Why water risk can’t be ignored

Although vital to all aspects of life, and in turn business, water governance is scarcely seen as a priority due to a lack of understanding around the availability impacts of overuse, pollution and increasingly frequent extreme weather events. As summarised in WWF’s paper ‘Understanding Water Risks’, tackling water scarcity is one of the key challenges facing the world in the 21st century. It underpins the challenges of food security, energy security, poverty reduction, economic growth, conflict reduction, climate change adaptation and biodiversity loss. 

Source: Earth.org

But with the knowledge that water demand might actually exceed supply by 56% by 2030 (projected by a United Nations resource panel), what can be done to remedy a lack of infrastructure, public financing, or decent regulatory compliance? 

Advocates argue that water scarcity is not given adequate importance in the economic development agendas of many countries. Given the intensifying nature of the issue, it’s unsurprisingly a hot topic at COP27, and likely to be a common theme in managers’ policy updates for 2023.

Physical and social risk

The impact of human exploitation and mismanagement of water resources is that water use limits are already being exceeded. In many regions, both the availability and quality of freshwater are deteriorating. India, the Middle East, northern and southern Africa, Australia and the U.S. Southwest stand out as likely high risk zones within the next decade.

In order to meet the UN goal for water and sanitation, US$735 billion needs to be invested by 2030 (according to the Sustainable Development Solutions Network); for this to be possible the private sector will need to step up and play a greater role to fill the gap. 

Disclosure and engagement

As part of this strategy, tools and metrics to better monitor water consumption and withdrawal must be employed. Patchy, or worse still, non-existent disclosure processes have exacerbated the measurement issues relating to water. And as with so many elements of ESG disclosure, progress is visible, but slow. 16.6% of companies within Sustainalytics’ global coverage disclosed data on water withdrawal in fiscal 2020/2021, compared with only 7% from the last year. Similarly, some 12.3% of companies now disclose water consumption, versus only 3% of companies previously. 

Many businesses continue to work on the assumption that water will always be available to them, exposing them to increased operational risk as an abundance of evidence demonstrates otherwise. Ceres estimates that 50% of companies in the four largest indexes have medium to high water risk. But according to Sustainalytics ‘Water-Related Risks and Challenges: A Quantitative Research Perspective” from March this year, only one in ten companies reports some information on its water usage. 

Current scarcity, increasing demand, and with no option of replacement, water resource management requires urgent innovation. And with innovation comes opportunity. 

Increased awareness about water-related risks, and growing investor focus on the United Nations Sustainable Development Goals, including SDG 6, “clean water and sanitation for all,” are likely to lead to better frameworks. In the meantime asset managers should step up engagement to identify companies which are managing water usage efficiently and effectively, as well as those offering products and services to enable more efficient and effective usage of water. In addition to the unthinkable environmental and social implications, failure to act now will have a huge potential financial impact on companies and their shareholders. 

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