Good quality water is essential to the production of nearly everything, from the food we eat to the clothes we wear. Trucost research found that in 2016, listed companies reported exposure to water risks totaling almost USD 126 billion, due to higher operating costs associated with declining water quality and water supply disruption. However, when taking into account the thousands of listed companies that do not disclose on water dependency, the risk could be up to USD 439 billion.
The main problem is the lack of an appropriate market price for water—one that reflects its full economic, social, and environmental value. In most regions, there is little correlation between the price paid for water and its availability or quality. In many places, water is cheapest where it is most scarce. Weak regulation means water basins can be polluted by effluent discharges.
As good quality water gets scarcer, companies become increasingly exposed to water-related risks. Market participants are also exposed to these risks through equity holdings, corporate loans, and project finance in water-intensive sectors.
Analysis by Trucost shows that if the full costs of water scarcity and pollution had to be absorbed by companies as a result of reduced water allocations, higher conditioning costs, or tougher effluent discharge requirements, average profits could fall by 18% in the chemical sector, 44% in the utilities sectors, and a massive 116% in the food and beverage sector (see Exhibit 1).
To understand and manage these risks, companies need better data on where water risks are in their global operations. Analytical tools, such as Aqueduct by the World Resources Institute, provide a way to screen locations where water is scarce.
Ecolab’s Water Risk Monetizer—powered by Trucost and Microsoft—extends the insights from the Aqueduct tool and puts a monetary value on water risks, including scarcity and quality, so that they can be factored alongside operational costs and revenue forecasts. The Water Risk Monetizer also allows users to calculate asset-level avoided risk and return on investment of water improvement projects, illustrating how businesses should prioritize investments, engage with other water users, and monitor local water conditions.
Market participants can manage risk by encouraging better corporate disclosure of water-related financial risks. This was recognized in draft recommendations published by the Financial Stability Board’s Task Force on Climate-related Disclosures in December 2016, which said that all organizations, from companies to financial institutions, should disclose information on their governance, strategy, risk management, metrics, and targets for managing climate risks, including water scarcity. Enhanced disclosure on water will accelerate mainstream green finance as more relevant information reaches the market.
The first step is for companies and market participants to understand the water risk exposure of operations, suppliers, assets, and investments so they can build resilience against increasing water scarcity and pollution impacts, identify opportunities from water stewardship solutions, and engage with stakeholders to drive change through the market.