Climate change will only further complicate water scarcity, posing formidable challenges to water systems  in the future.

Global companies that assume incidents like these are rare may soon find themselves in trouble. All business sectors—even individual industrial facilities—need to assess the specific water-related risks they face. Reliable access to clean water has emerged as a critical issue affecting the environment, human development and, increasingly, commerce around the world. With a few exceptions, corporations (and their investors) are unfamiliar with freshwater-related risks and are unprepared to respond to crises or take actions to head them off.

The most fundamental water challenge arises from simple scarcity. Already limited supplies of freshwater around the world are under mounting pressure from growing populations and the increasing needs of agricultural and industrial users. Growing demand is increasing competition for a fixed resource, fostering greater levels of public concern and participation in local control and management. Ultimately, organizations that fail to think strategically about water may find themselves embroiled in highly public and emotionally charged disputes over a resource considered by many to be a basic human right.

Climate change will only further complicate water scarcity, posing formidable challenges to water systems in the future. Global warming threatens to disrupt traditional rainfall and runoff and to increase the frequency and severity of both drought and floods. The changing climate may also degrade water quality by changing water temperatures, flows, runoff rates and timing, causing significant potential problems for water users. Power plants in the United States have already been forced to cut operations to avoid exceeding temperature limits in rivers affected by drought. In addition, rising sea levels will threaten coastal aquifers and developments, with costs for businesses in coastal metropolitan areas.

The Last Drop
Although the problems of scarcity have garnered much attention, declining water quality is an equally vexing issue. As important as

TOP VIEW With clean water supplies under pressure around the globe, many companies may soon see their supply chains interrupted and find themselves mired in local disputes. To secure the water they need in this climate of growing scarcity, global corporations must design and implement multifaceted water strategies. But first they must recognize the water-related risks they face;  to date, few have.

water quality is for human and ecosystem health, it is equally crucial to industries such as high technology, biotechnology, pharmaceuticals and food processing, which rely heavily on it. These businesses are often required to utilize already costly water treatment systems prior to using it. Even for companies that do not need the best water, diminishing water quality could lead to new and expensive mandates to treat or reduce wastewater discharges. While most industrialized countries have managed to curtail concentrated point-source pollution emitted from factories and sewage treatment plants, an estimated 90 percent of wastewater in developing countries is still discharged directly to rivers and streams without any waste processing or treatment. This is changing rapidly, and companies operating in those countries will likely have to absorb quickly rising costs associated with meeting new water treatment requirements.

The full extent of water-related risks to a global company may be determined largely by factors outside the company’s on-site operations. Sectors as diverse as apparel, forest products and agriculture require significant amounts of water to fuel important production inputs. For example, growing the sugar that goes into beverages or the cotton that goes into clothing may require more than 1,000 times more water than used in on-site production of the end product. But today’s traditional industrial water-use estimates fail to address water risks throughout the supply and production cycles.

Businesses operating in developing countries face a broader set of perils than those in developed nations. In many of these locales, governments have simply failed to meet basic human needs for clean water and sanitation services and to mitigate widespread water-related diseases. Even worse, they often lack the knowledge, institutional capacity and capital necessary to deal with these problems. Where the public sector is unable or unwilling to provide basic access to water for all citizens, businesses are increasingly finding themselves competing for basic resources in regions where people lack access to them. With as many as 5 million people dying every year from water-related diseases, this raises the question: What are corporate responsibilities in such circumstances?

A small but growing number of companies worldwide are taking steps to strategically address water risks in ways that protect long-term value. Most companies, however, are ignorant of these issues and address them in an ad hoc fashion. Although companies’ water risks vary depending on business sector and areas of operations, many businesses would benefit from a strategic assessment of their current water-related risks and a plan to mitigate them. This is particularly true for companies dependent on reliable supplies of high-quality water or on large volumes of water, companies with vital operations in areas with scarcity problems, and companies that rely on inputs that are themselves highly water dependent.

Water scarcity already poses serious challenges to many companies and will dramatically affect many more if current trends continue. The good news is that businesses have a wide range of tools, technologies and techniques to reduce water use and improve efficiency. There are many examples of businesses that have been able to save money and improve reliability while reducing water use—even in water-intensive sectors. Taking water-related risks seriously is the first step.

Fluid Tactics

By implementing a comprehensive water strategy, global businesses can address risks in ways that protect long-term value. An effective water-risk management approach includes the following components:

Establish a corporate water policy and factor water risks into relevant business decisions. Top management, particularly in water-intensive industries, should clearly articulate the organization’s policies regarding water resource issues. Given water’s growing importance, companies should consider scarcity and water risks as fundamental factors when making a range of strategic business decisions, from factory siting to new product development.
 
Measure water use. Companies must understand and measure water use and wastewater discharges associated with their current operations and production, including that of their suppliers. This will provide a baseline for assessing risks, prioritizing efforts and measuring progress.
 
Assess local water conditions. Companies, particularly those with global operations, should assess local water conditions, including hydrological, social, economic and political factors for all the places in which they operate. This assessment should flag areas of shortage, rapidly growing demand and disparities in either access or prices between industrial users and local communities. Such an analysis can provide advance warning of places where tensions with the local community may appear in future years or during dry periods.

Consult with stakeholders. Communities often feel very strongly about the use of local water resources—and rightly so. Experience has shown that early identification of local actors and their water-related needs, coupled with a policy of open and ongoing communication, can reduce the risk of water-related disputes. In addition, proactive efforts by companies to improve water quality or water availability can help build positive relations with regional stakeholders. These efforts can include direct participation in developing local water systems, provision of funds or appropriate technology, education or water resource planning.

Engage the supply chain. Many companies’ most significant water impacts and risks may be embedded in their supply chain. To address this, companies should assess and evaluate water use in their supply chain and work collaboratively with suppliers to reduce water use and minimize risks of supply chain disruptions from water-related problems.
 
Implement the best technologies available. Companies should assess the best-available technologies for reducing water use and wastewater discharges, commit to using such technology in new facilities and retrofit existing facilities in areas of significant water stress. There is a dizzying array of technology that can reduce water use and improve water quality, including reclaiming and reusing process water, sophisticated filtration systems and replacing water cooling towers with air cooling ones. Such technology investments often have very short payback periods and generate high returns on investment. This is likely to be increasingly true as water scarcity becomes more severe.
 
Set goals and targets; measure and report performance. Companies should measure and publicly report key metrics on their water use and impacts and track how their performance changes over time. This information can help build confidence among investors and inform customers, local communities and other key stakeholders interested in how the company is managing its water risks.
 
Form strategic partnerships. Many water-related issues can best be addressed on a regional scale involving multiple sectors and stakeholders. Some companies are working through organizations like the World Council on Sustainable Development to promote watershed protection and improve access to water for impoverished communities. Another example is the regional environmental management system being developed by Sustainable Silicon Valley in California. This initiative has identified freshwater as one of the main socioeconomic and environmental challenges facing the region. In an effort to address this issue, companies in Silicon Valley are working with other stakeholders on regional water sustainability policies and practices.

Commit to continuous improvement. Despite increased efforts by companies and other sectors of society, water scarcity and water-related business risks are likely to grow in the future. A commitment to continuous improvement in assessing and managing these risks and lessening the impacts of a company’s water use on local communities and the environment can help protect operations (and long-term shareholder value) from unexpected water-related disruptions.

Peter H. Gleick is president and cofounder of the Pacific Institute in Oakland, Calif. Jason Morrison is director of Pacific Institute’s Economic Globalization and the Environment program.