Greenhouse gas emissions reduction is the poster child of corporate environmental action. For many businesses, it’s the core focus of climate planning efforts. Yet climate change is interconnected with a myriad of other risks companies often overlook.
Last week, we discussed why businesses need to start incorporating biodiversity into their sustainability strategies. Another blind spot for companies and investors when it comes to environmental action is water risk.
In many ways, the worst impacts of climate change are felt through water. Extreme weather events, from flooding to prolonged drought, are already wreaking havoc on businesses and citizens alike.
In China, a record-breaking drought has caused parts of the Yangtze river to dry up, creating a shortage of hydropower. The result? Companies like Toyota and Tesla had to temporarily shut down operations due to limited power supplies. In the US, we’ve seen five “1-in-1,000-year” rainfall events in the last month alone.
For something so critical to life, it would seem like a no-brainer to add water to the list of issues companies need to proactively manage. The reality is that many still view water as a resource that will always be available when needed.
Read on to learn what risks water poses to your business and how you can become a leader in corporate water stewardship.
Why Water Risk is a Business Risk
Unlike fossil fuels, there’s no replacement for fresh water. If consumption and production patterns don’t change, the UN predicts a 40% global shortfall in water supply by 2030.
This opens companies up to a huge set of risks, from disrupted operations to stranded assets. Some especially high-risk sectors include energy, utilities, mineral mining, fashion, consumer goods, food and beverage, agriculture, and technology, to name a few.
For example, Unilever analyzed its water risk and found that the use of its products could account for over 90% of a home’s domestic water use. The takeaway? Without making these products more water efficient, water scarcity could cost the company $300M by 2030.
However, scarcity is just one example of water risk. Just like climate change and biodiversity, water has its own set of physical and transition risks:
- Physical risks include impacts from extreme weather, such as droughts and floods, and poor water quality. The aforementioned hydropower shortage in China is a case-and-point example of how susceptible businesses are to these physical risks.
- Transition risks include bans on water-intensive products (such as certain garments and textiles), the creation of new policies, including water pricing and zero pollution laws (already being introduced in the EU), and legal and reputational risks from community opposition. For instance, Coca-Cola has found itself in hot water several times for degrading local water supplies, from Uttar Pradesh in India to San Cristóbal de las Casas in Mexico.
Businesses in high-impact industries are already feeling the consequences. For food and beverage companies, water risks cost 3x more per year than carbon risks. Companies in energy, utilities, and mineral mining have lost billions from stranded assets. After all, many cannot simply move their operations or supply chains somewhere else to mitigate water risks.
At the same time, addressing the water crisis is also a tremendous business opportunity. Investing in infrastructure to reduce leakage, upgrade water treatment systems, and increase efficiency results in significant cost savings. For example, a bottling company was able to cut bottle cleaning time from 5 hours to 30 minutes by deploying a new technology called “radical water.” In India, drip irrigation projects could help farmers halve the cost of fertilizer and other inputs.
Bottom line – water is a business risk that you can’t afford to ignore. The good news is that we have enough water to meet our needs; it just needs to be managed properly. And that presents your business with huge economic opportunities!
Corporate & Investor Awareness Around Water Risk
Water is a considerable way behind climate when it comes to analyzing and incorporating risk into decision-making. That’s because many companies don’t assess and report on their water impacts, let alone disclose what steps they’re taking to manage risks and capitalize on opportunities. On top of this, water risks are complex and highly contextual based on location.
Despite these challenges, a majority of investors are at least aware of water-related risks – 69% of listed equities reporting to CDP say they are exposed to water risks that could substantially change their business. If climate reporting has taught us anything, it’s that once investors are aware, corporate disclosure will soon follow.
We’re already seeing an uptick in voluntary water-related disclosure. In 2021, CDP issued its water questionnaire to over 6,000 businesses. This was done at the request of 680 financial institutions managing $130T in assets who use their role as investors to nudge companies to respond. More recently, Ceres just announced its new Valuing Water Finance Initiative, an investor-led effort to engage businesses to act on water as a financial risk.
Momentum is also growing on the mandatory disclosure front. For instance, the European Commission’s newly proposed Corporate Sustainability Reporting Directive (CSRD) includes robust requirements for water reporting. In India, the top 1,000 listed companies must disclose water usage, discharge, and intensity metrics. In China, high polluters must report their water-related pollution control and management data.
While there are inconsistencies in reporting requirements by country, we are moving towards mandatory water disclosure, whether that’s in relation to climate risks (such as in the US SEC’s climate disclosure proposal) or to a specific issue (such as China’s rules for high polluters). As investor awareness continues to grow, your business should be prepared and ready to meet new demands.
