum has projected that global construction output will reach $15.5 trillion (3.9% CAGR) by 2030. The largest 750 cities in the world (representing 61% of global GDP) will require 260 million new homes and 540 million m2 of new office space.
The real estate sector plays an essential role in China’s economy, employing an estimated 29 million people, generating investment worth 7.9 percent of additional annual GDP in 2016, contributing up to 35 percent of local government fiscal revenue, and creating demand for China’s steel, cement, glass and other industrial sectors (The Diplomat, 2017). After years of aggressive investment by property developers in tier one and tier two cities, the government has introduced a series of cooling measures to cut buyer demand and control financing due to the concern over the potentially disastrous impact that the heavy load of debt may bring on the economy. Nevertheless, the demand for homes and new office space will not halt against the backdrop of population growth and urbanization.
The green building certification is a main contributor driving sustainability in the commercial real estate industry. The two most widely used green building standards in China are China’s Green Building Evaluation Labelling, also referred to as China 3-Star, established by the Chinese Ministry of Construction, and Leadership in Energy and Environmental Design (LEED), which was founded by the U.S. Green Building Council. To attain the certification, building owners are required to meet a certain level of efficiency for their energy and water usage. Along with China’s commitment to have 50 percent of all new buildings constructed by 2020 to be certified green buildings, the green building sector is expected to grow from 5 to 28 percent by 2030, representing a $12.9 trillion investment opportunities (WRI, 2017). It opens service opportunities for solution providers specializing in energy and water auditing, modeling and smart sensing technology.