Jennifer Heymann, Peter Easton, and Bogdana Marinova are water experts at Waterplan who provided additional support writing this article.
Corporate Sustainability Managers play a key role in reporting (both internally and externally) that their organization understands the water risks they are exposed to, and have a plan in place to mitigate them. Whether operations show low or high water risk, having this knowledge is essential to reassure stakeholders, such as leadership, investors, customers, and regulators that the business is sustainable and socially responsible in the long term.
The journey to understand, report, and address water risk often appears daunting, leaving many corporate sustainability managers uncertain about where to begin. The good news is that this article can help you figure out where to start if you want to assess and report your company's water risks.
What is Water Risk for Corporate Sustainability Managers?
How Could Water Risk Affect You
Water risk is a water-related problem that can impact your business, the environment, and nearby communities. The business impact typically materializes in revenue loss and in more severe cases, closure of operations. This risk may not always be readily recognized, because water is a relatively inexpensive resource in most countries, especially when compared to energy. As a result, attention to water risk often comes too late, triggered by what seem to be unexpected events like pollution, scarcity, or flooding.
There are different types of water risks to assess:
1. Physical Risk - Scarcity, Quality, and Flooding: The UN predicts 40% shortfall in water availability by 2030 and WRI predicts that by 2030, the global deficit in available water supply relative to demand is expected to reach 56%. Water scarcity, compromised water quality, and flooding risks can significantly impact operations, supply chains, and overall business continuity. Based on the Global Water Report by CDP, companies report that 79% of their water risk exposure is due to physical risks.
2. Regulatory Risk: This risk revolves around compliance with water-related regulations and standards, which can be difficult to track, especially for large organizations operating across multiple regions and regulatory frameworks. Non-compliance can lead to fines, legal repercussions, and reputational damage. According to CDP, companies report that 16% of their water risk exposure is due to regulatory risks.
3. Reputational Risk: Rooted in public perception, reputational risk relates to how a company is perceived as contributing to water-related problems. Accusations of over-extraction, pollution, or inadequate water management can tarnish a company's image and erode consumer trust, leading to brand damage and loss of revenue. According to CDP, companies report that 5% of their water risk exposure is due to reputational risks.
4. Infrastructure Risk: Tied to the availability and vulnerability of water infrastructure in the region, this risk can be considered a sub-set of physical risks. Evaluating the robustness of the water distribution, treatment, and storage systems is necessary to mitigate disruptions that could impact operations and business continuity.
Water Risk by Industry
Industries most vulnerable to water risk are those heavily reliant on water for their processes or products, for example:
Manufacturing, with water being integral to both products and operations for many companies. Consumer Packaged Goods (CPG) and electronics manufacturing, among others, are included within this category. Based on the findings from the 2020 Global Water Report by CDP, this industry faces the most significant value at risk, amounting to a staggering $191 billion.
Mining, which faces a variety of challenges such as dewatering, aquifer depletion, and downstream pollution. According to a report published in 2019 by CDP, the financial value at risk for the mining industry is $24.9 billion and 91% of the companies in the sector identify water security risks as an immediate concern.
The food & beverage sector, where high-quality water is essential for products, and is often complicated by an agricultural supply chain spanning regions with diverse and challenging water risk profiles. In 2020, CDP reported $19.59 billion at risk for the food, beverage, and agriculture sector.
Textile industry, akin to food & beverage, relies heavily on water for products and grapples with complex supply chains. According to the Ceres 2021 report, it’s estimated that eliminating the impact of this industry on freshwater would require approximate total annual expenditures that range from US$189.8 million to US$1.77 billion per large apparel company.
Data centers require substantial water for cooling systems. According to CDP, the estimated value at risk for the services industry, which includes data centers, is $11.1 billion.
Although industry challenges can be an indicator of potential water risk, other factors such as where geographically a company operates are also incredibly important.
Water Risk Hotspots
Water risks occur across the globe, but the specific challenges vary across regions and countries. Depending on both the overall physical situation of the region and the relative importance that is allocated to water by the government and the community, a sustainability manager may need to pay closer attention to the local operations in terms of water risk.
Below are some examples of places with complex water risk in different parts of the world:
Monterrey, Mexico
Monterrey is a rapidly growing city of approx. 5 million that relies on water primarily from surface water reservoirs, with groundwater as a secondary source depending on surface water availability.
Physical water scarcity in the region is mainly caused by two factors: regular droughts and rising demand for water by cities and industries. The area depends on an external municipal water supply, which has kept up with the growing demand until now. However, increasing scarcity is making it difficult for the supplier to improve its infrastructure capacity quickly enough. Additionally, pollution from urban, industrial, and agricultural sources in the area challenges the ability to treat water effectively to meed quality standards.
Ibaraki, Japan
Ibaraki Prefecture, with a population of approx. 2.9 million, relies on a combination of sources for water supply, including: surface water, groundwater, and reclaimed water for non-potable use.
Although there have not been significant water-related issues to date in Ibaraki, a deep dive into local data identified two risk aspects worth further monitoring. Firstly, there's a risk from old metal mines in the area. Though these mines are no longer active, they've left behind contamination that could be stirred up by earthquakes or severe weather, potentially challenging the current water treatment systems. Secondly, the area faces a medium-high risk of flooding, due to its history of river floods and typhoons. Modern flood defenses are in place, but the regular occurrence of typhoons and the earthquake threat could damage these defenses. Thus, it's crucial for ongoing monitoring and to have a flood response plan in place
Zaragoza, Spain
Zaragoza, located in northeast Spain with a population of about 700,000 people, relies on surface water from the Ebro River for water supply.
