Water Risk Assessments and Types of Risk
A water risk assessment analyzes a range of water-related business risks to which an organization is exposed.
Annual water risk assessments create valuable results to share with stakeholders, aid in short and long-term business planning, and form the backbone of an effective water stewardship strategy. While there is no standardized water risk assessment framework, assessments generally span across three categories: physical, regulatory, and reputational.
- Physical risk encompasses water quantity and quality issues, and potential climate-related impacts. These factors present the most immediate and disruptive threat to business continuity.
- Regulatory risk includes the strength and stringency of water management instruments, governing authorities, and water-related infrastructure; water pricing, allocation schemes, and regulatory costs; and access to safe drinking water and improved sanitation. These are important to manage and safeguard a company’s license to operate.
- Reputational risk assesses stakeholder perceptions of a company’s water-related impacts. The perception of misuse of water resources within water stressed areas can be extremely detrimental to a company’s brand value.
The financial impacts associated with water risks include:
- Lost revenue due to water supply disruption or permitting delays/limits
- Higher operating costs related to:
- Supply chain disruption
- Increasing water procurement costs
- Increasing energy costs
- Increasing costs to secure, reduce, recycle, or treat water
- Changes in production processes
- Higher capital costs tied to need for new or repaired infrastructure or early retirement of existing assets/operations
- Increased costs associated with permitting, compliance, fines, litigation, or insurance
- Shareholder costs related to brand damage
Sustainable Development Goal 6 Targets
- Access to safe water, sanitation, and hygiene (WASH)
- Water quality
- Water quantity
- Water governance
- Important water-related ecosystems
- Extreme weather events
Based on geographic location, water risk assessment tools generate basin and sub-basin data on water risks. Facility risks are then aggregated to rank a company’s overall water risk exposure. This analysis may be supplemented by operational data, such as production or water withdrawals, and may be extended to a company’s value chain. A deeper dive into local/operational water risks is then recommended by industry bodies such as the CEO Water Mandate, followed by analysis around the six shared water challenges aligned with Sustainable Development Goal (SDG) 6, 11.5, and 13.1 targets: 1) access to safe water, sanitation, and hygiene (WASH); 2) water quality; 3) water quantity; 4) water governance; 5) important water-related ecosystems; and 6) extreme weather events.
Water risk assessments are not only valuable for businesses to understand their risk and impacts, but they are also valuable for other local stakeholders in the same regions. This can include NGOs, governments, municipal utilities, indigenous peoples, and local communities who also rely on the ongoing health of shared water basins.
Leading Publicly Available Water Risk and Valuation Tools
Water risk assessment tools share a similar premise, but each tool has distinct risk indicators, a unique approach to calculating risk, and certain strengths and areas of emphasis. In comparison, water valuation tools aim to link water risk and financial impact to aid in establishing a business case for pursuing mitigation actions.
A brief synopsis of some of the most commonly used water risk and valuation tools is provided below. See Anthesis’ forthcoming “Water Risk & Valuation Tools – Which Tool is Right for Your Company?” white paper for additional detail and Anthesis’ review of these tools.
Water Risk Assessment Tools:
- World Resources Institute’s Aqueduct 3.0: Aqueduct generates high-resolution, customizable global maps of baseline water risks and projected future water risks for 2030 and 2040 across various climate scenarios. The Aqueduct Water Risk Atlas utilizes 13 water risk indicators grouped into physical risk quantity, physical risk quality, and regulatory and reputational risk categories to generate one overall water risk score. The platform also includes three additional tools, Aqueduct Country Rankings, Aqueduct Food, and Aqueduct Floods.
- World Wildlife Fund’s Water Risk Filter 6.0: The Water Risk Filter is a holistic and quantitative water risk assessment tool that uses scientific data sets with global coverage and operational data to analyze and respond to water risks. The tool uses 35 basin risk indicators grouped into twelve risk categories to generate physical, regulatory, reputational, and final basin risk scores, as well as an array of risk map layers at both global and select national/regional scales. Other key Water Risk Filter features include a customized set of response actions to mitigate specific water risks, country profiles, collective action examples and case studies, a database comparing water valuation methods and tools, and the forthcoming Water And ValuE (WAVE) tool.
Water Valuation Tools:
- Ecolab’s Water Risk Monetizer: The Water Risk Monetizer focuses on quantifying financial metrics around incoming (quantity and quality) and outgoing (quality) water-related risks. Key outputs include a risk premium relative to price for incoming and outgoing water, potential revenue at risk due to water quantity risks, and rank based on water quantities, monetized risk, and likelihood. Other key features include Risk Analysis, which helps businesses prioritize and determine appropriate risk mitigation strategies for each location, and an investment calculator.
- World Wildlife Fund’s Forthcoming Water And ValuE (WAVE) Tool: The WAVE tool, currently in beta mode, combines water risk event probabilities, water-related scenarios, user financial data, and financial impact ranges to determine the probability and scale of potential financial impacts from different water risk events. It will be an offline, Excel-based calculator allowing users to stress test financial information under different water-related scenarios to generate a discounted cash flow analysis without relying on shadow pricing. The WAVE tool will be an addition to the already existing WWF’s Water Risk Filter 6.0.
Our water risk assessments produce meaningful results for water stewardship strategy development and crafting responses to various water reporting and disclosure frameworks, including CDP Water Security.
Anthesis’ Approach to Water Risk Assessments
Anthesis can conduct both basin-level risk assessments and local/operational risk assessments.
Within the basin-level risk assessment, Anthesis offers both simplified and customized approaches to water risk assessments with the desired depth and breadth necessary to meet client needs. The simplified approach serves as a risk screening to determine whether water-related risks could represent a substantive risk to the business and to potentially prompt further analysis. The customized approach combines best-available indicators from multiple tools with operational data and is tailored to the client’s business model to create a depiction of prioritized water-related risks.
Local/operational water risk assessments are conducted with an explicit focus on just the highest risk facilities. This is most often done in addition to basin-level risk assessment analysis. Operational risk assesses the company’s dependence, and the impact of its activities, on local water resources. Establishing the local water context involves gathering detailed data on each basin’s current and future environmental, economic, and social needs to inform sustainable thresholds and facility “fair share” allocations that do not compromise the long-term viability of water resources.
Our water risk assessments produce meaningful results for water stewardship strategy development and crafting responses to various water reporting and disclosure frameworks, including CDP Water Security. We also offer additional support in translating risk assessment results into robust water disclosure responses that maximize value to stakeholders and, if applicable, client score performance. A detailed look at the tools we use and the work we do for water risk analysis and quantification can be found in our forthcoming whitepaper.