Risk Management

Is Water on Your Risk Horizon?

Is your business prepared for a water-scarce future?
Jeffrey FulghamSeptember 6, 2011

Recent water-related events — from extreme droughts across the southwestern United States to flooding in central China — provide vivid examples of the potential impacts of water on people, businesses, and local infrastructure.

In a 2010 survey of 150 large corporations conducted by CDP Water Disclosure, nearly 40% of respondents indicated they had already experienced disruptions in operations and incurred increased expenses due to water, among other detrimental impacts. From a financial standpoint, the direct cost of water in industrial and commercial facilities is rarely significant compared with the overall cost of operations. Businesses, however, cannot continue to operate without an adequate supply of sufficiently clean water. For this reason, forward-thinking companies consider water one of the top three issues that will either enable or inhibit sustainable future growth.

In practical terms, water sustainability means mitigating risks associated with water resources. The following are four key risk factors finance executives need to consider as they plan their long-term water strategy.

1. Financial Risks
Despite the common misperception that water is “free,” it presents many challenging and often hidden financial risks.

Direct water expenditures may include supply, discharge, and disposal or sewer costs. Indirect water costs — including energy for pumping and treating, labor to operate water systems, and revenue losses from unplanned disruptions — are harder to see on the balance sheet.

In many water-scarce areas, companies are faced with numerous financial risks: inability to expand operations or build new facilities due to water constraints, high local water costs with double-digit annual increases, and long lead times to gain new permits for water withdrawal.

Risk mitigation can include considering alternate, sustainable water sources; outsourcing water and wastewater treatment; water recycling and zero liquid discharge to reduce environmental-related financial risks; and assuring that all costs, direct and indirect, are being considered.

2. Operational Risks: Quantity and Quality
Today, the global annual water demand exceeds the available water supply by 80 trillion gallons. By 2030, demand is expected to outstrip supply by 470 trillion gallons, according to the United Nations.

How does that affect your business? Drought and long-term water scarcity can decrease production. Even when ample quantities of water exist, the quality may be unacceptable for business operations and require treatment prior to use, increasing total costs.

Industrial processes can cause water contamination, requiring treatment processes before discharge or an agreement with local municipalities to accept and treat wastewater streams. Left untreated, water contamination can have a crippling impact, requiring infrastructure investment, alternate water sources, or even cutting off water resources altogether.

One method to mitigate these risks is to look beyond traditional sources of water (such as municipal supplies, rivers, and wells) to alternate sustainable supplies. Some increasingly common alternatives include recycling-plant discharge; partnerships with local municipalities to purify, reuse, and recycle domestic or industrial wastewater; brackish and seawater desalination; and rainwater/storm-water recycling. Often the incremental investments to capture and purify these streams have strong financial returns and a positive environmental impact.

3. Regulatory Risks
Challenges to corporate water use and management include changing laws, regulations, and management practices that alter companies’ access to water supplies and services and create higher tariffs, causing increased operational costs and having an impact on profitability.

Stricter regulatory requirements can result from water scarcity and conflicting needs. For example, due to several years of drought, regulators in Chile’s arid north region enacted water restrictions, forcing major copper-mining operations to reduce water extraction by two-and-a-half times their normal output.

The key to managing regulatory risk is to be proactive rather than reactive and stay one step ahead of the changes that will inevitably occur. One example is wastewater discharge from an industrial facility. A decade ago, there might have only been a few regulated contaminants in a typical wastewater permit. New permits written today, however, often consider many other contaminants, requiring significant investment to maintain compliance. Reexamining these waste streams as a source of value can turn a potential liability into an asset. Purification technologies exist to beneficially recycle wastewater with several positive outcomes, including converting wastewater into clean, steam-producing gas or electricity; and extracting nutrients, metals, and process byproducts for possible reuse or resale.

4. Social and Reputational Risks
Water-related issues can often disrupt operations, jeopardize access to future expansion or reserves, and in general lead to value destruction. The result can be a decrease in brand value or consumer loyalty, or changes in regulators’ posture, ultimately threatening a company’s legal and social license to operate.

There are several ways to alleviate these risks by proactively developing site-specific water-sustainability plans, creating clear metrics, and monitoring and promoting positive results of water projects through CSR reporting and active employee engagement in water-efficiency projects. Consider sustainability issues when contemplating capital expenditures related to water and evaluate returns with a long-term view.

Water will become one of the primary global pinch points for the next decade and beyond. We cannot continue business as usual and ignore the risks associated with water, even in relatively water-rich areas of the world. By taking a proactive approach, building a comprehensive sustainable water strategy, and considering all potential risk factors, businesses can greatly reduce the risks associated with water and assure a sustainable future for the company and the world.

Jeffrey Fulgham is sustainability and ecoimagination leader of GE Power & Water.

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