Water Risk on the Rise

Twenty percent of global GDP already is produced in water-scarce areas. In the absence of more sustainable water management, the share could rise to 45% by 2050, placing a significant portion of global economic output at risk.

WASHINGTON, DC – Water is never far from the news these days. This summer, northern India experienced one of its heaviest monsoon seasons in 80 years, leaving more than 800 people dead and forcing another 100,000 from their homes. Meanwhile, Central Europe faced its worst flooding in decades after heavy rains swelled major rivers like the Elbe and the Danube. In the United States, nearly half the country continues to suffer from drought, while heavy rainfall has broken records in the Northeast, devastated crops in the South, and now is inundating Colorado.

Businesses are starting to wake up to the mounting risks that water – whether in overabundance or scarcity – can pose to their operations and bottom line. At the World Economic Forum in Davos this year, experts named water risk as one of the top four risks facing business in the twenty-first century. Similarly, 53% of companies surveyed by the Carbon Disclosure Project reported that water risks are already taking a toll, owing to property damage, higher prices, poor water quality, business interruptions, and supply-chain disruptions.

The costs are mounting. Deutsche Bank Securities estimates that the recent US drought, which affected nearly two-thirds of the country’s lower 48 states, will reduce GDP growth by approximately one percentage point. Climate change, population growth, and other factors are driving up the risks. Twenty percent of global GDP already is produced in water-scarce areas. According to the International Food Policy Research Institute (IFPRI), in the absence of more sustainable water management, the share could rise to 45% by 2050, placing a significant portion of global economic output at risk.

Companies know that sound risk-management strategies depend on solid data. When it comes to financial risks, data crunchers have access to vast amounts of information. But that has not been the case with water – until now.

The World Resources Institute has joined with companies like Goldman Sachs, General Electric, and Shell to develop an online platform, called Aqueduct, to help measure and map water risks. Aqueduct uses the latest data and state-of-the-art modeling techniques to offer a rich, granular picture of water risks worldwide. Empowered with this data, companies can make better and more informed decisions.

For example, CERES, a non-profit organization, has combined Aqueduct’s water-stress maps with hydraulic fracturing data (from FracFocus.org) to find that nearly one-half of shale oil and gas wells in the US are located in areas with high water stress. Early next year, Aqueduct will offer future projections of water stress based on the latest scientific analysis, including predicted effects of climate change.

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Major companies are already seizing on water-risk data. McDonald’s, for example, has asked more than 350 of its top supply-chain facilities to report on their water-risk exposure, using data from the Aqueduct tool. Incorporating water risk into McDonald’s Environmental Scorecard is an important step in engaging suppliers not only on water efficiency, but also in overall stewardship, including cooperation with local watershed stakeholders.

The international clothing company H&M is working to reduce water-quality risk in its supply chain. Through its Cleaner Production Program, the company works with NGOs in Bangladesh and China to implement cost-saving improvements that reduce their fabric mills’ impact on local water quality.

Similarly, the beverage company SABMiller is targeting a 25% reduction in the water intensity of its beer production between 2008 and 2015, and is now enhancing its water resilience throughout its global operations. Through its Water Futures Partnership, the company has identified which of its facilities are located in areas facing water-security risks and has created partnerships in the local watersheds to address these risks.

The message is clear: water-risk management is shifting into the mainstream of business practices. More than 90 signatories of the United Nations Global Compact’s CEO Water Mandate have pledged to develop, implement, and report on water-sustainability policies and practices in both their own and their suppliers’ operations, and to work with stakeholders beyond their own operations to address water risk. Leading companies are showing that sustainable water management benefits all involved.

While many executives have traditionally underappreciated the risks from climate change and resource degradation, understanding water risk – and acting to minimize it – is just one way that businesses are starting to incorporate natural-resource management into their core strategy and operations. Smart business leaders are investing in new tools that can provide comprehensive and up-to-date data, and companies are increasingly moving beyond recognition of natural risks to developing strategic responses to them.

As more companies do so, laggards will be at a growing competitive disadvantage. They, too, will have to act before the next flood or drought strikes.

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