Illiquid: Why water is the strategic business issue you cannot ignore

How would your business cope in a world with 50% less water? With government leaders taking steps to protect dwindling water resources in the face of climate change and water stress, water is emerging as one of the most important strategic issues of our time. In this article, we explore how businesses, particularly in ‘thirsty’ industries, can prepare for a future that is likely to be drier and more unpredictable than ever.

France experienced its worst drought on record in 2022. Usually, the wet winter months can make up for a summer drought. But following a record 32 days without rain over the winter months, reservoirs were left at 80 percent below normal levels. The country’s unprecedented extended dry spell prompted President Emmanuel Macron to declare an ‘end to abundance’ and in March, he unveiled a water crisis plan aimed at bringing ‘sobriety’ to the country’s water use practices.

For large businesses paying close attention, the message is indeed ‘sobering’. The developments in France highlight how governments and businesses are being forced to confront the real impacts of climate change unfolding today; many of which involve water. From droughts to floods and other severe weather events, as well as degraded water quality, many of those changes put water resources and infrastructure at risk.

With that in mind, we can expect other countries to follow suit – creating ‘water crisis’ plans of their own to reduce consumption and promote reuse, with a range of
potential business impacts.  For businesses, particularly in ‘thirsty’ industries such as agriculture, manufacturing, mining, and food and beverage production, the writing is on the wall: water is a strategic business issue that can no longer be ignored.

While major corporations have spent the last decade focused on shrinking their carbon footprint, the world’s water resources have grown increasingly scarce. Now, more than four billion people experience severe water scarcity for at least a month each year, and this year’s UN Water Conference made clear that corporations will be expected to play a large part in providing solutions. The beauty and harsh reality of water is its necessity; while not every company ‘sells’ water, water is indeed
everyone’s business. Organizations must begin addressing the growing risk of water-related impacts on their global operations today – and prepare for a future that is likely to be drier and more unpredictable than ever.

Source: McKinsey Water 2030 Global Water Supply and Demand model; agricultural production based on IFPRI IMPACT-WATER base case; World Water Development Report, World Research Institute, United Nations University Institute for Water, Environment and Health

The risky road ahead

The gap between water supply and demand is widening – with climate change increasingly driving a wedge between the two. At the current pace of industrial activity, we can expect a 53% shortfall in global water supply by 2050. For businesses, water stress will manifest itself in multiple – often interconnected, and financially material – ways.

  • Market Risk: Inconsistencies or reductions in the supply of raw materials and/or ingredients could result in price volatility and/or loss of contracts or market access.
  • Operational Risk: Changes in production zones could reduce outputs, increase transport costs, or result in stranded assets.
  • Regulatory Risk: Changing regulations, a failure to anticipate future government action (e.g., reallocation of water rights or increased tariffs), or even compliance violations, legal action, and sanctions for failing to address negative environmental or human rights outcomes could have lasting negative impacts.
  • Reputational Risk: Consumer concerns over the company’s inaction (real or perceived) could damage brand equity.

Astute business leaders can already see this unfolding in real-time. In fact, the number of companies disclosing on their water risk to the CDP almost
tripled between 2015 and 2021 and nearly a quarter of the industrial respondents to CDP’s most recent Global Water Report reported high water risk is already directly impacting operations.

One consequence on the horizon for many businesses is that it may become increasingly difficult to secure new capital and customers. Today, over 700 financial institutions and investors are now using climate or water security data to inform their investment decisions. At the same time, 90% of large purchasing organizations say they are engaging with their suppliers to benchmark and improve on their environmental performance – including both water and wider climate metrics.

In total, experts estimate more than $300 billion is at risk due to water stress, with at least ~$50 billion in investment needed to address it. The cost of inaction, however, is expected to be five times higher than that of taking action – making it even more surprising that no more than ~30% of the CDP respondents have reported that they have developed plans to set water targets and address water risk.

Source: CERES Investor Water Hub

Moving forward with confidence

While the risk levels and solutions to reduce risk will differ greatly across regions, companies and industries, the steps toward greater water security are similar for most.

1. Diagnose

The first step is getting a clear understanding of nature and severity of your water risk at a global level – and its potential impact on your bottom line. Specifically, you want to be able to assess water availability in terms of quantity and quality within the context of your current business operations, as well as your projected
water requirements and availability for at least 10 years into the future. For many, the goal will be to identify your highest priority sites; namely, your operational, sourcing, or production and manufacturing areas that may be facing the most acute water risk and generate a high-level estimate of the economic risk faced,
both per site and in total.

Understandably, this step involves gathering and analyzing a wide variety and volume of data – including data about your current operations, water sources, water withdrawal volumes, the level of on-site treatment and reuse, the nature and duration of your permits, access to infrastructure, such as external water treatment facilities or piping and more.

It may also be necessary to consider the water risk for entire watersheds, catchment areas, or basins which are connected to your operational site or water sources.
With a firm understanding of these and other factors, a ‘risk matrix’ begins to emerge, providing an overview of the likelihood, impact, and velocity of water risks you may encounter – whether they include physical risks, such as flooding, operational or regulatory risks or other brand and reputational risks – as well as insights enabling you to benchmark your risk level against that of competitors. However, as we saw in many events during the recent UN Water Week, there is also increasing pressure on corporates to take a broader approach to their water issues, and to actively identify water-related opportunities to make a positive social and environmental impact in those same “at risk” localities.

2. Design

From this position, businesses can next begin designing plans to reduce water risk across their entire operation. For many, it means digging deeper into the high priority / at-risk sites. The goal here is to develop a “lever library” of available measures from which one can evaluate the fit of various technologies and solutions, and determine which specific solutions have the greatest potential to improve water efficiency at each site – and how those actions can be best implemented.

At this stage we also begin setting short and mid-term targets, including pragmatic operational KPIs, and budgets. Budgets should estimate not only the  cost of the necessary actions but also a projected return for each site that includes not merely the savings achieved through reduced water usage, but more importantly the
overall risk that can be mitigated through such measures (including both operational and other risks).

For those who also consider additional measures on the social and/or economic front, this phase also involves estimating the potential for delivering the greatest impact for the local community (e.g., through water supply or reuse/irrigation projects, or WASH programs) and/or the environment (e.g., promoting biodiversity or natural regeneration in the local watershed). The same “lever library” can be used to identify solutions which can produce the best win-win-win approach for the company, the community, and the local environment. This is also a great opportunity to partner with DFIs, government agencies, and local community stakeholders.

3. Do

Lastly, in the implementation stage, the water risk mitigation plan is rolled out globally, according to your design roadmap, and measured against the metrics you have developed. Success in this stage will often hinge on the quality of execution in prior stages. By that, we mean that it is critical for companies to implement a concrete plan with a set of measurable metrics to demonstrate and track progress – both within the business and from a social and/or environmental perspective.

With water now being recognized as the frontline in climate impact and climate adaptation, we expect to see an increasing number of corporations
across nearly all sectors move to address the growing water risk to their operations. For many, this will mean not only avoiding disruptions or additional costs but preserving their very license to operate.