3 water-related impacts to business you hadn’t thought of

Over 2 billion people live in countries with high water stress levels. Global water use has more than doubled in the last 40 years. Coupled with the effects of climate change, the strain intensifies. Businesses are already experiencing financially-material impacts related to competition of water resources and its associated degradation of ecosystems.

Industries such as the food and beverage sector are riddled with water-related risks. Agriculture, for example, uses a major share (70%) of global freshwater resources and its survival is questioned by climate change. 

In 2020, companies reported maximum financial impacts of water risks at US$301 billion – five times higher than the cost of addressing them (US$55 billion). Adding to that, more and more investors, commanding trillions of dollars, want material water-related financial information disclosed as part of the mainstream financial reports. There is a growing momentum too of legal entities mandating sustainability-related disclosures. Given this water-strained, high risk and legal landmine environment, in what ways is water affecting your business that you had not thought of?

Your supply chain can inflate water-related risks

Semiconductor chips are in phones, computers, gaming devices and our smart internet-driven devices. They are crucial inputs for many industries. But manufacturing semiconductors requires billions of litres of ultra-pure water to avoid contaminating the products. Taiwanese authorities are threatening to reduce water usage, because of drought, for leading chip producers like Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC). TMSC uses more than 150,000 tonnes of water per day (60 Olympic size swimming pools) and is competing with locals for this limited resource. Along with high water consumption, semiconductors generate wastewater that contains heavy metals and toxic solvents.

So, while your company may not have direct connections to water usage, your suppliers may and this matters. Water is vital to industry even when it is used for cleaning, cooling or heating. Many more industries are exposed to water-related risks such as water scarcity through their supply chains. The key therefore is to include your supply chain in your business assessment of water-related risk. 

The current global semiconductor chip shortage, exacerbated by water issues, is roiling automotive and technology industries. Companies like Sony, Samsung and GMC are already struggling to meet production targets because of no chips. The shortage is expected to last well into 2022.

Water is essential for transport and energy

Often when water issues are discussed it is in the context of limited access to clean water. But water-related risks from climate change go beyond that. Floods, droughts, storms and rising sea levels can disrupt the industry. In 2020, low water levels prevented fully loaded cargo vessels from sailing on Rhine River in Germany. This caused vessel operators to increase charges for freight, due to added cost of running. Costs of petrochemicals also increased as the volume of the product ferried through this channel lowered. This meant consumers bore the higher market price because supply was low. At the lowest water levels in 2003, freight price increased by up to 100%.

Rhine River was so shallow in 2019 that several merchants had to declare a force majeure as they could not supply and receive material. Currently, COVID travel restrictions have resulted in lower consumer demand. With less travel and traffic on the roads, demand for petrochemicals is low. This has allowed the diminished supply levels of petrochemicals to still meet orders. Nevertheless, looming in the horizon for the transportation and energy sectors is a water-related risk. When lockdowns ease, demand will rise again but water levels on Rhine River will not necessarily be back to normal levels. 

Water valuation and stewardship are now more important than ever

When businesses or consumers are charged for water use, the price often reflects recovery cost and not value delivered. No fiscal consideration to the depletion of aquifers, biodiversity loss, reduced river flows or cost of pollution are added to the price tag. Even though agriculture uses 70 per cent of the world’s freshwater for irrigation, the value of water assigned is much lower (US$0.05/m3) than industrial or domestic use of water. Whether growing grains or higher value crops like flowers, water is viewed for the purpose it served and not the true value it brings. 

Water valuation clearly needs to be made adaptive as it is currently costed to a user’s perception of worth. Direct and indirect economic, sociocultural and environmental benefits of water are unaccounted for, and this leads to further problems for corporates.

Wherever there is water scarcity, conflict arises. In northern India, a Coca-Cola plant was ordered to close after farmers blamed it for using too much water. This came 10 years after another Coca-Cola plant was closed for the same reasons in the southern state of Kerala. Coca-Cola has since published a Water Stewardship Strategy in recognition of their responsibility. 

Adani, a coal mining company in Queensland, failed in a Federal Court to get access to billions of litres of water for its venture. Construction of the mine and rail project is still underway, but resolution over the impact on water and biodiversity must be found. The concern is the mine could contaminate or disrupt the aquifers supplying the Doongmabulla Springs, a wetland oasis 11 kilometres from the mine.

Companies around the world are increasingly recognising the value of water and the serious financial impact that water-related risks pose to their businesses. Importantly, they are no longer just consumers but stewards of this resource. Companies have a social responsibility to other stakeholders, such as governments and local communities, and would need to engage and cooperate with them to achieve effective water management.

Closing the water-risk gap for companies and investors through disclosure

So how can companies with water-related risks remain viable to investors? Comprehensively disclosing material water-related financial risks not only satisfies investors’ expectations, but the process also exposes potential climate and water-related risks necessary for sustainability. 

Many businesses view water as an input to the production process and therefore tend not to see true water value in financial risk and future growth. But water-related risks, from physical to reputational, can potentially damage companies’ financial performance. Investors increasingly want decision-useful information disclosed as part of the mainstream financial reporting.

At present there is an information deficit for investors and other stakeholders on the reporting of material water-related financial risks and opportunities in mainstream corporate reporting. A shortfall means investors are unable to allocate capital that can effectively instigate change.

The Climate Disclosure Standards Board’s (CDSB) Water Guidance supplements the existing CDSB Framework for Environmental and Climate Change Information reporting. It offers companies a means of developing their reporting practices and ensures investors are receiving the material water-related information needed for effective capital allocation. The Water Guidance integrates water-related financial information that fills the information gap and prepares companies to new regulations by illustrating how the CDSB framework can be applied.

It prepares a business for a profitable future. Do not get caught napping! 

Download the Water Guidance in various languages and formats here.

Watch the Water Guidance video here.

Written by CDSB’s Enock Chinyenze, Senior Communications Executive (enock.chinyenze@cdsb.net) and Francesca Recanati, Environmental Specialist (francesca.recanati@cdsb.net).