Water Crises Boost Company Values at Risk

When Water Crises Affect Operations, Companies Can Suffer Significant Profit Losses and Pay Higher Prices for Goods in the Supply Chain

Clean, consistent water supply — it's essential for businesses to operate. But few consider thevalue at risk (VaR)if they can't access the water they need. Water scarcity could drive up the prices of water and water-dependent materials. Impaired water quality could create new treatment costs. Even worse, companies could be forced to close down production in areas where they compete with local communities for the water supply.

What's Driving Water Crises?

In it its annual report on global risks, The World Economic Forumranked water crises as the third largest risk to global stabilityin the decade ahead. The rapid growth of the global emerging middle class is a major driver of water crises, as the world's limited supply of water is stressed by a population that steadily demands more resources.

Water needs are inextricably linked to increased consumption of food and energy, which is a direct result of higher incomes and standards of living. Ever-increasing energy needs are driving nearly half of the water withdrawals in the United States and Europe, according to the 2011 Ceres Aqua Gaugerisk management framework.

Climate change exacerbates water crises, as droughts, floods, hurricanes and other extreme weather events strain existing water systems. To prepare for these challenges,the United States may need to invest $1 trillionto upgrade its aging water infrastructure, according to the American Society of Civil Engineers' quadrennial infrastructure report card for America's Infrastructure.

How Companies are Affected

When water-related disruptions affect operations, companies can suffer significant profit losses and pay higher prices for goods in the supply chain. Further, water management issues pose the following immediate and significant risks to companies:

• Operational. Storms, droughts and other severe weather events can cause disruption of operations, increased supply-chain costs and erosion of product quality because of pollution.

• Regulatory. Stricter regulations can drive higher water-quality standards and increased costs related to treatment and litigation. Companies are looking closely at how regulatory issues in each of their locations might affect the bottom line.

• Reputational. Companies' operations can adversely affect local access to clean water and marine ecosystems, leading to negative publicity. Domestic and multinational companies alike have faced public backlash over issues related to depletion of local groundwater supply. Consequently, some companies are making significant investments in community education initiatives that start long before these organizations begin operations in some areas.

To mitigate those risks, many companies are adopting water-efficient technologies likeclosed-loop cooling systemsorsoil moisture sensors, working with suppliers to reduce water use in production processes and innovating to access new markets for cleaner and more water-efficient products. At the same time, they are fielding more frequent questions from investors, communities and other stakeholders about water- management practices.

Elevated water risk has led to increased expectations for companies to disclose how they're managing water. TheCarbon Disclosure Project's water program includes a questionnaireproviding investors with data on how organizations deal with water, in terms of evaluating it and strategizing for more responsible water use.

TheUN Global Compact's CEO Water Mandatealso was created to help companies develop, implement and disclose water-sustainability policies and practices. Further, many companies are including water management as a stand-alone component in their sustainability goals.

Source: CFO

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Taxonomy

• Water Losses
• Water Management