Water Scarcity and Business Risk

January 12, 2022 | Insights,

Total financial impact of reported water risks to CDP Water Security in 2020

$301 Billion

The Business Case for Water Risk

Global water scarcity is now considered an imminent threat, and stakeholders have taken notice. Investors are increasingly turning their attention to the broad range of water issues that are potentially material to the long-term financial performance of their investments.

The World Economic Forum’s Global Risk Report has listed the water crises as a top 10 risk in terms of impact every year since 2012. It is also listed as a top 10 risk in terms of severity in the long-term (over the next ten years).

Historic droughts, more pronounced extreme weather events, and escalating water competition are all adding to the materiality of water as a financial risk. The total potential financial impact of reported water risks to CDP Water Security in 2020 was US$301 billion; however, CDP responders reported that the money required to mitigate those risks was only US$55 billion, highlighting that the cost of inaction could be over five times higher than the cost of action.

It’s important that companies prioritize their water resource management by completing a water inventory and water risk analysis as soon as possible. These initial steps will help lay the foundation for a more robust water stewardship strategy that will increase business resilience to current and future disturbances, and also meet the growing stakeholder expectations around water disclosure.

Water Stress vs Water Scarcity

Water Stress refers to the inability to meet human and ecological demand for freshwater relating to availability, quality, and accessibility of water. 

Water Scarcity is specific to water availability, referring to substantial limitation on the volumetric abundance of freshwater resources. There are two primary types of water scarcity: 

  1. Physical Water Scarcity – is experienced when user water withdrawals and demand exceed supply. 
  2. Economic Water Scarcity – refers to situations where sufficient water resources are available, but access is limited by economic costs associated with establishing adequate water storage, distribution, and infrastructure. 

Water Sustainability in the Decisive Decade

Around the world finite water supplies are being stretched to their limit. In the 20th century, the world’s population quadrupled, but water use increased sixfold, creating a situation where global water demand is projected to outstrip global water supply significantly by 2030, the Global Risks Report 2020 reported.

A quarter of the world’s population is experiencing extreme water stress and increasing periods of water shortages. In fact, 1 in 3 people globally do not have access to safe drinking water, meanwhile 80% of wastewater flowing back into the ecosystem is returned without proper treatment.

This situation is exacerbated by climate change, aging infrastructure, increased demand for energy, the rising middle class, and increased water-intensive agriculture, all of which has driven unprecedented regional volatility in water resources, supply and quality.

Water scarcity can halt business operations, disrupt supply chains, raise the costs of raw materials, and put employee health and safety at risk. The COVID-19 pandemic has demonstrated that sustainability works best in building resiliency when embedded throughout an organization instead of as a programmatic response. Investors will look for agility when assessing the adaptability of business models and workforces in the face of disruptions.

 

Stakeholders Driving Water Risk Reporting

As water-related risks increase, companies must assure their investors that business operations will continue to be profitable and sustainable, and the right policies are in place to secure water resources for their operations in both the short and long-term. Companies need to assess their water-related risks as a strategic challenge, especially in already water-stressed regions.

Companies that better understand water risk, disclose their water data, and take strategic action to address their water impacts will be far better positioned in the future. As a result, companies are engaging in corporate water disclosure (e.g., CDP, Global Reporting Initiative, Sustainability Accounting Standards Board, Dow Jones Sustainability Index) to provide data on their water stewardship practices, associated business implications, and strategic responses. Take CDP for example — in 2020, 515 investors, representing more than US$106 trillion in assets, requested companies to disclose their water-related impacts through CDP Water Security and take actions to reduce them. Investors use CDP water data to engage with portfolio companies, inform investment decisions, capitalize on climate-resiliency investment opportunities, and catalyze change.

Other companies are taking their management efforts a step further in pursuit of alignment with the Alliance for Water Stewardship (AWS) Standards to achieve a net benefit for environments, communities, and the business alike. These standards aim to drive water stewardship commitments towards a use of water that “is socially and culturally equitable, environmentally sustainable, and economically beneficial, achieved through a stakeholder-inclusive process that involves site- and catchment-based actions.”

Business Solutions for Water Risk

The best way for your business to begin addressing its water risk is to complete value chain water footprinting & accounting to help assess and identify the long-term availability of clean water throughout the value chain. After this step has been completed, we recommend that businesses complete a water risk assessment annually to assess physical, regulatory, and reputational risks to a company’s facilities categorized by water basin and subbasin. Individual 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 assess specific products and services as well as suppliers across a company’s value chain. The water risk assessment can inform short- and long-term business planning and management and the development of a water stewardship strategy.

For more information about developing your approach to water stewardship, please see our water stewardship overview page

Stay tuned for our next water risk blog that will define water risk assessments and will provide an overview of the leading publicly available water risk and valuation tools.

Examples of Shared Water Challenges That Lead to Increased Value Chain Water-Related Risks

Shared water challenges Water-related risks Potential financial impacts from value chain water-related risks
Raw material sourcing and supply chain Direct operations Product use
  •  Access to safe water, sanitation, and hygiene
  • Water quality
  • Water quantity
  • Water governance
  • Important water-related ecosystems
  • Extreme weather events
Physical risks Drought or flood-induced power outages, commodity price spikes or delays Increased capital expenditure for water treatment and extraction Drop in sales driven by lower availability of water required for using consumer products
Regulatory risks Increased supplier costs due to changing water and wastewater regulation Reduced water allocation during drought disrupts operations Consumer demands drive new product standards that raise costs
Reputational risks Violations of the human right to water by suppliers Loss of social license to operate due to competition for water with local communities Public outcry regarding water intensity of product damages brand

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