How to Become a Water Stewardship Leader
Businesses that incorporate water-related risks and opportunities into their ESG strategies will enjoy cost savings, operational efficiencies, and increased resilience as the water crisis deepens. Here’s how to unlock these benefits and become a leader in corporate water stewardship:
1) Assess Your Impact
First things first, start assessing your water risks, opportunities, and impacts. There are a lot of factors to consider - a good place to start is by looking at water quantity. What is your water footprint? How is your business contributing to water scarcity? How is your business affected by water scarcity?
To do this, you’ll need to evaluate where your water usage is coming from and analyze your water stress in specific areas. WRI’s Aqueduct Tools and WWF’s Water Risk Filter give you a great snapshot of water quantity risks by region, from water stress and groundwater decline to coastal flooding and drought risk.
However, it’s not just about water quantity. You should also assess your impact on quality and access, or ‘WASH’ – water accessibility, sanitation, and hygiene. These issues will vary by local context. You’ll need to engage the communities in the regions where you operate to determine what impact you’re having. Without this kind of engagement, you could unknowingly be restricting access to the local water supply or increasing wastewater pollutants, for example.
2) Invest in ‘Water Positive’ Projects
Once you understand how your business impacts water supply – quality and quantity – in the communities where you operate, and what risks water poses to your business, there are several steps you can take to improve.
Doing Less Harm (Near-Term): One approach is to focus on actions that reduce your impact and enable you to do more with less. These often include investments to increase operational efficiency or reduce downstream pollution. For instance, one of our clients built their own water treatment plant to cut pollution from its factories. Some other ideas:
- Invest in technology to continuously monitor water consumption.
- Purchase low-flow shower heads and toilets in your facilities.
- Use and reuse grey water for irrigation.
- Look into nature-based solutions, such as rain gardens and rainwater collection systems.
- For any cleaning processes, research green chemicals and alternative cleaning technologies.
Working Towards ‘Net Positive Water’ (Long-Term): Several leading companies are championing a more holistic approach – net positive water impact. This not only means replenishing local water supply but also ensuring accessibility and quality for vulnerable communities.
These efforts have been spearheaded by businesses in the CEO-led Water Resilience Coalition. The Coalition aims to preserve the world’s freshwater resources through cross-section collaboration, public advocacy, and ambitious, quantifiable commitments. Here’s how a few members are taking action:
- Keurig Dr. Pepper has partnered with its highest water-risk operating communities to replenish 85% of local water use. By 2030, it strives to reach 100% replenishment.
- Cargill partnered with WRI to set company-wide targets across its entire value chain, given that this is where 90% of its impact takes place. These include targets for harder-to-quantify ‘WASH’ impacts. So far, Cargill has committed to restoring 600B liters of water in its supply chain and reducing 500kg of nutrient runoff.
Learn more about the Water Resilience Coalition and what commitments you’ll need to make here.
3) Disclose Risks & Opportunities
Of the 6,300 companies asked to disclose their impact through the 2021 CDP water questionnaire, around half chose not to respond. This leaves both these businesses and their investors susceptible to a major blind spot.
Regardless of your industry, water is the lifeblood of our most fundamental business operations. Your company’s growth prospects may well be reliant on your ability to secure a stable water supply, eliminate pollution, avoid infrastructure failings, and build trust with local sourcing communities.
To give your investors and customers a complete picture of your risks and opportunities, it’s crucial that you disclose your water-related impacts. Running through the exercise of disclosure will help you better understand your vulnerabilities, too.
Some established frameworks such as the TCFD and the US SEC’s climate disclosure proposal already incorporate climate-related water risks, namely drought and flooding. However, robust disclosure on water should go beyond climate-driven water risks.
Your disclosure should cover how you’re responding in terms of governance, strategy, risk management, and metrics and targets for water specifically. Check out this guidance from CDP on what makes up a high-quality disclosure within each category.
Thinking Forward
Investors paved the way for the surge we’ve seen in voluntary and soon mandatory climate reporting. It’s a safe bet that water-related disclosure isn’t far behind. Several companies are already getting ahead of the regulatory curve, saving money, increasing resilience, and strengthening community relationships along the way.
Your business can join them! By practicing better corporate water stewardship, you’ll help build a system that values and manages water properly, ensuring these resources meet the needs of society, business, and the ecosystems on which we all depend.
Want to start acting on your water-related risks and opportunities? Or have you been asked to respond to the CDP water questionnaire? Our team is happy to help! Get in touch with us here.
