Illiquid: How water challenges affect businesses (and what to do about it)

In brief:

• Water is central to nearly every stage of the value chain, from extraction to consumption.
• Water challenges are a substantial source of business risk, creating operational and supply chain disruptions for business, as well as increased costs.
• The consumer staples sector is most vulnerable to water risk and faces a $200 billion impact from water scarcity.
• Companies that prioritize water resource management today, including through collective action, will lay a strong foundation to tackle the challenges that lie ahead.
• Water is at the heart of the climate crisis: Mitigating water risks helps companies tackle other types of nature-related risks, such as climate, biodiversity and others.

Water is the lifeblood of business — and humanity as a whole — but the future of this finite resource is on the line:  rainwater is no longer safe to drink anywhere, vital rivers and aquifers around the world are running dry and, as of April 2022, we’ve moved beyond the safe operating space for the planetary boundary for freshwater. 

Rising demand for food and energy production, significant water pollution, climate change and under-monitoring of water use has led society to a point of critical risk. By 2030, it’s projected that water demand will exceed supply by 56%.

Businesses are human enterprises: humanity’s problems are business problems and vice versa. Both highly dependent on water and a major driver of water-related impacts (the food, fashion, chemicals, pharmaceuticals, energy, industrial and mining sectors have a hand in 70% of the world’s freshwater use and pollution) business has a crucial role to play — and a vested interest — in delivering a water secure future.  

Companies that prioritize water resource management today will lay a strong foundation to tackle the challenges that lie ahead. With an ambitious water stewardship strategy, organizations will increase value chain resilience in a rapidly changing world, contribute to global water security and accelerate progress on other environmental goals, like climate, biodiversity and more.

The interplay between water security and business risk

A top-ten fixture of the World Economic Forum’s Global Risk Report for the past decade, the water crisis is an urgent business issue with a myriad of physical, financial, reputational and regulatory risks. According to a 2020 report, an estimated $301B of business value is at risk due to water scarcity, pollution and climate change. How companies choose to address these challenges will determine the future vitality of their businesses.

Business’s water-related risks are driven by two things: its reliance and impact on water resources. 

The business community runs on water. It’s central to nearly every stage of the value chain, from extraction to consumption. Agriculture accounts for 70% of global water withdrawals, while industry, which includes resource extraction and manufacturing,  accounts for 19%. Inland waterways, which are drying up at record speed, are also necessary for transporting materials and connecting products to consumers. A diminishing water supply is a substantial source of operational and supply chain disruptions for business, as well as increased costs. Globally, water scarcity has caused power station shutdowns, periods of impassibility of billion dollar trade routes and tightening regulations including caps and restrictions.

These disruptions have an economic cost; financial losses linked to water challenges are substantial — and they could get worse if businesses opt for inaction. In 2018, global companies suffered $38.5B in water-related losses and, in 2022, depleted and contaminated water supplies led to $13.5B of stranded assets across four major industries (oil and gas, electric utilities, coal, and metals and mining). According to a recent research note published by analysts at Barclays, the consumer staples sector is most vulnerable to water risk and faces a $200 billion impact from water scarcity. This is largely linked to the sector’s dependence on agricultural commodities, which are highly vulnerable to fluctuations in the price of water and disruptions from droughts and flooding. By acting swiftly to address water risk by putting in place proactive water management measures, the global consumer staples sector could save big — the cost of doing nothing is estimated to be around 18 times more than action.

Water challenges also have the power to dramatically transform consumer outlook. Businesses operating and sourcing in water-stressed or water insecure areas face serious reputational risks if allocation disputes and other conflicts arise with local communities. What’s more, issues around water security may render certain products ill-suited to or less desirable in certain markets. By 2030 1.6 billion people will lack safely managed drinking water and 2.8 billion will lack safely managed sanitation if current trends continue. In a water-scarce world, will your product still be attractive to the consumer?

Water — at the heart of the climate crisis

The risks posed by water scarcity and pollution are not just financial, they’re also fundamentally ecological. Businesses that are serious about reducing their environmental impacts and operating in alignment with nature won’t be able to do so by acting on climate alone. Water plays a vital role in mitigating and adapting to the effects of climate change, as well as preventing biodiversity loss.   

