Impact of Water Scarcity

Water scarcity could result in serious problems such as the drying of river beds, destruction of biodiversity/ habitats and livelihoods, the extinction of species, as well as affecting agricultural prices, community water supplies and local economies. Businesses will need to understand their reliance and risk related to water usage.

  • The EU Water Framework Directive is driving a fundamental change in the management of water throughout Europe by committing member states to achieve good qualitative and quantitative status of all water bodies by 2015.

    Final River Basin Management Plans were scheduled for publication in 2010 to deliver “good ecological status” for all water bodies by 2015.

    Agriculture is expected to bear a major share of the directive’s implementation costs, as farmers are compelled to reduce their usage of nutrients and pesticides that could potentially migrate into water bodies.

    Manufacturing and process industries, even when regulated already, may need to meet higher discharge standards and are expected to improve water efficiency while working with local stakeholders.

  • Whilst operations may be designed to operate within extreme weather events, it is now necessary to take into account documented evidence of the longer term (chronic) climate changes in terms of how the baseline is changing and hence how changes to business decisions and practices must evolve.

    There is a risk that subtle changes over time may not be recognised and hence their impact on business models may go undetected until critical thresholds are breached. This will include operational, social and environmental performance.

    Insurers, lawyers, regulators, investors and other stakeholders are now considering climate change impacts as reasonably foreseeable.

    It will be important for companies to consider their strategy for how it will adapt as it could be at risk if its strategy remains within a policy of “business as usual”.

  • Water resource management and social responsibility, particularly in known countries of water scarcity (hence competition for supply) can potentially affect both company reputation and share price. Demonstrating good corporate governance and building robust business strategies, however requires sufficient water usage evidence (internal & external) & documentation to justify policy and actions. Such information is being incorporated into strategic planning and finding its way into annual reports, but recent surveys suggest that this is ad hoc and disclosures related to water risk is extremely variable across industry as a whole.

    Water is both an emerging risk and opportunity which needs to be integrated into long term commercial strategies, and potentially affecting critical operations within any supply chain; whether concentrated in just one country or present across many. Investors will be increasingly keen to see measures that will demonstrate sustainable business at an operational level as well as company management being able to make informed business decisions; taking account of in-country impacts, international influences and possible future considerations (such as climate change, increasing regulation, water quality and availability) over the longer term.

  • The impact of water scarcity will also create challenges with delivering long-term investment potential with increasing short-term volatilities.

    It is important for a company to benchmark its operations now in order to address water supply disruption or reasonably foresee reputational risks, through understanding its operations within its local geography and social context.

  • Some countries are very reliant on water to generate power. Brazil, for example, generates 80% of its energy through hydropower.

    During the drought of 2001 the government was required to take severe measures and introduced electricity rationing. This type of scenario is therefore important to business continuity over the longer term in countries of operation.

    There is similar documented evidence for China because the energy intensity of water provision is increasing rapidly as the transportation of water increases (particularly given the country’s south-north water transfer project), and as energy-intensive water treatment becomes more widely used in the delivery of potable water for municipal and industrial systems.

  • Agriculture accounts for some 70% of water use globally and this is predicted to increase as the demand for food to feed a growing population increases. The food (& beverage) industry has to address a number of water related factors influencing reliance on issues such as crop harvest, cost, competitiveness and good governance. These factors also affect everyone in terms of food availability and the price we have to pay.

    Food price increases are in the news , as has been political unrest due to food shortages in certain countries. For example, poor rice harvests in one major producing country can create local basic food shortages as well as create a spike in global rice price. As cropped areas are expanded into geographical areas where water quality is poor, this is one example where more energy is required to treat the water to sufficient standards for food production use.

    Hence risk and opportunities will relate to factors such as; where crops are grown, risk of crop failure, costs related to irrigation, water treatment etc. Other critical water security supply chain considerations could relate to food processing locations, package manufacture location; external influences including competition for catchment water supply from communities, other industries such as tourism, manufacturing, mining etc; regulations restricting water supply whilst increasing standards required for any water treatment after process use; and stakeholder expectations for a more sustainable water usage throughout a products life cycle.

  • Scarcity of water is also predicted to increase armed conflicts.

    This is yet another aspect for future consideration where environmental impact can result in political instability and may therefore need to be considered in long-term investment strategies.