Historically, water has been considered a cheap input with little financial impact; climate change and systemic water pollution is changing this view. Increasing awareness of both the magnitude and materiality of water risks, means, the importance of good water governance and active water stewardship is rising up corporate sustainability agendas.
Investors are also waking up to the importance of water stewardship and have started to indirectly screen for strong water governance through the lens of water risk.
Financial and non-financial reporting mechanisms like CSRD, ISSB and TCFD, all require businesses to report on their exposure level to water risk.
Questions we regularly receive:
- How can my business improve its water governance to reduce risks to the business and the environment?
- Where exactly within my supply chain should I be applying better water governance practices?
- As the climate changes, will my business still have access to water in the quality, quantity & rate it needs to operate?
- How can effective water stewardship reduce climate-induced water risks on my business?
- How can I develop a water governance strategy that proactively mitigates water risks?
We created our first steps guide to help our clients answer these questions.
Our seven-step guide to water stewardship
STEP 1
Understand the relationship between water risks and financial risks.
Firstly, it’s important to understand the value of a water stewardship strategy. We find the best way do this is to understand how water risks translate into financial risks like increased costs and lost revenue.
Below are some examples of water risk types and how they can materialise as financial risk:
Physical Risks
These are risks that result in the inability of an organisation to access water in the quantity or of the quality required for operations.
For example, groundwater depletion, seasonable variability, and eutrophication.
An organisation is particularly exposed to physical water risks if they conduct water-intensive practices in water-scarce regions.
Regulatory Risks
Stricter regulation often occurs due to a perceived increase in water scarcity or an increase in conflicting water demands.
For example, perceived water scarcity may occur due to urban expansion (more people needing utilities) or lowering levels of groundwater resulting from agricultural practices and industrial use.
In response to these changes in perceived water security, policymakers change laws and/or regulations that force companies to apply water governance practices that increase water efficiency.
Reputational Risks
The perception of an organisation is diminished due to their poor water stewardship.
For example, stakeholders may include consumers, investors, local authorities and/or local communities.
Stakeholders may perceive (accurately or inaccurately) that an organisation's water practices have negative impacts on watersheds, ecosystems, and/or communities.
This risk can decrease a brand’s value or consumer loyalty or changes in regulatory posture and can ultimately threaten a company’s legal and social license to operate.
STEP 2:
Understand that water risk changes over time and are being exacerbated by climate change.
So now you understand types of water risk and how these translate into financial risk.
Next what’s important, is to understand that your business’ exposure to these risks is constantly increasing, due to climate change.
This is because climate change is magnifying the likelihood and severity of water risks by:
- Increasing exposure to unpredictable weather patterns
- Increasing exposure to water-related hazards such as storms, floods, droughts, and heatwaves (with increased intensity and frequency).
- Increasing the legislation and regulations required to protect water resources in a climate-stressed world.
Examples of how climate change is increasing corporate exposure to water risks:
Increased price of semiconductors and the digital products in which they are embedded.
- Billions of litres of ultra-pure water are required to manufacture semiconductors.
- One manufacturing plant can use the equivalent of 60 Olympic size swimming pools PER DAY.
- Due to increased drought, Taiwanese authorities are threatening to reduce the water usage of leading chip producers, leading to a decrease in production and output.
- This is an increasing issue for semiconductor manufacturers across the globe.
Increased price of freight due to climate-induced disruption.
- In 2020, lower than average water levels on the Rhine River in Germany, prevented fully loaded cargo vessels from journeying along the river.
- Cargo operators did not absorb the costs associated with this delay but instead passed them onto their customer.
- In 2019 the Rhine waters were so shallow that several merchants had to declare a force majeure as they could not supply and receive material.
- In 2003 when a similar issue occurred, freight costs increased by 100%.
Increased commodity price due to climate-induced disruption.
- When the Rhine River levels lowered in 2020, the cost of the commodities being transported also increased.
- Petro-chemicals were one of the commodities impacted. As less volume of the product could be transported, supply was reduced, and market price increased.
Increased exposure to asset stranding or mandated relocation due to water stress.
- In 2014, a Coca-Cola plant was ordered to close after farmers blamed it for using too much water.
- This came 10 years after another Coca-Cola plant was closed for the same reasons in the southern state of Kerala.