Earth’s systems are interconnected; the stability of one system depends on that of another. We impact water systems directly and indirectly. Water supply is stressed due to increasing demand, and this is further exacerbated by climate change and pollution. Increasing temperatures and more extreme, less predictable weather conditions have a profound effect on the water cycle. This has led to unprecedented droughts and floods, both of which have significant land-use and biodiversity impacts. For example, soil is our water’s natural filtration system. Major drought conditions degrade the quality of soil, compromising its ability to absorb water. When the rains do come, the degraded soil cannot absorb water as readily, and, as a result, it leaves the area as run-off, further weakening the soil through erosion. The water that remains accessible is increasingly polluted, as 80% of global wastewater is released into the environment untreated.

The consequences are severe. In April 2022, scientists raised the alarm on the freshwater planetary boundary. Planetary boundaries are the “safe zones” for human impact and consumption of certain resources such as climate, land, and water. The transgression of a planetary boundary risks irreversible environmental changes. This is a perilous indicator for the future of water availability and risks further destabilization of other boundaries including climate change and land use. Ambitious actions to preserve and restore water resources are important if businesses are serious about making progress on their environmental goals.

It’s time to turn the tide on water risk

Despite the clear economic and environmental imperatives to act, companies are not yet reducing water withdrawals according to global sustainability targets. In fact, only 31% of companies in high-impact sectors have established incentives for C-Suite executives on water-related issues.

The transition to water stewardship and a water secure future will require  transformation of business models, practices and products. Companies formed their historic practices based on the availability of cheap and abundant access to water, which is now a relic of the past. The average price of water increased by 60% in the 30 largest U.S. cities between 2010 and 2019. History has taught us that ignoring a problem over time will compound its consequences. Reservoirs such as Lake Mead, the largest reservoir in the U.S., are drying up at alarming rates and may face a fate as dusty as the Aral Sea if business does begin to pay attention. 

Ignorance is no longer an option as supply diminishes and price dramatically increases.

Addressing water as a strategic business priority

The time has come for companies to adopt ambitious strategies to respond to the challenges at hand. These strategies must be set in coordination with climate, land, and biodiversity targets.

You can’t manage what you don’t measure, so assessing and estimating your value-chain-wide impacts and dependencies on water is the first place to start. Conduct comprehensive water footprint and risk assessments using established tools, such as those listed below, to gather data and develop a list of potential issue areas and locations for target setting. The Science-Based Targets Network (SBTN) offers extensive guidance to support corporate assessments. Be sure to also encourage and facilitate suppliers to conduct assessments of their own water usage and impacts. Resources available to support your water assessment include:

• WWF’s Water Risk Filter is a screening tool to help companies and investors prioritize action on where it matters most to address water risk.
• Aqueduct was developed by the World Resources Institute to identify and evaluate water risks around the world.
• The Water Risk Monetizer helps you assess water-related business risks to understand the gap between what your business pays for water and the potential costs of water risks to your business.

Data from your assessments can help inform strategic planning. Set ambitious science-based targets utilizing established water-related frameworks such as the science-based targets for water methodology by SBTN (to be released in 2024), enterprise water targets, and volumetric water benefit accounting. Align your ambitions to what is necessary and set them for the near-term and set key performance indicators to measure progress. Prepare to disclose data in line with CSRD and beyond, as transparency is necessary for the global community to understand water risks associated with this shared resource and to drive further action by your company.

Once your targets are set, prepare to transform the mindset of your company to align with your targets. In collaboration with key stakeholders such as investors, customers, sites, suppliers and communities, develop clear water action plans to direct decision making to support your set targets. Deploy new business models, operational initiatives, location-relevant strategies, etc. to reduce water use and pollution. Implement water stewardship programs that will benefit the communities you operate in to ensure continued sustainability and relationships. Be sure to implement annual reporting on your progress and report publicly to maximize the potential of collective efforts to preserve watersheds.

Over time, such strategies will lead businesses toward becoming the water stewards our world desperately needs. Companies that begin to develop strategies sooner rather than later will be better resourced to respond, adapt, and thrive in a rapidly changing world.