Identifying Water-Related Business Risks



As one of the key drivers for water accounting, we will look closely at the types of waterrelated risks that businesses are exposed to, as well as the ways in which water accounting methods/tools are working to (and intended to) identify and mitigate them. Our headline conclusion is that all water accounting methods/tools reviewed for this study are generally good for risk identification purposes, particularly in terms of providing a “broad brush” understanding of relative water risk. However, each approach provides unique information, helping companies understand the nature of the risk in different ways.


The interplay between waterrelated impacts and business risks

Water-related business risks are closely related to water-related impacts. In most cases, companies with significant water impacts will be subject to corollary business risks. However, the inverse is not necessarily true: even companies with relatively insignificant water impacts may face major water-related risks. This is typically due to physical and/or socio-political factors that may change outside the company’s fenceline. For instance, economic development or population growth in a region may increase pressure on water resources and thus jeopardize a company’s continued access to water. New source water pollution may require (through regulation or otherwise) a company to install expensive on-site pretreatment technology so that the water is of suitable quality for production processes. In this respect, water-related impacts are just one (albeit a large) subset of issues that create water risk for a company. While it may be true that not all social and environmental impacts eventually manifest themselves as business risks, companies often find addressing major water impacts (both the company’s impacts on others and vice versa) a prudent risk management strategy.

Impact assessments attempt to explore the implications of water use and discharge on “external” factors such as human health, community access to water, ecosystem health, etc. In contrast, assessments of business risks tend to focus more on exploring the implications of this water use and changing external circumstances on “internal” factors such as the company’s legal access to water supplies and services, operational efficiencies, investor confidence, consumer perceptions, etc. Both types of assessments (risk and impact) require companies to consider how their own water use fits within the broader local water resource context. As such, the process for assessing impacts on watersheds, ecosystems, and communities is often linked to (or at times integrated with) the process for assessing business risks. For this reason, it is useful to consider water impacts and risks together; however, it is also important to note that the various water accounting methods/tools may have an emphasis on one or the other.

While some water accounting methods (e.g., LCA) are geared toward addressing the environmental and social (e.g., human health) impacts a company might have as a result of its water use and discharge, others focus instead on allowing companies to broadly understand their water risk, for example, by using place-based water indicators that contextualize the company’s water use (e.g., WBCSD Global Water Tool). Others (e.g., water footprinting) aspire to shed light on both a company’s business risks and impacts.


The range of water risks

Companies’ growing interest in water is driven by a number of factors, including pure operational efficiency, brand management, and corporate ethics/philanthropy. However, they are all ultimately driven by the desire to reduce related business risks whether that is to maintain social license to operate, build competitive advantage, encourage investment, or ensure long-term water supplies. The severity and type of these risks (as well as the appropriate mitigation strategies for them) depend on geographic location and type of industry sector and water use. That said, water-related business risks are often divided into three general and inherently inter-related categories:

  • Physical: Physical risks pertain to the inability to access adequate water supplies or services to effectively manage a company’s operations. This can be caused by drought or long-term water scarcity (i.e. insufficient and/or unreliable access to water); flooding (causing damage to infrastructure and/or disruptions in supply); or pollution, to the extent that such water is rendered unfit for operational use. This is most often a problem for companies with water-intensive operations in water-scarce regions. In many of those regions, climate change is exacerbating the problems of water scarcity.
  • Regulatory: Regulatory risks manifest themselves when policymakers and/or water managers change laws or regulations or management practices in ways that alter companies’ access to water supplies/ services, increase the costs of operation, or otherwise make corporate water use and management more challenging. Stricter regulatory requirements often result from water scarcity and/or ensuing conflict among various needs (e.g. ecological, urban, agricultural, industrial) or because of public perception of a company’s water uses and discharges as wasteful, disproportionately harmful, or inequitable. Regulatory risk can also stem from poor management—and therefore an inconsistently applied regulatory framework—among a region’s water managers.
  • Reputational: Reputational risks stem from diminished stakeholder perceptions (i.e., consumers, investors, local communities, etc.) due to inefficient or harmful production activities (or products) that have (or are perceived to have) negative water-related impacts on watersheds, ecosystems, and/or communities. Reputational concerns can lead to decreased brand value or consumer loyalty or changes in regulatory posture, and can ultimately threaten a company’s legal and social license to operate.

All of the abovementioned risks lead to financial risks, which are created by increased costs or lost revenue due to the diminished status of the local watershed (i.e. scarcity or pollution) or the mismanagement of water resources. For instance, water scarcity or excessive pollution can lead to higher water prices, disruptions in production due to unreliable water supply, higher energy prices, higher insurance and credit costs, or damaged investor confidence, and therefore significantly affect the profitability of certain operations.

New stakeholder expectations regarding corporate responsibility now expose companies to financial risks based on the perception of inefficient or inequitable corporate management of water resources.


Click each box to learn more about each method’s approach to water-related business risks

Our research suggests that businesses consider
water footprinting (WF) a useful framework for understanding and contextualizing their water use, and in turn, for identifying related water risk “hotspots” in their products, facilities, and/or supply chain. In this regard, WF can be considered quite effective for “big picture” strategic planning purposes and for helping companies prioritize actions and set long-term objectives and targets. The strengths and weaknesses of WF as a risk assessment tool are explored below.

Green-blue distinction
For companies that have undertaken WF, the distinction between blue and green WFs appears to be quite helpful. This is particularly (and perhaps mostly) the case for companies in agriculture-based industry sectors (such as food and beverage, textiles, etc.) due to their greater reliance on green water supplies. This may also prove true for companies with large land-use impacts such as those in the petroleum, mining, and forestry industry sectors, among others. With regard to agricultural production, blue water essentially is comprised of irrigated water (whether groundwater or surface water), while green water is comprised of the evapotranspiration of water naturally occurring in the soil from precipitation. Though evapotranspiration occurs in the absence of human intervention, it varies greatly depending on the type of land use (e.g., fields, orchards, pasture, forest) which humans frequently modify for agricultural purposes.

