Businesses Can’t Afford to Ignore Global Water Risks

Written by Chair, EGA Climate Policy Nikolaus Schultze and Director, EGA Climate Policy Andy Morimoto.

This week, the UN Water conference will convene the private and public sector in New York to better understand and address the global issue of water scarcity. The conference is well timed, after a year of historic droughts across North America, Africa, Europe, and Asia. The conference is timely for another reason: never before have businesses faced greater water-related risks.  

Water covers 70% of the planet, yet just over 2% of that is freshwater. And of that freshwater, only 1% can be used for drinking, washing, and growing food – the rest of it is trapped in glaciers and snow. The upshot, as National Geographic notes, is that only 0.007% of the world’s water is available to sustain a population of 7 billion people.

In theory, this 0.007% should be more than enough for the current population. However, a combination of pollution, urbanization, drought, mismanagement, and poor water infrastructure has resulted in water shortages around the world. Today, nearly four billion people experience severe water scarcity for at least one month each year. And by 2030, global demand for freshwater will outstrip supply by 40%.

Climate change is exacerbating this challenge. The UN estimates that each 1C increase in global average temperatures is projected to result in a 20% reduction in renewable water resources.

Businesses must grapple with these water risks, lest they find their operations disrupted, their reputations tarnished, and their local communities and environments degraded. Four risks stand out.

One risk is rising costs. The average price of water, according to Barclays, increased by 60% in the 30 largest US cities from 2010 to 2019. As water scarcity increases, companies will face increasing price pressures, directly impacting the profitability of water-intensive products and services – especially in sectors such as agriculture and energy production.

A second challenge comes from legal and regulatory risks. Governments are becoming more stringent in their rules around water use, which expose businesses to steeper fines, more lawsuits, and worse penalties if they fail to comply.

A California-based construction firm, for example, was forced to pay over $2 million in civil penalties after it discharged contaminated storm water into a nearby creek in violation of the Clean Water Act. In another case, a southeastern Washington farm was fined over $300,000 for alleged water theft during a 2021 drought. Regulatory compliance will be particularly important in water-scarce regions.

A third risk arises from geopolitical tensions. Transboundary waters account for 60% of the world’s freshwater flows. Most countries, however, are not bound by operational agreements to cover their transboundary basins, and disputes over transboundary waters can escalate into political tensions that create uncertainty for businesses operating in the affected regions.

In the summer of 2022, Switzerland and Italy were confronted with historically low water levels in the Po river. Rome requested Berne to release more water from Switzerland’s hydropower plants, as the water shortage constrained agricultural performance in Italy’s Lombardy and Veneto. But Switzerland retorted that its dams were also at very low levels and that what remained needed to be kept for power generation. The water politics only exacerbated the water shortages and uncertainty facing the region’s farmers and other businesses.

A fourth risk is reputational. If companies exploit—or are perceived to exploit—water resources, they face potential backlash from consumers and other stakeholders. In Mexico, for instance, global beverage companies have faced growing protests from locals who are opposed to companies’ use of water supplies amid shortages. In Panama, water intensive mining has led communities to oppose some mining projects altogether. 

How should businesses mitigate these risks and forge better water solutions?

For one, companies can reduce water usage in their own operations by recycling, reusing, and replenishing the water they use. This will involve working closely with local communities, governments, and NGOs to improve water access.

At the same time, businesses can stress-test their business models for water risks. They should develop water resilience strategies to reduce use of water throughout their supply chains and adopt a high internal water pricing mechanism for internal project evaluation.

Technology can also play an important role. Businesses can invest in more water-efficient technologies and processes to reduce the amount of water used in operations. Some companies have installed sensors and connected devices that allow utilities to access real-time data on water pressure and quality. This enhances their asset management capabilities.

Ultimately, successful businesses will protect their operations from water risks while doing their part to conserve and better manage their water resources. In doing so, they will help ensure that companies and communities thrive in a water-scarce future.

Written by Chair, EGA Climate Policy Nikolaus Schultze and Director, EGA Climate Policy Andy Morimoto.