From Droughts to Floods, Water Risk Is an Urgent Business Issue

When companies think about risk, most of them don’t think about water. Historically, water has been available even in areas prone to drought, and flooding followed a fairly predictable pattern. But as the climate warms, the world is beginning to see more extremes — and that often means too little or too much water. Water scarcity contributes to wildfires, but other problems, too: As the water table drops, the quality of the water degrades, often leading to increasing concentrations of minerals and salts that are expensive to treat or can even make the water unusable. On the other extreme, more violent storms are already making flooding a new risk in areas that didn’t worry about it before. Floods and droughts are now sudden, unforeseen events — and increasingly hit areas in quick succession.

This growing variability has caught major corporations unprepared.

Risks are appearing on multiple fronts. Companies in water-stressed areas face increasing risk of regulatory restrictions on water use, or fully losing access. Last year Taiwan Semiconductor Manufacturing Corporation, the largest computer chip maker on the planet, had to truck water for miles to keep its chip fabrication plants running when the local water supply dried up. Barrick Gold, a Canadian mining company, is being forced to close the Chilean portion of its $8.5 billion Pascua Lama gold and copper mine because of concerns that the mine draws too much water from the local watershed. And a water shortage on the Colorado River threatens water supplies for more than 40 million Americans and food production for the rest of the country.

While the warming climate is drying up some areas, the evaporating water is being dumped in torrential rains elsewhere. A recent paper published in Nature predicted that flash floods are likely to become more common in a warmer climate. Most companies pay for flood insurance, but the data and models they rely upon are coarse and are rarely integrated with any analysis of actual impact on operations.

The changes to the natural environment are spurring responses in the regulatory one. The U.S. Securities and Exchange Commission (SEC) has already proposed disclosure rules that could go into effect by the end of the year. Under the proposed rules, companies will be required to disclose the percentage of their buildings, plants, or properties that are in areas at risk of flooding and to disclose the amount of assets located in areas of water stress along with those assets’ total water usage.

There’s no way to escape these global changes, but there are ways to understand and plan for them. Right now, many companies have no idea of what their exposure might be, let alone how investors might feel about those vulnerabilities. They shouldn’t wait until disaster — or mandated regulatory disclosures — forces them to make an accounting of their vulnerabilities. Instead, they need to start collecting relevant data and proactively preparing to address the growing threats.

Running Dry

There are three basic sources of water: surface water such as rivers and lakes that are replenished primarily through rainfall and snowmelt; groundwater in replenishable aquifers a few hundred feet below the surface of the earth; and deeper, non-replenishable aquifers with so-called fossil water that is thousands if not millions of years old.

While changing rainfall patterns are causing droughts in some areas and floods in others, groundwater is quickly become a pressing concern.

A study that measured groundwater from 2002 to 2017 found that over half of the world’s major aquifers are being depleted faster than they are being replenished. By 2050, another study predicted, more than half of the world’s population will reside in water-stressed areas. The trend will only worsen as climate change and population growth progress.

Groundwater is poorly managed in most of the world, and companies shouldn’t assume their business is drawing water from a replenishable source. One of the world’s largest aquifers, the Ogallala Aquifer, stretches from South Dakota to Texas and supplies drinking water to more than 2 million people in eight states, and irrigation water for the entire region. Large-scale extraction of water from the aquifer began after World War II and has been accelerating ever since. Scientists estimate that the southern portion of the Ogallala, from central Kansas to Texas, will run out of water in less than 30 years. Once depleted, they estimate that it will take over 6,000 years to replenish the aquifer through rainfall.

Versions of this story are happening all over. And as the global water crisis has percolated into public consciousness, companies have been responding with actions to highlight their water stewardship. The trouble is, without some regulatory oversight, it’s difficult to know how effective those actions are or whether they are just efforts to burnish corporate reputations. The point of the coming disclosure rules is to provide some transparency in the face of greenwashing public relations campaigns that obscure the real story.

So what does that mean for companies?