The green-blue distinction is helpful because these two types of water use create substantially different potential risks and have different impacts on the surrounding hydrologic region. Blue water use directly depletes aquifers and surface waters, thereby potentially contributing to water scarcity, destruction of ecosystems, and/or reduced access among human communities, among other things. There is often competition for blue water among users, sometimes leading to business risks when corporate water use hinders, or is perceived to hinder, other uses. In contrast, green water use does not deplete aquifers or surface waters, but rather uses water trapped in the soil. This typically does not create risks in and of itself, but can pose risks when it relates to changes in land use, for instance converting forest to agricultural land. Such land-use changes can impact biota and ecosystem functions.

The distinction between green and blue water is also perceived as useful in its capacity to assess long-term risks related to climate change. Climate change is predicted to have significant impacts on regional hydrologic cycles and the availability of water for human uses. Precipitation patterns will change on a regional basis, with rainfall often becoming less or more frequent and more concentrated depending on the location. This has many implications for blue water resources (e.g. infrastructure’s ability to cope with longer droughts), but it particularly presents risks for operations in those regions heavily reliant on green water. Less frequent rainfall will ultimately mean less water stored in the soil. Because of this, those relying solely on green water use (namely agricultural growers in the Global South who do not have access to irrigation infrastructure) will simply not be able to sustain crop production through long droughts. This of course poses business risks for companies that rely on those growers as suppliers or that use large amounts of blue water in those same regions. For this reason, the green-blue water distinction in conjunction with climate change models can help companies better assess which of their water uses may be most susceptible to climate disruptions.

LCA is not typically characterized by companies and/or LCA practitioners as a water risk assessment tool, but rather a management decision support tool. Here, a distinction can be made between the different ways in which water accounting methods and tools define and address “risk.” In some instances (i.e., WBCSD Global Water Tool), the focus is solely on business risks—how local water conditions might potentially damage a company’s short-term or long-term viability, reputation, or profitability. However, a company’s water use/discharge may pose risks in a number of ways: it can lead to an inefficient use of resources and therefore money and it can negatively impact the ecosystems and communities in which it or its suppliers operate, thereby creating potential regulatory and reputational risks.

A key characteristic of LCA is its emphasis on science-based environmental or human health impact assessment, which in turn can serve as an entry point for companies seeking to identify and understand water-related business risk. Such LCA assessments are typically carried out using complex fate-transport modeling and other relatively sophisticated modeling techniques. While distinct from direct business risks, these potential impacts to ecosystems and communities may ultimately have severe implications for business viability. In this sense, to the degree to which companies with significant water impacts will be subject to corollary business risks, LCA can help identify operational “hotspots” whereby product design and technical improvements can be seen as risk mitigation efforts.

As with water footprinting, the WBCSD Global Water Tool appears effective at identifying water risk “hotspots.” However, where WF delves into the nature of company water use to help identify and characterize risks, the WBCSD Tool emphasizes geographic location as the primary basis for a qualitative assessment of relative water risks. The Tool is typically used by companies seeking to identify “hotspots” across global operations by comparing sites’ relative water stress. This allows companies to prioritize their mitigation activities on facilities in water-stressed watersheds which are presumably more likely to pose water-related risks. It does not provide an in-depth system for companies to accountfor water use or impacts.

The Tool provides companies with a series of data and maps that reflect country-level and watershed-level data and help identify risk. Metrics used to shed light on the nature and degree of risk based on the local water context include:

  • Mean annual relative water stress index
  • Access to improved water
  • Access to improved sanitation
  • Annual renewable water supply per person (1995 and projections for 2025)
  • Ratio of industrial to total water use

The Tool allows companies to evaluate each of their facilities based on these “contextualizing” metrics. For instance, a company can use the Tool to determine what percent of its operations or suppliers are in regions considered to be under water stress or the percent of its employees who live in countries where populations have low/high levels of access to improved water and sanitation. By providing these indicators for each of a company’s operations or key suppliers, the Tool helps to identify and characterize the risks that are prevalent on a site-specific basis.

Both GEMI’s Sustainability Water Planner and Tool can be used to assess water-related
business risk. Like the WBCSD Tool, the GEMI Tools focus primarily on identifying and mitigating risks that occur because of issues external to the company operations (e.g., infrastructure, pricing, scarcity, etc.).

The Planner assesses the likelihood that these external factors might have negative effects on specific facilities. It is built around a web-based questionnaire that features seven components: General Information, Watershed, Supply Reliability, Efficiency, Supply Economics, Compliance, and Social Context. The Planner uses questionnaire input data to provide quantified “Average Risk Ranking” scores (0-5) for each of these components and provides links to variables, documents, and articles that may be relevant to the company based on their survey input. This helps companies identify specific issues that may pose the most significant risks in a particular area, and provides some preliminary information on how the company may mitigate those risks.

The Tool is focused on business-wide water-related risks. It is divided into three steps: 1) Water Use Risk Assessment; 2) Water Impact Risk Assessment; and 3) Prioritize Water-Related Risks. In the first step, companies answer a series of questions to determine the business importance of each water use; how sensitive the company is to changes in issues such as water pricing, availability, quality, or the loss of a specific water source; and the probability that these changes will occur. The second phase is a very similar analysis to step one but is focused on risks due to discharge and pollution. Once these steps are complete, companies plot their water uses on a matrix that features business importance and chance of change on its axes in order to easily prioritize different actions.

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