Water Scarcity Creates New Business Risks

As global climate patterns shift and weather becomes more extreme, there’s a growing recognition that organizations must adapt. However, one factor that’s frequently overlooked when examining business risks is the impact of droughts, floods, and other events involving water.

Shifting climate patterns increasingly alter sourcing, supply chains, operations, and product distribution. A lack of water puts data centers to crops at risk. It also puts pressure on production and logistics, particularly as navigable waterways become impassable due to low water levels.

A tidal wave of potential problems can ensue. “As a result of water scarcity, there are growing regulatory risks and restrictions limiting water use. These could drastically increase operational costs or halt operations,” observes Sarah Brody, a partner at business consulting firm McKinsey & Company.

For CIOs and other business leaders, the takeaway is clear: there’s a need to reevaluate water policy. Today’s highly intertwined global supply chains introduce a “domino effect,” says Lila Pupo, sustainability consultant at Cognizant. Ignoring this fact “can lead to diminished product quality, reduced farming yields, and increased prices in supplies due to water scarcity.”

Weathering Change

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It’s remarkably easy to underestimate the severity of the problem because many companies haven’t yet encountered severe water shortages. Yet the United Nations predicts a 40% global shortfall in water supply by 2030, based on current water trends, including consumption, economic activity, and population trends.

This puts more than US $300 billion at risk, according to CDP, a not-for profit organization that operates a global disclosure system for investors, companies, cities, states, and regions to manage environmental impacts, including water resources.

“Business leaders are underestimating the impact that water scarcity will have on operations. The risk extends across industries and affects businesses of every type and size,” states Simon Fischweicher, head of the corporate and supply chain program at CDP.

Already, some companies are feeling the squeeze. For example, Canadian mining company, Barrick Gold closed the Chilean portion of its US $8. billion Pascua Lama gold and copper mine because of concerns that the mine consumes too much water from local water shed. Meanwhile, the world’s largest computer chip maker, Taiwan Semiconductor Manufacturing Corporation, had to truck water for miles to keep its chip fabrication plants running when local water supply dried up.

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Now, drought and a lack of runoff on the Colorado River in the US threatens water supplies for more than 40 million Americans and food production for the rest of the country.

Water Works

 So far, the urgency of the problem isn’t registering with business leaders. According to CDP, 69% of businesses acknowledge that they are exposed to water risks that add up to a potential value of US $225 billion. However, it noted that while about 18,600 companies worldwide now disclose climate data, only 5,000 focused on water security and about two-thirds of companies inadequately manage water risks. Only about 16% of companies track water security.

According to the World Bank, some areas could see GDP growth rates decline by 6% by 2050 if water-management practices don’t improve. Low water levels have already impeded transport on the Mississippi, Yangtze, and Rhine rivers. This, in turn, causes supply chains breakdowns. In 2021, economic damage from droughts jumped 63% compared with the 20-year-average, the World Economic Forum reported.

Indeed, water security risks now extend far beyond arid regions. Consider: In Des Moines, Iowa, a water utility recently stipulated that future data center projects from Microsoft would only be considered if the company could clearly demonstrate that it has the technology to significantly reduce peak water usage.

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“Many government and local regulatory agencies are establishing new water tariffs, caps, and penalties for industries in an attempt to reduce water demand,” Pupo points out. As new regulatory reporting requirements take shape, including the likes of CSRD, GRI, CDP and TCFD, businesses must focus on aligning metrics with these regulations and reporting requirements.

Floating New Ideas

It’s also important to rethink water costs, says CDP’s Fischweicher. This means establishing an internal price of water “that accurately reflects the cost of operations.” When groups are accountable -- and see how their actions impact business costs and the supply chain -- they tend to act more responsibly, he notes. “They are six times more likely to invest in opportunities to reduce consumption.”

A focus on internal water costs must fit into a broader review of supply chain risk management practices, Brody says. Water management is evolving from a “site level consideration” to an issue that involves “C-suite ownership and greater centralization of water responsibilities.”

CIOs and other tech leaders can help an organization identify how and where technology, including analytics and machine learning, improves efficiency, resiliency, and overall water security.

This includes the use of IoT sensors and instrumentation, robotics systems, digital twins, and other tools such as smart pumps and high-tech wastewater reclamation systems. These technologies can directly reduce water consumption, improve products and help monitor changes in both water availability and quality. “They drive more efficient processes and reduced resource demand,” Pupo notes.

It's also wise to keep an eye on emerging technologies that directly map to water management. For example, ZwitterCo and AquaTech have developed membrane technologies that are far more efficient and cost-effective in separating solids and organics from wastewater. Nettra offers sophisticated sensor-based monitoring and analytics. In Argentina an online AI-driven marketplace, Kilimo, helps farmers optimize irrigation and sell water offsets to companies so they can become carbon neutral.

Industry consortiums and partnerships can also cascade into real-world benefits, Brody says. For example, Chevron, ExxonMobil, Conoco Phillips, and ARIS have recently collaborated on projects that pilot new technologies to treat water for reuse. Gold-mining company Newmont has appointed a C-level officer to oversee water use, while copper-miner Freeport-McMoran is engaging local communities.

Concludes Pupo: “Technology leaders must keep in mind that the issues of today are very different from the issues of tomorrow. Designing growth to encompass the challenges of future scenarios, changes in environmental conditions, and the availability of resources is key to ensuring a resilient business.”