think water scarcity isn’t a risk for your company?
think again
While corporations have increasingly grown accustomed to examining the risks posed by climate change, these efforts have mainly been focused on energy and green house gases (GHG). Businesses, however, can no longer afford to overlook the additional risks of water scarcity and diminished water quality. To raise awareness about these risks and their effect on the bottom line, we’d like to go into details about the issues and then begin a dialog around the solutions.
The two key factors creating water scarcity are climate change and increased demand. Together they are applying previously unseen pressure on municipal, residential, and corporate water use.
climate change
Studies have shown an increase in the duration and intensity of droughts, as well as changes in precipitation patterns and snow pack caused by climate change. Naturally, if we don’t have the rainfall and snow melt necessary to 
replenish our rivers and lakes, we will be forced to rely more on alternative sources such as groundwater. Unfortunately, rising sea levels threaten these freshwater reserves, especially along the eastern U.S. coast. An estimated 50 percent loss of freshwater supplies could occur in coastal communities from a combination of over pumping groundwater, growing population, and rising sea levels.
increased demand
Our water supply will be put under additional strain due to an increase in population and global demand. The U.S. Census Bureau forecasts global population climbing to 9 billion people by 2040, further fueling the need for water simply for food, sanitation and drinking. As populations expand and become wealthier, the demand for agriculture increases. As the leading water-consuming industry, agriculture currently accounts for 70 percent of the world’s annual freshwater consumption, and up to 90 percent in the developing world. Adding to the world’s water demand is the growing wealth of developing nations. As their wealth grows, their citizens increasingly prefer the taste of meat. Beef is a particularly sought after and surprisingly water intensive item. One pound of beef takes 1,500 gallons of water to produce, making it one of the most water intensive food products.
water scarcity and the risks to business
Many companies today have an understanding of their carbon footprint, but very few know their water footprint. Even fewer know the water footprint of their supply chain and take into consideration the potential risks posed by water scarcity. Think about all the points where your business requires water. Now, what would you do if you faced water shortages or even a complete lack of clean water? The potential risks for businesses fall into three main categories:
- Physical Risks
- Regulatory Risks
- Brand Equity Erosion
physical risks
There are several physical risks associated with water scarcity, including unexpected shortages, poor water quality, and balancing supply and demand. Products ranging from beverages to metals to silicon chips require tremendous amounts water. Intel and Texas Instruments used 11 billion gallons of purified water for the cleaning silicon wafers and cooling the equipment in 2007 alone. Most of that production took place in Asia where water scarcity is already a problem. A JPMorgan study estimated that a water-related shutdown of a silicon chip production facility could result in a loss of up to 200 million dollars per quarter.
Let’s use a hypothetical example. You run an apparel company, and the areas where the majority of the world’s cotton is grown are experiencing droughts; several problems may arise. The price of cotton could rise, the amount of cotton you can source may be limited, or your main source of cotton may no longer be available because farmers can’t plant their crop. What happens to your company if it can no longer find enough cotton, or to your profit margins if the price of cotton rises dramatically? Cotton as a crop is highly susceptible to water shortages and yet most of the production occurs in water scarce regions of the world: China, U.S. (primarily Texas and California), India, and Pakistan. If the governments in countries where cotton production occurs, decide they need the water for food production instead, your company will have suffered the next type of water related risk.
regulatory risks
Regulatory risks can occur anytime there is a greater public need for water and a particular sector is utilizing too much of the resource. California has faced a record drought this year and Gov. Schwarzenegger has said that if companies in California don’t conserve water voluntarily, they could face mandatory rationing. The drought in California could mean an economic loss of $3.5 billion in 2009 alone. Los Angeles Mayor Antonio Villaraigosa said,”Water shortages are becoming permanent realities.” As a result, he has accelerated water use restrictions as part of a twenty-year water plan.
Half way around the world, Coca-Cola is struggling to maintain its water-rights contracts. In Kerala, India, both Coca-Cola and Pepsi Co temporarily lost their licenses to use groundwater at their bottling plants when the local wells and hand pumps went dry. The Central Ground Water Board of India found that not only was Coca-Cola extracting a tremendous amount of water, but they were also causing ecological imbalances. Coca-Cola maintains that they were not the cause of groundwater depletion. However, the local government in Kerala decided that appeasing its local citizenry was more important than the contract they had with the global beverage giants. Local outrage has been expressed in many communities with bottling plants, and has led many citizens to boycott Coca-Cola altogether, causing damage to the brand and sales.
brand equity erosion
Coca-Cola’s actions in India have caused them to lose not only water rights, but also the customers upon whom they rely. In an attempt to avoid other water related incidents, Coca-Cola has embarked on an ambitious partnership with the WWF (World Wildlife Fund) to improve its water efficiency 20 percent by 2012, hopefully saving 50 billion liters of water. Coca-Cola is making strides to improve the sustainability of their supply chain and institute water stewardship programs, with over $20 million invested in the partnership so far, but damage to their reputation has been profound and expensive.
create an action plan
The economic incentives for companies to evaluate their water inputs and outputs are clear; the plan to mitigate water related risks is not. Fortunately, Ceres and the Pacific Institute have authored a study on water scarcity and have recommended businesses take the following steps to create a corporate action plan for water:
- Measure the company’s water footprint (i.e., water use and waste water discharge) throughout its value chain.
- Assess the physical, regulatory and reputational risks associated with its water footprint, and seek to align findings with the company’s energy and climate risk assessments.
- Engage key stakeholders (e.g., local communities, NGOs, government bodies, suppliers, employees) as a part of the water risk assessment, long-term planning, and implementation activities.
- Integrate water issues into strategic business planning and governance.
- Disclose and communicate water performance and associated risks.
Once a corporate action plan is in place, there are benefits from the newly gained knowledge beyond mitigating risk. There are profits to be had in efficiency and innovation. The tech titan IBM achieved savings of $3 million for a single production plant while increasing output by 33 percent. They achieved this through a 27 percent reduction in water purchases, $1 million in savings from water treatment reduction, and $1.5 million in energy savings, without incurring any capital costs. Taking water efficiency measures can also improve a company’s public image, as well as its relationships with the communities in which it operates.
What has your company done to evaluate its water-related risks? Please share your own efforts and results. We want this to be a forum in which we can learn from each other and build on best practices.
[...] a company already familiar with the social and reputational risks of water scarcity, (link to water + business risk post to reference incident in India) announced via Chief Executive [...]