Floods, Drought, Disasters Make Water Risky for Business

Floods, Drought, Disasters Make Water Risky for Business

Airplane image via Onizu3d / Shutterstock.com

Water -- whether it's too much, too little or too dirty -- has been a fixture in the news in recent years, a continual reminder that it is a precious resource with the potential for devastating impacts to business operations and local communities.

Recent floods inundated thousands of local businesses in Thailand, for example, shaving the country’s Gross Domestic Product by more than 1.5 percent and disrupting global supply chains. Honda cut its third quarter profit forecast by more than 50 percent after the floods forced it to shut a car factory outside Bangkok and reduced the availability of components for its facilities across North America and Europe. In fact, analysts at JPMorgan have estimated these floods could cost Japan’s three largest carmakers more than US$450 million this year.

Water Becomes Risky for Business

Earlier this year the Yangtze Delta in China, which supports 400 million people and 40 percent of the country's economic activity, experienced its worst drought in 50 years. The lack of water for irrigation damaged agriculture, led to power cuts that impacted manufacturers, and closed hundreds of kilometers of the Yangtze and its tributaries to container ships, which disrupted distribution networks.

MAL Zrt, the Hungarian aluminum producer, received a €472 million fine in September for spilling 700,000 cubic meters of toxic sludge in a 2010 incident in 2010 that killed 10 people and caused huge environmental damage. 

It is therefore no surprise that major global companies have this year reported to CDP Water Disclosure that water poses a substantial risk to their business. The majority of these risks are recognized as occurring between now and 2016, highlighting the very real current threat to business operations. What’s more, more than a third of the 190 companies reporting to CDP from the Global 500 have already experienced detrimental water-related business impacts, such as disruption to operations from water shortages and severe weather events.

What is more surprising is the fact that just more than half (57 percent) of companies report board-level oversight of water policies or plans. This could perhaps be down to insufficient awareness of the impact that water can have on their profitability. Either way, when compared with the 94 percent of Global 500 companies that have board-level oversight of climate change -- and taking into account the near-term reported risk -- greater inclusion of water is clearly required within corporate business strategies.

Shareholders Demanding -- and Getting -- Action on Water

Water presents complex issues that require local solutions. There is no one easy solution to tackling water scarcity and other water-related pressures, but greater transparency and awareness of the risks is a critical first step. Norges Bank Investment Management (NBIM) is an example of an investor that is calling on companies to take this seriously and to start by measuring and reporting their exposure to water risks. This will enable NBIM, and the 353 other investors that support CDP Water Disclosure, to better understand to what extent companies are managing this exposure to risk in their direct operations and supply chains.

Some leading companies are taking action. H&M, for example, is participating in global initiatives to educate cotton farmers on better farming practices to safeguard their cotton supply. Molson Coors work with local stakeholders and have conducted watershed assessments for all their breweries to protect future water supplies. Puma has set water use reduction targets that go beyond its operations to include its suppliers’ water use as well. There are many other examples of leading practice in the CDP Water Disclosure report.

Instead of simply cutting profit forecasts or raising product prices, smart companies are thinking longer-term and putting water stewardship at the heart of their business strategy.

It is this that will ultimately deliver a win-win for business and the environment.

Airplane image via Onizu3d / Shutterstock.com