Water Is Not A Right, It's a Risk

Before carbon emissions become a huge liability for companies, water risk could dry up business in an existential way.

By MATTHEW BRODSKY, senior editor/Web editor of Risk & Insurance®

"There will be a critical shortage of water long before people can no longer live because of temperature rise because of greenhouse gas," said Rod Taylor, managing director in the Orlando, Fla., office of Aon Risk Services.

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But don't take his word on it. The United Nations Environment Programme Finance Initiative has a Water & Finance Workstream, whose publication "Half Full or Half Empty?" addresses corporate water risk. Multinationals such as Pepsi, Unilever and SABMiller have joined with NGOs and governmental groups in the Water Footprint Network. And the investor group Ceres has focused on water risk, recently commissioning the report "Water Scarcity and Climate Change."

"It is a serious problem," said Linda Hwang, manager of environmental research and development at Business for Social Responsibility, a San Francisco-based global organization that works with businesses on sustainability issues. "There's less available water for companies around the world."

Most U.S. companies are not doing anything about their exposure to this.

"People haven't thought about it in North America because of the abundance and cheapness of water," said Taylor. "We're spoiled here."

But not for much longer. Just ask folks in Atlanta about their water supply. Or talk to farmers in California, or anybody in the West for that matter, about the Sierra snowpack and the Colorado River.

"In California, every cubic meter of water is spoken for in some way," said Hwang, and the supply of water west of the Mississippi is only going down.

MULTIFACETED RISK

One of the most profound ways a company can be impacted by water scarcity is in its operations. All companies use water in some fashion but some depend on it--take agricultural interests or soft-drink makers, energy companies or textile mills.

And companies also face serious threats from regulatory and legal motions should they be found to be polluting local water supplies. They might suffer loss of market too. Just ask Coca-Cola about the worldwide movement against it organized by 20 villages in northern India, where the company was accused of overuse and pollution of local water resources.

Local communities are demanding their say in how nearby corporations use their water.

"That voice is becoming much, much stronger and demanding to have a seat on the table," said Hwang.

In addition to boycotts, such negative headlines related to water involve obvious reputational risk.

Getting back to that existential threat to how you do business, public relations are secondary. At-risk corporations have to act to save their water supply.

Amazingly, according to Hwang's estimates, only six or seven companies in the world think systematically and holistically about their water risk exposure--the likes of SABMiller, Coca-Cola, Unilever, Rio Tinto, Pepsi and Nestle.

These firms know which watersheds their facilities draw from. They know how their supply chains are water-impacted and impactful. Within a given facility, they can then break down their water usage. With each new investment, they analyze the availability and quality of nearby water sources. And all of their strategic water-related goals are made with local communities' interests in mind.

"That's a tall order," said Hwang, whose firm works with companies to carry it out.

Insurance does not appear to be a solution for this effort.

"Some risks you can insure," said Taylor. "Just losing your water supply may or may not be insurable, it depends on how it happens."

WATER RISK FOR BEGINNERS

So what can firms do if they are just starting to grapple with their water risks--or if they haven't started at all?

According to BSR's Hwang, one of the first things she does with clients is map out where all of their facilities are, then overlay onto that map the geography of where water scarcity and stress are an issue. This visualization can quickly help companies prioritize exactly where they have exposure, whether it be Northern China, the Middle East or Atlanta.

Then with this short list of exposed facilities, said Hwang, companies can drill down to find out how much water is being used at each one, then work to make those numbers smaller.

"Every facility will have a manager there that knows how much water is being used," she said.

We're talking how and why water is being used, if any is being conserved or recycled, what impact runoff has, and how could water use be more efficiently. Facilities could look into storing rainwater, reusing runoff, avoiding evaporation or cutting out water use for landscaping, say.

"Those things you can do very easily," said Aon's Taylor.

Taylor added that water must also be taken into consideration when locating new or expanding old facilities.

Another first step for risk managers and other managers with water on the brain could be to take a look at already established guidelines for understanding the exposure. UNEP has published such a tool--the aforementioned "Half Full or Half Empty" publication.

Once you master the first steps of water risk management, then you can take the next mitigation step. It is not enough to merely be water efficient, said Hwang. Companies should also focus on protecting water resources and the ecosystems they support.

"If the environment is not producing water for you, you're screwed," she said.

March 3, 2009

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