At the World Economic Forum in Davos last week, I was struck by how often the issue of water risk was raised by business executives. As the global economic turmoil is receding, many CEOs and global leaders are turning to other threats -- and water is high on the list. For the second year in a row, water crises were named among the top four global risks at the WEF.
It's easy to see why. More than 1.2 billion people already face water scarcity. By 2025, two-thirds of the world population will experience water stress. That's largely due to population increase and climate change, but also behavior patterns: Water use grew twice as fast as population growth in the 20th century. The "food-water-energy nexus" was one of the top four megatrends to watch in the recently released Global Trends 2030 report by the U.S. National Intelligence Council.
CEOs increasingly recognize that water is essential for their business models and economic growth. Disrupted availability of affordable, clean water leads to business interruptions, increased commodity costs, and reduced earnings. The extreme drought gripping much of the United States is likely to cost up to 1 percent of GDP, potentially making it the costliest natural disaster in U.S. history.
More than half of the Global 500 companies that responded to the 2012 Carbon Disclosure Project Global Water Report cited "detrimental" water-related impacts. These effects include property damage from drought or flooding, higher prices for water itself, poor water quality requiring on-site pre-treatment, and fines and litigation over pollution. According to the report, the associated costs for some companies ran as high as $200 million, up 38 percent from the previous year.
Measuring and Managing Water Risk
Until recently, it has been difficult to accurately assess the business risks related to water. Water risks are unequally distributed around the globe, and businesses have lacked geographically specific information to understand the water problems they face. Further, much of the available information is outdated or the data is not precise enough to be useful to grasp geographic differences. Given the importance of water, we are flying frighteningly blind.
This week, the World Resources Institute is launching a new online platform to be a go-to source for accurate and high-quality water-risk information. The mapping tool, the Aqueduct Water Risk Atlas, offers an unprecedented level of resolution and a comprehensive picture of water risks around the world. It enables companies, investors, governments, and the public to assess risks using 12 indicators. It breaks down water quantity and quality and reputational and regulatory factors, giving users a multi-faceted view of the particular water challenges they face.
In the coming months, a new projection tool will be added that will allow users to better manage risks in light of likely impacts from climate change, population and economic growth. The tool is geared toward business. GE and Goldman Sachs are two of the founding members, and there are now more than a dozen partners on the project. WRI also worked with partners in academia, government, and civil society to develop the tools.
Several major companies have already used earlier versions. McDonalds, for example, asked its top 350 suppliers' facilities to use the tool to report on local water risks at their facilities. Other companies -- including Bank of America/Merrill Lynch, Owens-Corning, and Procter & Gamble (also a funder) -- have used the tool to evaluate risks.
How Businesses Respond
Water risks are increasingly compromising businesses. The U.S. drought has disrupted shipping along the Mississippi River. Sea surge from Hurricane Sandy impacted major companies in New York and New Jersey. And we all recall the massive floods in 2011 in Bangkok, Thailand, that disrupted global supply chains.
In response, companies are realizing they need to work with governments and local communities to improve water management. Some industries are beginning to define water stewardship principles and water accounting standards. For example, 45 major companies representing hundreds of billions of dollars in revenue endorsed the U.N.'s Global Compact CEO Water Mandate, an initiative designed to help companies develop, implement and disclose water sustainability policies and practices.
In Davos, a group of CEOs -- including Shell CEO Peter Voser, and executives from Dow, DuPont, Siemens, McKinsey and others -- launched an initiative to address the Food-Energy-Water Stress Nexus. Through this initiative, companies are looking to partner with governments, communities, and non-profits to better understand the complex linkages between food, energy, and water. They also hope to develop local approaches to reduce resource risk and enhance economic resilience.
What I heard in Davos was encouraging. Many businesses understand what's at stake and are beginning to adapt their practices. Hopefully, the companies that are leading will drive more businesses to manage their growing water risks.