- Whilst these instances were not necessarily climate induced, they are an example of how if water stress increases in a location, high water usage by industry may no longer be accepted by local communities or authorities, thus resulting in forced relocation.
STEP 3:
Familiarise yourself with what good water governance looks like.
So now you understand water risk, how this translates into financial risks and the role of climate change in increasing a company’s exposure to water risk. Next, it’s time to learn more about what good water governance looks like.
Recommended resources:
- The Alliance for Water Stewardship Standard Guidance. The AWS Standard is a globally applicable, voluntary certified sustainability standard that takes the user through a process to identify and understand their site and catchment water risks. This is the standard utilised by many large business like Diageo and Apple.
- The new European Sustainability Reporting Standard on water (E3). This standard is part of the new EU mandatory sustainability reporting standards (CSRD) that businesses trading in the EU are required to comply with (depending on size). If you operate in the EU you will likely need to comply with this anyway! It provides a useful overview of what measures to include within corporate water governance.
- The Water Resilience Assessment Framework. This Framework is intended to inform resilient decision-making to avoid shocks and stresses from becoming crises; helping to visualize the corporate water risk in the light of stresses and shocks and pushes the risk reduction lens a step further. The resilience lens and indicators encourage corporations to address root causes of existing shared water challenges directly while preparing a response better suited to future shocks and stresses.
STEP 4:
Locate where in your supply chain you rely.
After exploring some corporate water governance frameworks, the next step is to start locating where in your supply chain water resides.
The quality and quantity of water required for business activities can vary significantly.
Whilst some experts only recommend scanning your supply chain for activities that use large quantities of water, we recommend also scanning for activities that require specific quality of water (e.g. for cleaning processes) and all activities that are critical for business continuity which use water.
These additional factors are important for developing robust climate resilient water strategies for your business.
To pinpoint areas in your value chain where water-stress is likely to occur, consider whether your business relies on the following water intensive & quality-specific activities:
- Agricultural commodity production & processing including foods.
- Textiles processing & manufacturing.
- Beverage & cosmetics manufacturing.
- Mineral or heavy metal processing (key for digital supply chains).
STEP 5:
Locate key sites where these water critical activities take place.
When it comes to reducing waterrisks, location matters. Especially in a climate-stressed world.
Once you’ve located ‘at risk’ business activities, it’s time to start understanding the water context in which they are situated.
The more granular the location the better and a site address is always the best. This is because a site’s water stress (and contribution to the water stress of others) can vary depending on where it’s located even within a settlement.
If you outsource these activities, ask your supplier for the address or at least the region or country these activities take place.
To gather data on ‘at risk’ water locations we recommend you:
- Compile a list of the site addresses of where water critical business activities take place.
- If you outsource, ask your suppliers for site addresses.
STEP 6:
Determine how much data you have on site-level water usage, governance and wastewater quality.
After the site is located it’s timeto understand how water used: as an input or an output? How much? What qualityis required for the business activity? What quality is being released into theenvironment?
The most efficient way to access data is through a conversation with the facilities or EHS manager. Or, if these activities are conducted through your supply chain a conversation with your key contact for them to collate this data for you.
To gather information on site-level water data we recommend you:
- For each site, contact the facilities manager or EHS manager.
- If these activities are conducted by your supply chain, contact your suppliers and ask for the site-level data.
STEP 7:
Determine whether these high-usage sites are in areas of high-water stress.
Once you have located the site and its water usage, it is critical to understand if it is situated within an area of water stress. This is key for prioritising sites for action. This will help you understand the extent to which your business activities are placing pressure on the water resources of local communities and the environment.
Review the water risk atlas to gather information on water stress. Explore risk by different indicators and (using the monthly toggle in the left corner) see how they vary across the year.
By completing our 7 steps you will gain:
- A high-level understanding of the key points of water risk exposure in your supply chain.
- A prioritised list of sites ready for (1) a more detailed water impact analysis, (2) the development of science-based targets, (3) the development of contextual water reduction plans.
- A high-level understanding of which sites are likely having the biggest impact on surrounding ecosystems and communities.
- A set of entry points for discussions with leadership and suppliers on water risk exposure and how to start mitigating against.
If you want to learn more about how climate change will impact your businesses water risk profile or what a water impact assessment and resiliency strategies may look like for your business, feel free to get in touch at hello@bemari.co.uk.
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