Waterplan's analysis has identified two main water risks at the catchment level. The first significant issue is poor water quality, which stems from high nitrate levels due to extensive agricultural and livestock activities. Additionally, the ecosystem is disrupted by problems with aquatic plants, linked to human activities, and the river's inability to transport sediments effectively to its lower basin. The second major concern is the scarcity of water. This is exacerbated by water use for irrigation and a series of droughts, which, coupled with expanding agricultural lands, puts increasing pressure on both the river and groundwater sources, leading to more severe and long-term consequences to the aquifer and local water availability.
The Water Risk Journey
The Objective
Before embarking on your water risk assessment, it is crucial to establish a well-defined objective. The type of risk assessment intended for reporting purposes can significantly differ. Considerations such as the granularity and the frequency at which assessments should occur vary between objectives.
Key objectives for the water risk assessment may include:
Sustainability and Environmental Reporting - Integrate assessment findings into:
Your company’s sustainability report, In this case, there are no requirements for the data to include as it depends on each company.
Reporting frameworks such as CDP Water Security, TCFD, and TNFD and reporting standards such as ESRS. In this case data requirements differ based on the report
Business Continuity - The risk assessment can be a critical input to develop mitigation plans to minimize the impact on business operations, including the supply chain.
Setting a Water Strategy & Targets - The assessment results can be used to establish a water strategy, with clear targets at a global and local level, such as water efficiency goals.
Informing Watershed Stewardship Activities - The analysis can be used to gather contextual information about the watershed and support data-driven decision making for water security initiatives.
Steps of Water Risk Assessments
Risk Screening: Companies typically start by conducting a global risk assessment across facilities. This will give you a general idea of what sites may have higher risks and what those risks may be (e.g., scarcity). Many sustainability managers use this assessment for reporting purposes.
Prioritise Sites: Once you identify the high-risk sites, consider how critical water is for the site and the actual business value of the site for the company.
High-Risk Sites Deep Dives: This involves collecting locally-relevant public data to understand contextual watershed issues, and engaging with facilities to understand their past water-related challenges and existing or planned mitigation measures.
Recommended Frequency of Water Risk Assessments
It is recommended to conduct the water risk assessment on an annual basis (or on the reporting frequency) to provide the latest available information in company disclosures.
Stakeholders on Water Risk
The Need for Internal Stakeholder Engagement
Corporate sustainability managers should engage vital internal stakeholders for effective water risk management:
Leadership: Engage senior management to emphasize that water risk is a corporate issue, transcending individual facilities; resources should be allocated accordingly.
Facility Teams: Foster collaboration with facility teams to ensure seamless integration of their water risk data and participation in in-depth site risk assessments and the development of mitigation plans.
The Whole Organization: Ensure universal awareness among all water users, fostering shared responsibility and commitment to water sustainability.
The Role of Regulations and Investors
An increasing number of regulations, investment funds, and stock exchanges require companies to disclose water risk information publicly. According to CDP, in 2020 515 investors with $106 trillion in assets requested 1,868 large companies to disclose their impacts on water security and take action to reduce them.
Investors will initially want to know water consumption and discharge data. Still, they will expect more granular information on water risks, risk mitigation strategies, and water targets as time progresses.
The Role of NGOs and Consultants
NGOs proactively advocate to persuade businesses to apply water stewardship principles. NGOs typically raise awareness about water risks, and some of them conduct different types of projects to mitigate water risks, for example, a water restoration project, such as reforestation projects, which can help improve water storage and quality.
Consultants also have a role in promoting water risk assessment and stewardship to their existing or prospective clients. Consultants can conduct water risk assessments, provide recommendations on mitigation strategies, and assist with reporting. Some consulting firms specialize more in risk assessment and others in reporting.
Frequent Challenges & Opportunities on Water Risk
The following are key challenges you may face as you embark on your water risk assessment journey.
Collecting the correct water risk data is time-consuming and requires water expertise.
Structuring the data for diverse purposes: standard or custom reports, setting targets, etc.
Getting everyone on board and aligned on the assessment.
By addressing these challenges through effective communication, basin-level risk assessments, and engagement with local stakeholders, companies can enhance their water risk assessment initiatives and contribute to more resilient and sustainable water management strategies.
The Opportunity of Technology
You can leverage technology to enhance and streamline water risk assessment and reporting processes, saving valuable time and getting actionable insights. Technology can provide the following advantages:
Data Consolidation: Streamlines the consolidation of water data from multiple sources.
Updated Data: Provides access to updated and accurate data.
Speed and Accuracy: Can enable faster risk screening for various water risks with minimal team effort.
Cost-Effectiveness: Offers a potentially less expensive alternative for conducting assessments.
Trend Analysis: Allows for identifying trends in water risks and understanding changes over time.
Collaboration: Eases the sharing of data and results with other stakeholders.
Smart Metering and Automation: Automates processes such as smart metering and water accounting, making them faster and informing decision-making.
Streamlined Reporting: Helps automate the reporting process for more efficient communication of assessment results.
Conclusions
In summary, mastering the basics of water risk is critical for corporate sustainability managers to secure their current and future water supply for continued operations. Strategic communication and engagement with internal and external stakeholders as well as leveraging the right technologies become key, from basin-level assessments to reporting and taking action to effectively manage risk.
Remember that you are not alone in understanding and addressing water risks. As a corporate sustainability manager, you stand alongside a community responsible for water stewardship. Through collaboration, shared insights, and a commitment to sustainability, we navigate the complexities of water risk together towards a more resilient future.
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