Addressing water risks to build business resilience

Understanding water-related risks is key to helping businesses and societies to adapt to climate change, but too often, these risks are not understood and are under-valued. Ellen Shaddock, Sustainability Officer at AXA XL, explains how the global insurance and reinsurance company’s Valuing Water initiative aims to help companies better identify these risks and equip them with the tools to mitigate and manage them. By Ellen Shaddock, Sustainability Officer at AXA XL | March 24, 2023

The theme for this week’s UN World Water Day is “accelerating change to solve the water and sanitation crisis.” All of us – as individuals, companies, consumers, employers and – in our case, members of the risk industry – have a role to play in working to understand, address and mitigate water-related challenges.

Companies across all sectors need to recognise the acute need to address water risk, not only from an ethical and moral perspective but also to ensure sustainable business growth and resilient operations. Nonprofit CDP estimates that the cost to businesses of inaction on water risks is five times higher than the cost of action. But currently, too few companies are incorporating water-related issues into their financial and operational planning.

As part of AXA XL’s Valuing Water initiative, we worked with clients to understand the risks posed by too little, too much, or poor-quality water and published our findings in our interactive Water Risk Insights report. The report is designed to help improve understanding of water risk and some of the steps that companies can take to manage their own physical, regulatory and reputational-related water risks.
Subheading: Varied risks and challenges

To develop an understanding of the risks faced by different business sectors we worked with a range of clients and stakeholders. There are several sectors for which the challenges around water risk are acute, and the lessons learned from working with clients in these sectors, from understanding their risks and developing solutions, can serve a wider purpose in helping companies across all industries better assess, evaluate and manage their own water risks.

In our report, we looked at the risks faced by seven sectors that have particular exposure to water risk, namely: food, beverage and agriculture; apparel and textiles; utilities; manufacturing; technology and electronic equipment; healthcare and pharmaceuticals; and transport and logistics. While some of the challenges these sectors face are universal, others are more specific and illustrate the breadth and magnitude of risks posed to businesses by water scarcity, extreme weather events like flooding and the need for clean water, among other things.

The food and beverage sector consumes about 70% of the world’s freshwater and is, consequently, extremely sensitive to water stress. Many companies in this sector are leaders in water stewardship – some, for example, are aiming for 100% water reuse. But there are still areas of risk that companies need to address, notably vulnerabilities across the agricultural supply chain.

The cost to businesses of inaction on water risks is five times higher than the cost of action – CDP

The apparel and textiles industry also relies heavily on water for production and is, therefore, vulnerable to scarcity. But it also has the potential to be a major polluter of water supply, right through from the agricultural processes from which it derives raw materials, to the accidental release of chemicals during the dyeing process, to the release of microfibres and microplastics during the wearing, washing and disposal of clothing.

Notable reputational risks for both the food, beverage, and agricultural sector, and the apparel and textiles sector are negative media coverage and public scrutiny, as well as damage to brand. Companies are increasingly being held to account for poor water stewardship practices by the public and the media and those seen as having poor water-related policies and practices are likely to suffer a hit to their reputation.

Utility companies like water, electricity, gas and waste management services, face challenges caused by a growing global population and increasing urbanisation, and the stress that these factors put on infrastructure. The price of water is also a challenge for this sector. Solutions such as desalination, smart metering and leak detection can be powerful here to help utilities keep on top of water-risk-related costs.

The manufacturing sector accounts for about 16% of global water demand as water is used in many processes and systems. Manufacturing facilities often are in water-stressed areas, and the sector also is vulnerable to flood risk, presenting various risk challenges. Disruption in this sector can also create knock-on effects to other sectors that rely on manufactured materials.

The technology and electronic equipment sector also relies heavily on water in its processes. Items like the semiconductor chips in phones and computers, for example, require billions of litres of ultra-pure water to avoid contamination. The sector is vulnerable to the risks posed by drought; this is a particular issue in Taiwan, one of the industry’s most prominent markets, where regulatory restrictions on water usage are in place. This sector also has to consider pollution risks as its waste products can be highly toxic should they escape.

Water is also crucial in the manufacture of pharmaceuticals and healthcare products. This sector is vulnerable both from water scarcity and flood risk. The sector is acutely aware of these risks factors, and some 83% of pharmaceutical companies report that they carry out regular water-risk assessments.

The transport and logistics sector, too, is at risk from extreme weather events like flooding, storm surge and drought, and the pressure that these events put on infrastructure and maintenance costs.

Water stewardship; working towards solutions

While some of the water risks faced by businesses are universal, others are industry or location-specific, but all sectors and companies of all sizes can learn from others about how risks affect them and how they might be mitigated. We believe that engagement with water stewardship is vital. This might be a dedicated business function or fall across other teams like risk management, sustainability or finance, but companies need to take an active role in understanding, valuing and beginning to mitigate these risks.

To effectively understand and manage the risks associated with water, businesses need first to have ways to begin to evaluate and quantify them. Water footprinting and accounting can help companies to see their water consumption – whether that is hidden or indirect. It can illustrate a company’s reliance on blue water, sourced from surface and groundwater, grey water that is diluted with domestic or industrial waste, and green water, rainfall stored in soil.
When companies are able to evaluate the full cost of water – the true costs of consumption, abstraction, treatment and supply – they can not only better model those costs but develop a business case for investment in water-saving strategy and technologies.

Shareholders and stakeholders are likely to increasingly examine the water-risk-based targets set by companies. These targets enable companies to monitor and benchmark their performance, additionally it also enables them – when those targets are scientifically-based and well communicated – to have strategies in place to manage reputational risks around water.
Future scenario analysis, taking into account factors like water scarcity, costs and potential regulation, can help companies to derive a deeper understanding of how water risks might affect them in future, depending on various developments and outcomes. This can help in planning and investment decisions too.

Water risks affect all businesses, across all sectors and geographies, whether large or small. The degree to which these risks will manifest in companies’ own day-to-day operations will vary, but all companies have an interest and imperative to better understand these risks and prepare for them in future. Learning from the experiences of others will be invaluable. We hope our Valuing Water initiative will open this dialogue and help us all to better appreciate, understand and manage this important risk area – now and in the future.