Finding the Water Level

The World Resources Institute, the World Wildlife Fund, and our company, Waterplan, each offer water risk platforms to help companies gather the information that will be needed for these disclosures. By bringing together satellite data, regional watershed data, and company consumption data, companies can better understand the global and regional risks and quantify facility-level risks including flood and drought risk, water scarcity threats, and reputational risk.

Right now, the world’s largest aggregators of corporate water use data is the CDP, a nonprofit organization originally called Carbon Disclosure Project, which disseminates an annual water security questionnaire as part of an environmental impact disclosure system for companies and their investors. Current protocols for measuring and reporting water-related risk are largely aligned with the CDP water questionnaire.

The most prominent recommendations on water disclosure come from the Task Force on Climate Related Financial Disclosures (TFCD) — these are what the proposed SEC rules will follow. These guidelines were also used to shape regulations in the UK, the EU, Switzerland, Brazil, Hong Kong, Japan, New Zealand, and Singapore. Established in 2015 by the G20 Financial Stability Board and chaired by Michael Bloomberg, the TFCD requires information about what companies are doing to mitigate the risks associated with climate change, including water. Many countries are making TFCD reporting mandatory.

The Taskforce on Nature-related Financial Disclosures, meanwhile, was initiated in 2020 and offers an online portal to guide companies in reporting nature-related risks like freshwater consumption in stressed areas. This newer taskforce is focused on risks beyond climate change with a heavier focus on water than TFCD. It has released a draft disclosure framework that it hopes will become the gold standard for reporting and managing environmental risks.

It is not yet clear which disclosure protocol will take precedence in which jurisdictions.

Today, there are dozens of metrics, tools, and frameworks to measure how companies impact nature. Mandatory disclosure of those impacts is coming, so business leaders should familiarize themselves with the available tools, including the CDP questionnaires and software platforms that gather the relevant data. It will soon be required, but it is good practice to be prepared.

What Companies Can Do Now

Companies need a plan of action, and they need it now. There are a few simple steps they can start with.

First, they should immediately assess their water quantity impacts and set water use reduction targets that are informed by local conditions. They can invest in systems to improve reporting and traceability of water-intensive inputs. There is a coalescing market of mitigation tools and services to implement cost-effective solutions — such as using harvested rainwater, air-cooling condensate, and reclaimed wastewater — while returning any water drawn from rivers, reservoirs, or wells to the source.

Second, they should immediately assess their water quality impacts and use this assessment to set targets and develop action plans to improve that impact, such as reducing the use of harmful chemicals, investing in recycling technology, and reducing pollutant discharges — in particular, persistent organic pollutants and heavy metals that degrade natural ecosystems. For instance, Bangladesh extracts 80% of its water from groundwater, boring wells more than 200 feet deep in some cases. As a result, the World Bank estimates that up to 17% of the country’s population is exposed to elevated levels of arsenic, salinity, and other groundwater-depletion hazards.

Third, companies should engage deeply in water stewardship activities in the basins in which they operate by advocating for watershed protection, or by supporting new water conservation and groundwater sustainability policies, such as reforestation and wetland conservation, which help recharge aquifers. In South Africa’s Cape Town, which nearly ran out of water a few years ago, the city is cutting down invasive species that suck up water. Australian acacia trees alone are estimated to consume nearly half a billion gallons of water a year that would otherwise infiltrate the Atlantis Aquifer, just north of Cape Town.

Finally, companies should ensure that water-related risks and opportunities are fully embedded within corporate governance and decision making, from the boardroom and senior management to employees at all levels of the workforce. Gathering relevant data is key to understanding where the risks lie and how they can be addressed.

While the service sector of the economy is less dependent on water than physical industries, there are few industrial or manufacturing processes that are not susceptible to water risk. Apparel and textile manufacturing, cotton farming, livestock, oil and gas extraction, and mining are among the most water-intensive industries, according to CDP. If anyone needs convincing, CDP reported that water disruptions cost companies $301 billion in 2020 — five times more than it would have cost to address those risks beforehand.

Water risk might not your most pressing business problem right now, but at some point in the near future, it may well be. Beginning to address it now won’t necessarily be easy, but it’s only going to become harder — and more costly — the longer you wait.


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