New Tool Monetizes Growing Business Water Risk

In November CDP (formerly the Carbon Disclosure Project) released its 5th annual Global Water Report: From Water Risk to Value Creation.  The report analyzes responses from 174 (35%) of the largest 500 global companies (Global 500) to the CDP water survey.  One of the key findings: 68% of respondents are exposed to water risk that has the potential to “generate a substantive change in their business, operations or revenue.”  The sectors reporting the greatest exposure to water related risks are shown below:

Water Risk Sectors

Twenty-two percent of respondents report that water insecurity could constrain growth, and fully one third of those indicate that constraints could be reached in the next 12 months.  The top five risks drivers identified by respondents are

Water Risk Drivers

Digging deeper into the Consumer Staples Sector (food and beverage, personal and household products) illustrates that water risk is a problem companies are already dealing with.  Exposure to water risk in direct operations was reported by 77% of respondents; 77% also reported supply chain risk, the highest for all reporting sectors.  Water risk is not hypothetical, 45% of respondents reported detrimental impacts of water challenges in 2014.  The sector is responding to these challenges with over 80% setting goals to reduce water use or intensity and 52% requiring suppliers to report on water use.  Driving these actions are the opportunities to: improve water efficiency, reduce cost, and increase brand value (as reported by 45% of respondents).

Overall, the move to action is not as clear.  Though a majority of respondents report exposure to substantive water risk only 38% report that they are assessing that risk in their direct operations and supply chains.  Respondents reported to CDP that awareness of the problem is increasing and consensus is building around how to monitor and manage the issue.

Water Risk Monetizer

The Water Risk Monetizer, a new tool released by Ecolab, Inc. and Trucost may help build support for taking action to address water risk.  The Water Risk Monetizer is a freely available, online tool that enables not only the identification of water risks, but the cost implications of those risks.  As a financial modelling tool it adds another dimension of information to the water risk discussion that will enable these risks to be more concretely included in corporate-level strategic planning and risk mitigation activities.  Users enter facility-level information into the tool such as location, annual water use, production, etc. and the tool provides information on the financial water risk premium (in dollars) in one, three, five and ten year time frames.  Qualitative risk scores (e.g. High, Moderate) are provided for water scarcity, reputational risk and regulatory risk.  The Water Risk Monetizer has global coverage so it can be used to assess risk for direct operations and in the supply chain.


New Water Risk Metrics Combines Impact of Scarcity and Drought

Columbia University, Veolia Water, and Growing Blue have released a report that provides a new perspective on water risk in the U.S.  While other tools look at the water supply and demand imbalances to measure risk, this report also adds in the impact of climate variations such as drought.  In America’s Water Risk: Water Stress and Climate Variability two new metrics were developed:

Normalized Deficit Index (NDI) – measures the influence of within-year dry periods
Normalized Deficit Cumulated (NDC) – measures the influence of drought across the years

Water ThumbnailEach metric was computed across all 3,111 U.S. counties for 61 years (1949 – 2009).   The report indicates the potential for severe water stress “over much of the agricultural belt of the mid west USA as well as the arid regions of California and Arizona.”  Many of these high stress areas would require 2-5 times the average annual rainfall to meet demand.  Click the thumbnail on the right to see the full map of areas with the greatest water risk.

Continuing water scarcity in the Midwest has far reaching impacts.  In 2012 drought reduced corn yields and drove up prices.  This led a group of states and representatives from the livestock, poultry and food industries to petition the EPA to waive the mandate to blend corn-based ethanol into the nation’s gasoline supply.  Though the EPA rejected the waiver request, continuing drought will keep the food vs. fuel debate alive and pressure on the EPA to adjust the blending mandates in the Renewable Fuel Standard (RFS).

Business also faces water scarcity risk.  The report indicates that water scarcity risk can take many forms and occur at many points along the industrial supply chain.  As outlined in a previous post, many S&P 500 companies have already experience negative impacts due to water related issues.


Water Scarcity a Growing Business Concern

Globally, water demand is predicted to exceed supply 40% by 2030 according to the report Charting Our Water Future .  The report was produced by the 2030 Water Resource Group – a consortium of businesses formed in 2008 to look at water scarcity issues and headed by the World Bank and McKinsey & Company.  The map below, developed by the U.N. Environment Program, highlights geographies that are experiencing some level of water stress.  With the red areas considered to be over-exploited – that is, water withdrawals already exceed the recharge rate, resulting in resource depletion.

water-scarcity-index_14f3Source:  United Nations Environment Program

In 2012 the U.S experienced the most severe and far reaching drought in the past 25 years, with over 2,000 counties in 26 states being declared natural disaster areas.  This is the largest disaster declaration in U.S. history.  As of late April 2013 the U.S. Department of Agriculture predicts that most of the U.S. west of the Mississippi will continue to experience varying levels of drought; with the most severe drought conditions occurring in a line from South Dakota down through Texas.  For the most up to date information the USDA Drought Monitor can be found here.

The CDP’s 2012 US Water Report shows that water-related issues are already a concern for many U.S. businesses.  Of the 141 S&P 500 companies surveyed 45% said they had experienced detrimental impacts due to water related issues in the past five years.  For example, in 2008 Southern Company reported a $200 million loss from reduced power production caused by drought, and in 2010 Kimberly-Clark reported a $2 million loss due to production curtailments caused by drought.  Additionally, 63% of respondents identified water as a substantial business risk to their direct operations or supply chain.

The takeaway is that water scarcity will continue to be a business risk that should be actively managed to reduce the negative impact it may have on operations and the bottom line.  When water scarcity is severe enough companies must approach the issue as one of risk management and mitigation, not necessarily cost control.