For the first time, the World Economic Forum’s annual Global Risks report has ranked the water supply crises as the number 1 global risk to businesses over the next ten years. Meaning the number 1 risk to businesses is their inability to access, sustainably, good quality water of sufficient quantity necessary for the creation of economic goods and services.
How are companies exposed to water risks?
Companies need to understand the concept of physical and ecological footprints: The physical footprint is the percentage of the Earth’s surface their facilities are located on – the company’s direct operations, while a company’s ecological footprint is the geographical area in which their suppliers (of goods or services) are located in – their supply chain. Therefore, companies are exposed to water insecurity through both their direct and supply chain operations.
Mega-trends and corporate water risks
To mitigate the corporate water risks, companies need to understand the global mega-trends that impact water security of all users including companies directly and indirectly. These mega-trends include:
Rapid urbanisation: Currently 50% of the world’s population is urbanised. By 2050 this will rise to 75% increasing demand for water resources. In addition, water quality is threatened by land-use changes that degrade ecosystems, point source pollution from industrial and domestic waste, and non-point source pollution from organic and inorganic chemicals.
Rapid economic growth: Rapid economic growth in emerging markets will see a significant increase in the percentage of water resources used by industry: In low-to-middle income countries, industry typically accounts for around 10% of total water withdrawals; however, this rises to nearly 60% for high-income countries.
Increased energy demand: World energy consumption will grow by 56% between 2010 and 2040 with most of this growth in non-OECD countries. This trend will result in increased demand for water in the production of electricity.
Increased food demand: Currently, the world’s population is 7.2 billion. This will increase to 8.1 billion in 2025, 9.6 billion in 2050 and 10.9 billion in 2100. Currently, agricultural production accounts for 79% of water withdrawals, but this is expected to increase by 75-100% over the next half-century.
Climate change: Climate change will likely increase the frequency and magnitude of floods and droughts. Specifically, flooding will decrease the availability of good quality water from the contamination of surface and ground water supplies, while droughts decrease the quantity of water available while increasing demand for water for cooling and drinking.
Corporate water risks
If companies do not address water security overall, they will be exposed to numerous risks, which include:
- Financial – Losses from disruptions to the production cycle as well as increased costs of treating poor quality water.
- Litigation – Consequences of lawsuits or other legal actions in relation to the company’s impacts on water quantity and quality of other users.
- Physical – Include both current and predicted change in water quantity and quality that may impact the company’s direct operations, for instance lack of water supply can slow down or stop production.
- Regulatory – The impacts of current and/or anticipated water-related regulations on a specific company.
- Reputational – Current or potential conflicts with the public over water issues that can damage the company’s brand image locally, nationally or internationally, or result in the loss of the community’s license to operate within a certain location.
- Strategic – Failure to incorporate water availability data into strategic planning.
- Technological – Lack of adequate technology in ensuring the efficient use of water resources, which can hinder production during times of limited water supply.
Corporate water risk management strategies
To achieve water security in both their direct and indirect operations and mitigate the numerous risks of water insecurity, companies can implement a 5-step corporate risk management strategy.
1) Companies can establish a water policy and set quantifiable goals and targets on water-use efficiency and conservation to minimise water-related risks to their direct operations,
2) Companies can assess water conditions and risks to both their own operations and those of their suppliers,
3) Companies can implement best-available technology for reducing water consumption,
4) Companies can factor in water-related risks (droughts, floods, sea-level rise) into their business decisions and,
5) Companies can form strategic partnerships to address water-related problems on a regional scale.
Global mega-trends will exacerbate water insecurity exposing companies to numerous risks to both their direct and indirect operations. To achieve water security, companies can follow the prescribed 5-step process.