Supply Chain

Water Crises Boost Company Values at Risk

When water crises affect operations, companies can suffer significant profit losses and pay higher prices for goods in the supply chain.
Lauren Kelley KoopmanSeptember 18, 2014

Clean, consistent water supply — it’s essential for businesses to operate. But few consider the value at risk (VaR) if they can’t access the water they need. Water scarcity could drive up the prices of water and water-dependent materials. Impaired water quality could create new treatment costs. Even worse, companies could be forced to close down production in areas where they compete with local communities for the water supply.

SwanwaterThese risks are affected by a set of trends. Like most other risks, quantitative analysis and valuation can help companies take action in managing water risks.

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What’s Driving Water Crises?

In it its annual report on global risks, The World Economic Forum ranked water crises as the third largest risk to global stability in the decade ahead. The rapid growth of the global emerging middle class is a major driver of water crises, as the world’s limited supply of water is stressed by a population that steadily demands more resources.

Opinion_Bug7Water needs are inextricably linked to increased consumption of food and energy, which is a direct result of higher incomes and standards of living. Ever-increasing energy needs are driving nearly half of the water withdrawals in the United States and Europe, according to the 2011 Ceres Aqua Gauge risk management framework.

Climate change exacerbates water crises, as droughts, floods, hurricanes and other extreme weather events strain existing water systems. To prepare for these challenges, the United States may need to invest $1 trillion to upgrade its aging water infrastructure, according to the American Society of Civil Engineers’ quadrennial infrastructure report card for America’s Infrastructure.

How Companies are Affected

When water-related disruptions affect operations, companies can suffer significant profit losses and pay higher prices for goods in the supply chain. Further, water management issues pose the following immediate and significant risks to companies:

• Operational. Storms, droughts and other severe weather events can cause disruption of operations, increased supply-chain costs and erosion of product quality because of pollution.

• Regulatory. Stricter regulations can drive higher water-quality standards and increased costs related to treatment and litigation. Companies are looking closely at how regulatory issues in each of their locations might affect the bottom line.

• Reputational. Companies’ operations can adversely affect local access to clean water and marine ecosystems, leading to negative publicity. Domestic and multinational companies alike have faced public backlash over issues related to depletion of local groundwater supply. Consequently, some companies are making significant investments in community education initiatives that start long before these organizations begin operations in some areas.

To mitigate those risks, many companies are adopting water-efficient technologies like closed-loop cooling systems or soil moisture sensors, working with suppliers to reduce water use in production processes and innovating to access new markets for cleaner and more water-efficient products. At the same time, they are fielding more frequent questions from investors, communities and other stakeholders about water- management practices.

Elevated water risk has led to increased expectations for companies to disclose how they’re managing water. The Carbon Disclosure Project’s water program includes a questionnaire providing investors with data on how organizations deal with water, in terms of evaluating it and strategizing for more responsible water use.

The UN Global Compact’s CEO Water Mandate also was created to help companies develop, implement and disclose water-sustainability policies and practices. Further, many companies are including water management as a stand-alone component in their sustainability goals.

Equipping your Organization

Given the accelerating pace of change, how can your company best assess its risk and enable smart decision-making to implement adequate water-management policies going forward?

The answer may lie in measuring and valuing water in economic terms. Many companies find that calculating water’s value to their core business operations better prepares them for long-term decision making across the business, in such areas as:

• Value at risk. Where is your organization most vulnerable to the risk of water scarcity, and what is the potential economic impact? Is your company in compliance with regulatory requirements in order to keep operating under local jurisdictions? Are more regulations expected? Is there a potential for backlash related to your current or expected water use?

• Total cost of water. Are you taking into account all the costs associated with your water usage? The procurement price of water may be low, but are you tallying transport, treatment, and discharge costs? Are you including the water needed to meet your energy needs? Are rising prices ahead?

• Opportunities. Does the true cost of water suggest that you should focus on innovation? What if you could eliminate the need for water from certain production processes or invent products that would help your customers use less water?

Putting a price on water is challenging, but achievable through accurate valuation techniques. Adopting a holistic perspective on risks, coupled with the valuation exercise, can help you determine which strategies to pursue.

By analyzing financial and non-financial risks and opportunities related to water, and then translating them into consistent financial terms, companies can be positioned to make better investment decisions and more successfully navigate water-management challenges today and in coming decades.

Lauren Kelley Koopman is a director in PwC’s Sustainable Business Solutions practice.

Photo by Igor GOLUBENKOV (NGO: Saving Taman)