Water needs to move up the ESG agenda

Decarbonization has dominated international goal setting and corporate priorities in recent years, but there is another area of risk and opportunity that forward-thinking companies are increasingly addressing: the environmental, social and economic consequences of water risk. Whether it be drought or flooding, the increasing frequency and severity of water-related events associated with climate change present a very real challenge to performance. While the impact of climate change on water-dependent sectors of the economy varies, the key challenges across the board include increasing costs from storm or flood damage to assets and infrastructure, restricted production due to water scarcity and changing rainfall patterns, and supply chain disruption. Companies that are early adopters of proactive water management approaches can position themselves to avert or mitigate these risks, while also realizing cost savings in the form of efficiency and improved operational performance.

Manufacturing & distribution
FMCG & retail
Banking & insurance
Energy & utilities

Data shown is total global GDP loss in billions by sector between 2022 and 2050

Modelling from the recently published Aquanomics report, authored by GHD in conjunction with Cambridge Econometrics, demonstrates that droughts, floods and storms could potentially wipe USD5.6 trillion from the GDP of the seven countries studied between 2022 and 2050. At the same time, the report presents the forecast economic repercussions as an opportunity for businesses to get ahead of the risks now, before the crisis escalates.

With the emergence of Environmental, Social and Governance (ESG) as the predominant metric and management approach for how companies operate, attract investment and are evaluated; those that can effectively plan for and manage the impact of water risk, while demonstrating how they have integrated this into their ESG strategy, will be in a stronger position to maintain operations and deliver sustainable commercial outcomes.

Integrating water risk into ESG strategy

A sound ESG strategy lays out a framework to manage risk, realize savings, improve performance and increase stakeholder satisfaction. Identifying which water risks have the most potential to affect performance puts businesses in a better position to proactively manage them before a disaster happens.

Recently, the Wisconsin Central Limited (WCL) Kirk Yard Facility in Gary, Indiana, Canadian National (CN)'s largest classification yard in the US and the center of CN's Chicago Terminal operation, was assessed for the likely impacts of changing water levels due to climate change-led factors such as increasing rainfall events; severe storms; less precipitation as snow and more as rain; and thinner winter ice on lakes. Combining climate data with a site assessment revealed a number of options to mitigate current and future climate change risk, including subgrade PVC drainage with a sump-pump, revisiting the frequency of facility roadway maintenance and erosion and deploying sediment control curtains. As an outcome of the assessment, it was also recommended that the WCL incorporate climate vulnerability screening in capital improvement plans and annual reviews.

Carbon-management within the context of an organisation’s ESG strategy often involves consideration of emissions reporting, carbon accounting and digital management to set targets and monitor success. This allows companies to set achievable goals, articulate them internally and externally, and move toward achieving them – adding commercial value to their business. There is a parallel process to embedding water risk and opportunity into ESG frameworks: identifying use, reuse and waste of water; incorporating digital and other tools to identify opportunities and pain points; and examining how to move closer to a sustainable — or ideally net positive—water strategy for the future. Moreover, sound water management and carbon management are often linked, as water is frequently a significant source of carbon emissions.

In the manufacturing and distribution sector, for example, water scarcity is increasingly restricting industrial production processes, while flooding and storms cause direct damage to assets (buildings, inventory and machinery) and energy supply, as well as operational disruptions, either directly to organizations or to critical supply chains. As damages ripple out to the insurance industry, companies may also find that failing to address water risk will increase insurance premiums.

Water risk also impacts distribution. Extreme drought can cause disruption to waterborne transportation while flooding and storms can disrupt roads, rail lines and airport infrastructure. The connecting role that water plays between all sectors means that companies must examine which parts of their supply chain might be most vulnerable to water disruptions and disasters and address these accordingly.

Adding a further layer of complexity to a company’s consideration of water risk, Aquanomics found that specific water impacts are tied to geographic location. In calculating water risk at a GDP and sector level, the report shows that companies need to understand the geographic context and implications of their water use, the specific combination of external water risks they face – and how these conditions may shift due to climate change. The geographic profiles covered by Aquanomics provide a snapshot of risk and resilience in seven different countries and enable comparisons across sectors and locations.

The implications of a higher profile for water risk

More attention in general to good water stewardship could make sustainable water practices a more important investment criteria and draw the attention of stakeholders. An example at the vanguard is Dutch asset manager ACTIAM – with $63 billion in assets under management, the company has a ground-breaking goal of being water neutral by 2030 – meaning that “companies in the firm’s portfolio will consume no more water than nature can replenish and cause no more pollution than is acceptable for the health of humans and natural ecosystems.” To take it a step further, rather than rewarding companies demonstrating good water stewardship through access to investment, action to hold companies liable for their role in exacerbating the impacts of water disasters is likely to emerge – for instance, penalties for the spread of contamination in a flood.

Ultimately, companies will need to set long-term goals, similar to now-common benchmarks for decarbonization, for water use and risk. These goals will drive radical transformation, while demonstrating how companies are actively building water resilience and protecting their commercial interests – and investments – from future shocks and threats.